With almost six out of 10 IT and business process outsourcing arrangements failing to deliver the expected benefits or even ending in failure, organisations need to recognise that sound contracts will only succeed if they are underpinned by strong relationships.
Research by Compass Management Consulting across 8,000 organisations in 32 countries suggests that 58 per cent of all outsourcing contracts fail.
Eight out of 10 contracts that fail do so because of poor governance, Compass has found, with problems covering issues such as a lack of pro-activity and a shortage of management skills on the part of the customer and service provider.
As a consequence, such poor governance undermines the core objectives of an outsourcing strategy, reducing anticipated returns by as much as 75 per cent.
"It comes down to the ability of all parties to forge good relationships", says Ian Leask, Head of Compass' Sourcing Practice.
"These 'soft' intangible issues are all too often overlooked during sourcing and negotiations, yet it is here where the foundations for success or failure are set."
According to Leask, outsourcing arrangements are akin to neighbourly relationships. Clients and service providers have a mutual interest in improving their quality of understanding if they are to successfully 'live' within the close proximity of each other.
But as a study earlier this year by Deloitte found, six out of 10 firms have discovered that outsourcing deals require more management effort than they had anticipated.
With an increasing dependency on high-value outsourced services such as application development and data centre management, along with business processes such as payroll, accounts and human resources, companies stand to sustain huge unanticipated costs unless they take steps to become a 'good neighbour'.
Looking across the outsourcing contracts that it has been involved with over the past 25 years, Compass says that companies exhibit five primary personality types in the neighbourhood with only one in five being built on foundations that lead to a strong relationship.
The Curtain Twitcher: When interfacing with the 'curtain twitcher', suppliers will find them nosy, but not interfering. They will often complain to colleagues about their service providers' short-comings, but not address the issue head-on.
This irritable relationship, based on a sense of mutual suspicion, is often inherited by the company's internal manager who may feel that there could be better supply options to hand, yet the decision has been taken to persevere with the status quo. A contract review, which should be implemented annually, would ensure objectives are understood on all sides.
The Trend Spotter: The internal team, lead by a 'trend spotter', has outsourced because it is the current trend in business service management. They have embraced help desk and IT maintenance outsourcing and currently are hurtling towards off shoring back office services.
Pressure to do this is coming from the top - eight out of 10 IT Directors are actively pursuing off shore solutions, often fuelled by the perceived belief that outsourcing costs minus previous in-house costs equals cost savings.
It doesn't. Companies should fully quantify the extent of an outsourcing opportunity before embarking on a long, difficult and expensive process that is fraught with risk.
The Noisy Neighbour: This over zealous micro-manager prevents the service provider from getting on with the job. A seeming obsession with the minute details can result in 'analysis paralysis' and confusion among colleagues.
The tendency to escalate every service issue can interfere with a successful project transition and progression toward the business goals on which the contract was struck.
Companies need to be sure that in-house teams are suitably reassigned to other tasks while new or different management skills are developed to ensure a proactive rather than interfering governance model.
The Hedge Builder: The 'hedge builder' sets up a contract and expects to watch it happen without getting involved. This cuts off the possibility of the service provider advancing with the contract and business working hand in hand.
There is a tendency to keep 'the roses well pruned' on his/her side of the hedge and ignore the mess next door that may well be affecting property values for the whole street. The misguided belief is that outsourcing will cure all ills, once inefficient processes have been chucked over the hedge.
Generally a budget of 4-6 per cent of the value of the contract is required to ensure an adequate in-house team to manage the relationship.
The Good Neighbour: Representing only one in five of outsourcing deals, the 'good neighbour' understands that the retained in-house organisation should be designed to maximise value creation from the outset.
A multi-layered organisation ensures alignment between client and service provider at the strategic, tactical, and operational levels. Working from a win-win mentality, the time is taken to assess not only technical competency but also the business goals of the provider, maximising the opportunity for a cultural fit.
Service provider personnel receive ongoing training and key personnel are given individual incentives related directly to the client's organisational objectives.
"If companies are going to realise the objectives on which their outsourcing business cases are based, they must first recognise the need to develop a strong relationship along with a sound contract," says Ian Leask
"Cultural differences between client and service provider must be actively identified and bridged and an environment developed that ensures client and service provider business interests are in alignment over the life of the relationship - including a joint commitment to an ongoing, expanding relationship between the parties."