04.11.07
Why is Outsourcing Governance So Bad?
Much has been written about the failures of outsourcing deals to live up to their true potential. Poor communications, scope creep, and unrealistic promises and expectations top the list. Interestingly, these are all derivatives of poor deal governance - both by suppliers and customers.
Certainly, the governance issues among customers are well understood, even if they’re not well addressed. In many outsourcings, the business group who led the deal process and the business group left to run the deal are entirely different, ensuring no continuity between the deal-making process and the deal-running process. In these cases, suppliers are faced with an entirely different team - with different priorities and personalities - and, generally, with a poor understanding of the deal. Furthermore, governance teams often lack the political power to manage the deal, and are regularly bypassed in communications between internal business clients and the supplier.
Suppliers do no walk away guilt free in these instances. Having been pushed to the limits of their profitable margin during the deal process (or even if not), many suppliers are expert at wringing additional short-term profitability out of each deal. Every little request is met with a change order and hefty price tag, every opportunity to squeeze an extra dollar is seized. Even if the price is ultimately fair, customers feel as if they’re getting fleeced every time a conversation occurs or bill arrives, a sure way to poison the relationship.
Advisors to the deal process also share significant responsibility. They tend to focus on the deal closing, forgetting that their customers are going to be left to manage the results of their work. Also, to a certain extent, they’re paid “by the word.” The result is outsourcing contracts that are about the size of a phone book, filled with unreadable, turgid prose. Worse yet, the documents tend to put the legal first, relegating the details of the business deal to subsidiary sections buried deep in the later sections. Expecting quality governance to flow from these documents is unrealistic, at best, and impossible at worst.
In my opinion, an executive of either the customer or supplier should be able to pick up the deal document and, by about page 5, have a pretty good, 50,000 foot-level understanding of the business deal. By page 20, the governance teams should know about 90% of what they need to know to run the deal. Indemnities, choice of law, and how the “Key Supplier-Customer Service Liaison Executive can be replaced in the event of her untimely demise should be found somewhere after page 70.
A deal structure like this is customer-friendly and supplier-friendly. It can be understood by governance teams and, therefore, can actually help them govern the deal. The business deal would assume its proper, primary role and the legal boilerplate would assume its proper place as a supporting document, along with the other supporting documents, necessary in the event of a dispute, but otherwise quietly laying in wait.
