In the last article in this series, I outlined the 11 most common failure modes for IT outsourcing relationships. These are summarized below for your reference: The vendor over-promises, and fails to deliver on their commitments The client fails to exercise proper governance over the vendor contract The vendor underprices the contract and fails to earn a profit The contract fails to align vendor and client goals and objectives Vendor reports contain raw data, but rarely include proper diagnosis The client does not understand the metrics included in vendor reports Both client and vendor view the contract as a zero-sum game Vendors spin data and reports to cast themselves in the most favorable light Continuous improvement is ill defined or not included in the contract Vendors experience extremely high turnover on a client project Vendors and/or the client do not adequately train personnel In this second installment of the series, I will address the problem of vendor over-promising. Vendor Over-Promising The single greatest challenge encountered in most outsourcing relationships is that the vendor has promised to do things that they either cannot or will not be able to achieve. How does this happen, and why is it so common? There is massive overcapacity in the IT outsourcing industry. I would estimate that the industry has roughly double the capacity vs. the demand for outsourcing services. The effect, as in any industry with overcapacity, is fierce competition and price pressure on vendors. In this environment it is almost a given that, in an effort to win new business, even the most well-intentioned vendors will make promises they cannot keep. Oftentimes this is due to a disconnect between vendor sales and the vendor delivery teams. In their zeal to win new business, it is not just a well-worn cliché that salespeople will say or do anything to win new business – it’s a reality! In other cases, it’s not an issue of sales over-promising, but one of the delivery team overestimating their abilities. For example, in service desk outsourcing a vendor delivery team that agrees to a 20 second speed of answer, a 90% first contact resolution rate, and a 98% client satisfaction score is almost certainly over-promising unless these performance targets are also accompanied by an equally outrageous price per ticket. So, how do we know when a vendor is over-promising? The surest way to avoid this trap is to benchmark against contracts that deliver a similar set of services. To continue with our service desk example, this would entail benchmarking other outsourced service desks to gain insight into the price, quality, and service levels that can be realistically achieved. The reason price must be part of the discussion is because it is highly correlated with quality and service levels. In other words, in some sense you really do get what you pay for, and a good benchmark will provide visibility not only into what can be achieved from a performance perspective (e.g., quality and service levels), but also what the tradeoff is between price, quality, and service levels. Moreover, understanding the tradeoff between price and quality can inform more intelligent buying decisions. Oftentimes, for example, client RFPs will contain quality and service level targets that are extraordinarily high, not realizing the enormous impact these requirements will have on price. However, in my experience, I have seen numerous examples of RFP requirements where a 10% reduction in service level and quality targets can result in as much as a 40% reduction in price. The table below is extracted from a recent MetricNet service desk benchmark. The question is, which client got it right? The answer is none of them got it right, per se, but each made a different set of tradeoffs when selecting their outsourcing partner, and some negotiated better deals than others. The value of benchmarking is that it not only tells you what’s possible and realistic, thereby avoiding vendor over-promising, but what the tradeoffs between price, quality and service levels look like, and what a “good deal” vs. a “bad deal” might look like. Some Final Thoughts The problem of over-promising hurts both vendors and their clients. It often creates a toxic environment where the client feels let down, or even betrayed by the vendor, while the vendor feels that the client is making unreasonable demands. The goal of win/win – where the vendor fulfills their contractual obligations and is fairly compensated for their services, while the client is highly satisfied with the vendor’s performance – requires more than a little finesse. Like threading a needle, it can be done, but it is a rarity. In my estimation, no more than 5% of all IT outsourcing contracts fall in the win/win category. By leveraging benchmarking to understand not only what is possible, but what is realistic, both suppliers and their clients can avoid one of the most common and destructive forces in the IT outsourcing industry. An exclusive white paper with benchmarking data and case study examples is also in the works. Sign up here to receive your copy as soon as it’s available!
