Innovation in Contract Outsourcing Models

The adoption of business process outsourcing will fragment a company’s outsourcing vendor landscape even further and the governance of all these different vendors turns into a complex endeavour. As outsourcing customers consistently rank "governance" as a top issue for the failure of outsourcing agreements, customers are looking to upgrade the multi-vendor model and develop innovative solutions for "next generation" outsourcing models.

Outsourcing of IT functions as well as business processes has followed a steady path from IT infrastructure, networks, desktop support and applications to business processes like finance & accounting and human resources. The early adopters, typically started with one function, and as their comfort level increased, expanded the scope to other functions. As customers started gaining confidence in managing outsourcing vendors they added new vendors in a "best-of-breed" approach.

Managing different vendors can be very complex when the underlying functions interact (e.g. applications support and business processes) and a coherent strategy aimed at improving services or reducing cost through adoption of new technologies would require constant renegotiation and realignment of priorities between the vendors. More and more executives are concerned that the growing task of constantly aligning multiple vendors and renegotiating contracts is slowing them down instead of helping them move forward.
As the early adopters started looking for a more agile way to manage their vendors, the next wave of companies seized the opportunity to catch up with early adopters by signing mega-deals with large IT services companies or consortia.

As the customers demanded an integrated approach from their vendors, the focus of services provided started moving from technical skills to operational skills and the strategic management of operations. IT services companies focussed on consolidating and diversifying their services, acquiring specialized outsourcing vendors and beefing up their operational and strategic consultancy functions. As management of operations started to increase in importance, consulting firms entered the market. However, having limited assets on their balance sheets and a relatively high cost of borrowing, consulting firms found it difficult to generate the cash necessary to take over customer’s IT assets and eventually proved more effective in the BPO area. 

While the BPO market started to gain momentum, customers experimented with managing their outsourced operations through joint ventures in an attempt to maintain some control over their operations. As it became apparent that the objectives of customers (reduce cost and limit investment) and service providers (increase profit on current customers and increase revenue by investing in new customers) were difficult to reconcile, the joint venture model was quickly abandoned.

The scope of operations being outsourced continues to expand and as the focus shifts to managing vendors, governance models will become more and more sophisticated. Although there has been great progress in the development of governance models, it is starting to occur to many outsourcing professionals that large IT services firms have just as much difficulty in aligning different competencies internally as their customers do. In addition, they must squeeze their subcontractors in order to win mega-deals and are reluctant to have to renegotiate to upgrade services for their clients. Their focus remains on executing services according to contract and improving their profitability. Customers are left with little flexibility, and service improvement/cost reduction through the application of new technology is typically postponed until the contract is up for renewal.

In the last few years, a new model has surfaced that provides a different approach. In what looks like a revival of the "best-of-breed" model, Dutch banking group ING outsourced their European desktop installation, maintenance and support to four different vendors. Three vendors provide the desktop, printing and telephone services and one vendor acts as an ‘"integrator." Each of the vendors has an individual contract with the customer. The "integrator" is responsible for the integrated service offering, managing vendors according to their individual contracts, and aligning them to meet the customer’s objectives. Non-performing or non-cooperative vendors can be replaced without disrupting the entire outsourced operation. An innovative solution and a brave attempt at finally settling the "best-of-breed" versus "integrated solution" controversy, and at the same time a seemingly effective approach for companies pursuing a growth strategy through mergers and acquisitions, which need to integrate outsourcing vendors from newly acquired companies.

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