March 10, 2016
The International Association of Outsourcing Professionals (IAOP) has confirmed that the Annual Contract Value of outsourcing relationships in global industry eclipsed $1 Trillion in 2014. Beyond the fact that this is an incredible milestone and validation of the strategy of business to stick to “core competencies” and consider outsourcing everything else, it is also a good time to pause and ask the question – what are we getting for our $1 Trillion?
Apparently, less than we had thought or hoped. Many studies have been conducted by organizations as diverse as the IAOP, ISG, and Deloitte. All have identified a significant value gap between the expected outcomes outlined in studied companies’ original outsourcing business cases, and the value provided by the eventual contracted services. In fact, it has turned out to be about a 20% value leakage – a $200 Billion Opportunity.
So, why is this such an issue? In September of 2015, our firm and SirionLabs, the industry leading cloud platform provider for “post signature contract governance” conducted a “State of the Industry” survey to gain insight into this challenge. Here is the essence of what we discovered:
- The vast majority of attention paid to outsourcing arrangements is “pre-signature.” From business case development, to scope determination, to supplier selection, and finally to contract negotiation, the majority of corporate attention (and resources) is paid to this aspect of the outsourcing relationship.
- Most outsourcing contracts are negotiated without an operational perspective. Once “ink is on the paper,” the contract becomes the responsibility of the people charged with management of the outsourcing arrangement. In most cases, the operational team was not involved in defining the contract obligations for the outsourcer. This leads to many discussions about “what was meant by…”, and that leads to further value leakage from what was contemplated.
- The Governance infrastructure for most firms is Excel. This may be the most damning aspect of “post-signature contract governance.” There is no equipping framework and automation infrastructure to assist in the management of these contracts – contracts that can run upwards of 7 years, 3000 pages, and 100s of Millions of dollars.
In the Shelby/SirionLabs survey, we found that essentially, the gap between what clients thought was important to manage their outsourcing relationships, and what they believed they had as infrastructure (tools, people and process) to accomplish this was roughly 50%. If the fence they needed to hop was 8 foot, they were able to jump 4 feet. Hardly a winning proposition.
Is there any good news?
Yes. Finally, the industry is responding with platforms to address the five core issues of Outsourcing Governance – Contracts Management, Performance Management, Financial Management, Relationship Management and Risk Management.
We believe it is high time that clients invest in this crucial aspect of Outsourcing value realization, and begin to address their lack of critical infrastructure.
Interested in a further discussion? Give me a call at 312.445.8501.
The Shelby Group