Most of the outsourcing contracts are in troubled waters right from the start of the contract. In spite of lengthy vendor selection, contract negotiation process, and abundant contract agreement clauses, they don’t achieve the expected business objectives both from the client and vendor side. What makes these outsourcing contracts fail? Some of the main problems facing failed relationships are:

Unclear Expectations on Client front

Client lacks a clear picture in mind as to what are the business objectives that are to be achieved through this contract. The contract outcome is measured in terms of service level agreements which are quantitative and rigid and does not consider the qualitative aspects. They leave other important parameters for measuring the real value such as business process optimization, risk mitigation, change management plan, innovation etc. In addition, processes followed for contract implementation are not clearly defined and mapped out.

Poor Cultural Fit

Cultural incompatibility between the vendor and the client is another major factor for the relationship failure. The corporate culture of both the client and the vendor might not be similar in aspects related to decision making, risk appetite, and way of communicating. One company may be risk-minded and a slow decision maker while the other can be agile and accustomed to making proactive decisions. The cultural differences are escalated to contract implementation differences due to different approaches followed by each of these companies.

Information Exchange Barrier

Vendor and the client do not proactively share necessary information with each other. Client does not disclose all relevant information to enable the vendor to accurately assess the business requirements at the start. Both parties share information reactively and not openly, proactively.  

Communication Barrier

Multiple official and unofficial communications drive any kind of work. The end result does not depend as much on the official communications than on the unofficial ones. The unofficial communications help assure that the task requirements are accurately conveyed to the concerned people. In failed outsourcing contracts, all of these unofficial relationships are given an afterthought. People don’t communicate very well and all communication flows through relatively few authorized channels. Hence rather than people constantly interacting with others who better understand the work, directions are passed down a chain of people who don’t understand them. The end result is costly mistakes. The more complicated the web of unofficial communications, the bigger the adverse impact on outsourcing will be.

Poor Working Relationship

The partners do not have a trusting working relationship where they understand each other's expectations and motivations, and can engage in good dialogue.

Deal Inflexibility

Vendor lacks flexibility and is unable to meet client's changing needs. The parties' interests were aligned at the beginning of the contract but became misaligned as the client's business environment or needs changed. Vendor is not committed to the ongoing change management effort necessary for success and wants the client to adjust the solution rather than incorporating requisite changes.

Poor Governance Structure

Governance problems are cited as the reason for failure for 80 per cent of outsourcing contracts. Most relationships fail because they lack “effective vendor governance structure” for managing the ongoing relationship and ensuring that the outsourcing efforts meet both the vendor’s and client’s goals. The reporting structures followed are ineffective with “information overload” and "frequently missed" performance items. Senior management spends most time reading reports without giving attention to items that matter most.

Poor Vendor Performance

The vendor fairs poorly against the agreed service level agreements. Certain services/solutions that the vendor initially committed didn't actually happen; or the vendor in one or more instances did not treat some of the important aspects of the contract in an honest, up-front manner.

The bottom line is

An outsourcing relationship should be built on mutually beneficial goals and with a highly effective vendor management and vendor governance structure that facilitates collaboration, visibility, and realigned interests. Otherwise, the relationship health will suffer and the relationship will ultimately fail. The partners should establish a structure for open communication and should create rules for having regular discussions about the relationship, its progress, issues faced and resolution procedures. By dealing with issues before they become problems, the likelihood of relationship success rises dramatically.