Even after the frequent reinforcements of the fundamental principles that are inevitable for outsourcing success, most buyers and providers fall short of realizing 100% outsourcing success. What makes it happen? Here is a quick overview:
SLA’s – Are they realistic?
The buyer needs to find out whether the SLA’s laid in the contract are really attainable in the buyer organization or are they just wishful thinking? Often as it happens in most of the standard practices followed by the buyer, there are generic SLA’s in every contract of his. However rarerly or occasionally does the buyer performs a benchmarking exercise of the contractual SLA’s with his organization. A benchmarking exercise will enable the buyer to see which SLA’s are actually pertinent to the contract and which are not. Removing the redundant SLA’s and limiting the contract to valid SLA’s fine-tunes the overall scope of the contract and makes it easier for both the buyer and his provider to interpret and to implement them.
Pricing Model - kinks in a garden hose
The pricing model agreed with the provider is a key determinant of outsourcing relationship success. However a rigid pricing model can act as a kink in a garden hose and can obstruct the desired flow of services. Consider the following example:
A UK based firm entered into a contract with one of the established application development firm. The pricing model agreed upon was more like “as-is scenario” but failed to consider “what-if scenario”. As the buyer’s business grew after the contract was signed, it had new set of requirements with changing business needs. It expected its current provider to meet those needs. But the provider didn’t dedicate money and resources to provide added value. The reason - the pricing model in the outsourcing relationship was not configured to motivate the provider to deliver such services.
A good pricing model should be flexible and be adaptive to evolving needs of both the buyer his supplier. It should also act as a mean of addressing operational and relationship issues. For instance, the earlier buyer and his provider could have negotiated a pricing model, which involved buyer paying a base rate to the provider for the standard services and a differential rate for value-added, ad hoc services with some of the value-added funding in advance and remaining/ or add-on year over year. This kind of pricing model ensures transparency in its cost elements. Hence, the buyer gets the level of services he wants with the added benefit of getting decreased prices over subsequent years for the standard services; and the service provider gets increased revenues with increased scope and minimized financial risk when the scope changes.
More to be continued in our next blog…