Soccer is Uruguay’s National Passion

By Robert L. Scheier

Any batter who got a hit 50% of his times at bat would be a superstar. An airline that gets you to your destination on time 50% of the time would be a loser.

So what do you call a procurement organization that has to renegotiate half its outsourcing contracts before they expire? Normal.

That’s the bottom line from a recent Alsbridge Inc. report based on interviews with 65 companies. It also showed that “between 20-30% of the buyers in all categories except FAO (finance and accounting outsourcing) terminated early and switched suppliers.” Alsbridge found (somewhat to its surprise) that no buyer had repatriated all the services in the contract, although about 16% repatriated some.

Among the reasons given for the renegotiations were the need “to adjust the scope to better fit our needs” or that “business conditions have changed and the original economic assumptions are no longer valid.”

Root Causes

Alsbridge itself advises that outsourcing customers begin planning an end of year strategy halfway through their current contract. But the reasons given by the customers in this study don’t sound like the prudent, informed process Alsbridge recommends.

Listen to the main reasons buyers gave for renegotiating:

• “The initial business case was flawed because the assumptions by either the buyer or supplier weren’t valid and/or the numbers were `cooked…’”

• “Scope of the relationship was poorly selected.”

• “The metrics used to measure supplier performance weren’t tied to how the business measures success…”

• “The buyer didn’t establish and empower the right type of governance organization, abdicated its governance responsibilities (or) allowed the procurement organization, rather than the business units receiving the services to manage the relationship.”

To be fair, the interviews were conducted in 2008, when everyone was throwing out their business assumptions and scrambling to cut costs wherever possible. But none of these reasons have to do with being blind-sided by the worst economic downturn in forty years. They sound like systematic failure problems that don’t hurt as much when times are good, but that stand out when the economic crunch is on.

Change Happens

Nobody expects either the buy or sell-side to predict currency or inflation rates, levels of consumer confidence or how new technologies such as tablet computers will affect retail spending trends. That is where the “G” word (governance) comes in. By creating relationships and processes to respond to unpredictable changes, customer and provider should be able to respond more nimbly (and with less expense to both sides) than going back to the negotiating table.

One bit of encouraging news from the report was that buyers who renewed early with their providers didn’t do so for lower costs, but to apply the lessons learned from their first contract. Among the most common reasons were to “gain more flexibility and capability/capacity,” “turn fixed cost structures into variable ones,” to gain access to skilled staff without adding to their own head count or to change the scope (including the SLAs) of the relationship.

That, at least, sounds like progress based on learning. But many other customers, it seems, still need to develop the processes and metrics to fix troubled relationships before they go totally bad and (possibly) avoid the expense and trouble of renegotiating.