In June of this year I was interviewing the COO of a California-based bank as part of an application strategy engagement.  At the end of the conversation, he asked if Alsbridge had any data on the number of contracts where the client repatriated all the services.  The reason behind the query was that the bank was seriously considering terminating for convenience a BPO contract and repatriating all the services.

My answer was, “Off hand, I don’t know, but I will find out.”

After asking several fellow consultants and researching the question, I found little or no useful data that would provide a fact-based hint at the answer, much less something that was directionally correct. So, I started digging.

The COO’s original inquiry actually raised a much broader set of questions. So my initial question set was how many deals were:

• Repatriated in their entirety?
• Renegotiated before the end of their term?
• Re-competed before the end of their term?

Source of the Data

The key was to find recent case studies with enough data to categorize the relationships and discover what really happened.  That led me to the Outsourcing Center, which evaluates over 100 relationships a year as part of the selection process for the Outsourcing Excellence Awards. One portion of the judgment process for this award is an hour long, structured interview by the Outsourcing Excellence Awards Editor, Beth Ellyn Rosenthal, who asks each applicant the same set of questions.

With her help, we identified 65 companies she interviewed during 2008 through 2010 that were involved in either a repatriation, re-competition or renegotiation.  The 65 companies had a total of 81 buyer/provider relationships that fell into one of the three categories.

As we began reviewing the information on each relationship, it was clear that there were more than three categories, which ultimately morphed into six:

• Repatriate all the services
• Repatriate part of the services
• Re-compete some or all the services in the original scope
• Renegotiate the contract before the end of the term
• Renew or renegotiate at the end of term
• Terminate the existing relationship early, then re-compete or repatriate

The 81 transactions were in a variety of industries as shown in Table 1:

Not surprisingly, the transactions represented a broad mix of processes. Thirty-six outsourcers provided ITO, ADM, BPO and KPO services. The provider mix included tier 1, 2 and 3 providers. We found deals for:

• IT infrastructure – mainframe, mid-range, network, desktop, help desk, etc.
• ADM – included ERP system support as well as specialty apps
• HR – payroll, benefits administration, contact center, recruiting/staffing, HRIS and others
• F&A – AP, AR, general accounting, general ledger, tax, billing and collections and others
• General BPO – life and health policy admin and claims processing, underwriting, inbound and outbound call centers, loan processing
• General KPO – media effectiveness, stock and equity research
• Procurement – P2P, S2P, O2C and general procurement/purchasing

Lessons Learned

First lesson learned: Like almost everything else in consulting, answers often begin with the phrase, “It depends.”  After reading the interview transcripts, we had to make some judgment calls because the answers, in some cases, weren’t black and white. We also recognized that while the sample was relatively small (81 transactions and 65 buyers), it was large enough to be directionally correct and give us an answer that met the 80/20 rule.

Second, we were surprised that none of the buyers had repatriated all of the services. Many had re-scoped their deals during the contract either by renegotiating or re-completing, but none of the buyers repatriated all the services in the contract.  This doesn’t mean it has not happened, but the directionally correct answer is that it doesn’t happen very often.  However, just over 16% of the buyers repatriated some the services.

Third, over half of the buyers renegotiated early.  Most did it around the two year point.  The most common reasons given were; “We wanted to adjust the scope to better fit our needs,” or “Business conditions have changed and the original economic assumptions are no longer valid,” (Which comes at no surprise since these interviews were conducted during the height of the recession).

Chart 1 below shows the summary of the number of buyers with deals in each category.

Process vs. the Three R’s

There are a lot of perceptions in the marketplace that one process is a better fit for outsourcing.  While it is not a definitive answer by itself, one would think the long- term relationship and whether or not the buyer would be tempted to tweak the relationship mid-term would be an indicator.

We divided the processes into the “standard” categories I(TO, ADM, BPO, F&A, and HR), for comparison. Because there were so few KPO deals and information on their scope, we included them in the BPO category.

Table 2 shows the number of deals in each category as well as the percentages:

Here’s what is interesting from this chart:

If nothing else, the data confirms the popularity of BPO versus ITO.  There are six more BPO deals than ITO transactions.

• HR deals, while few in number, clearly have their issues with half of them being redone early.  In three of the 10 (30% of them), the buyer was so unhappy with the original supplier, the company terminated and switched providers
• A large percentage of the deals were renegotiated early
• Between 20- 30% of the buyers in all categories except FAO terminated early and switched suppliers

Lessons Learned

Table 2 is very revealing because more than half the deals we reviewed were renegotiated early.  Assuming the relationship is not in trouble, we show the following graphic to Alsbridge clients who ask when they should we renegotiate.

But what we see in Table 2 is that many buyers renegotiated and/or re-competed the services much earlier in the life-cycle.  Here’s what we learned from the interviews:

• The initial business case was flawed because the assumptions by either the buyer or supplier weren’t valid and/or the numbers were “cooked,” etc…
• Scope of the relationship was poorly selected
• The metrics used to measure supplier performance weren’t tied to how the business measure success as an enterprise
• Buyers who applied lessons learned to their new deals and are extremely happy with their new supplier

The buyer either:

• Didn’t establish AND empower the right type of governance organization
• Abdicated its governance responsibilities
• Allowed the procurement organization rather than the business units receiving the services to manage the relationship

We also learned that cost did not drive early renewals. The buyers’ comments clearly showed that they were applying “lessons learned” from their first contract to how the renewal was structured.  The most common reasons given for renewing early were:

• Gain more flexibility and capability/capacity than available now
• Turn fixed cost structures into variable ones
• Avoid investments in technology, plant, property, equipment and processes
• Access to resources either because the buyer doesn’t want to add FTEs or can’t find them at an affordable price
• Change the scope (including SLAs) of the relationship
• Move work off-shore
• Reduce time-to-market for new products and systems

Conclusion

The facts show that there is considerable, for want of a better word, change that goes on in an outsourcing relationship.  The keys to success, which is not a surprise to anyone, are get the scope, metrics, business case and governance right.  There were several “ah ha’s” from the data which led us to the following conclusions:

• HR deals are clearly the most troubled and dominated those in which the buyer terminated early and switched suppliers
• F&A transactions led those in which some services were repatriated.  To be fair, not all of the F&A services were brought back in-house
• None of buyers we interviewed brought all of the services back in house
• More than half – 54.32% – redid their deals early for a variety of reasons
• 17.28% or 14 buyers realized that they had a failing relationship and terminated it but still believed in outsourcing enough to re-compete AND continue outsourcing successfully with a new supplier
• Broad range of industries and processes were evaluated and no “per industry” trend emerged
• Other business issues rather than from where the services are delivered drove decisions on whether or not to renegotiate, repatriate or re-compete
• Customer service was the second most outsourced function after IT

The Cliff Notes from the study can be boiled down into four points:

1. Few, if any companies repatriate everything
2. Best time to renegotiate is, in a typical five-year contract, at the end of year two and before the end of year four
3. HR deals are the most troubled
4. Buyers who understand their relationship is in trouble use the learnings to be very successful with the next supplier

[!] Report this post

Processing your request, Please wait....

Report as:	Invalid Contents Other
Write in Words: (Optional)