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Mistakes Companies Make in Outsourcing Deals

by: Karen Cayamanda

Tuesday, January 26, 2010 |

Outsourcing Mistakes to Avoid

In a study on different outsourcing deals, researchers at the University of Tennessee learned several mistakes that companies make when it comes to outsourcing deals. Kate Vitasek, UT lead researcher and supply chain consultant, said buyers will only get what they contract for, and service providers will only do what is indicated in the legal agreement.

UT researchers identified ten mistakes that are commonly committed by companies in making outsourcing deals:

1.    Penny wise and pound foolish - Having a perception that outsourcing is purely a cost-cutting measure may lead to two end results. According to Vitasek, it can be that "providers will get tired of constant bidding exercises and will decline to compete for the contract”, or "a low-cost bidder will encounter serious operating losses that curtail services and eventually force termination of the contract."

2.    Precise to a fault - The problem with placing precise and clearly defined requirements is that it does not allow enough room for creativity. The statement of work may even become unrealistic, resulting in waste.

3.    Hangers-on - “When employees suspect that outsourcing is on the table, they stake their claim to work that's likely to stay in-house, like managing the IT service provider.”

4.    Transaction trap - An outsourcing deal that is purely transactional has its downside - opportunities for improvement on the part of service provider will be overlooked.

5.    Counterproductive incentives - Giving incentives to achieve a certain level of performance from the service provider may be contradicting to what you actually want to get. The provider may end up improving just a little in order to gain the incentive. "Rather than establish the highest level of savings achievable, the provider will offer up savings in small increments over time."

6.    Honeymoon effect - Both parties put their best foot forward at the start of the outsourcing relationship. As time progresses, productivity levels decline.

7.    Ruthless negotiator - It is important to think that outsourcing can be beneficial for both parties. It is also crucial to overcoming the perception that the service provider is the only one that gets the good part of the deal.

8.    Rudderless deal - According to Vitasek, outsourcing relationships eventually do not succeed due to lack of metrics to keep track of the service provider’s performance.

9.    Measurement minutiae - Placing metrics to monitor everything is not good either, as companies usually fail to keep track of their own metrics.
10.    Hands-off management - "If you don't use the measures you have to make improvements, you should not expect [positive] results," Vitasek said.

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