Offshore Outsourcing Vendors, Customers, and Advisors: They Should Know Better

Posted by Anthony on Monday, November 16, 2009 · Leave a Comment

Offshore Outsourcing Contractual Conflicts Never Payoff.

Today’s Dallas News included an interesting article on the State of Texas’ seven-year, $863M IT offshore outsourcing contract with IBM. What makes it interesting? The doom and gloom comments by the esteemed outsourcing advisors, Equaterra and Sierra Systems Group.

“In the final analysis, the current relationship is not sustainable,” the advisors say. Then they suggest that the offshore outsourcing contract be rewritten by February.

The State’s alleged problem? Last year, governor Rick Perry said IBM failed to perform, “…the crucial backup of data for more than 20 state agencies.” He then suspended the outsourcing project. This year, EquaTerra’s commented that “…for some agencies, once a week backup may be adequate. For other agencies, where they do large volumes of transactions … it’s not adequate.”

Let’s be serious. This is backing up data, which is arguably one of the simpler outsourcing tasks to perform and probably not worth $863M annually to perform. It is a minor task, something that should, if properly managed, be included in regular daily, weekly, and monthly reviews with IBM. Why are the parties heading toward litigation? It should have been resolved years ago. Especially on a public contract.

Equally interesting, is EquaTerra’s suggestion that the contract be renegotiated. This is a massive contract that was publicly bid and folks want to renegotiate it? This is exactly what vendors love to do. Outbid other vendors and allow the requirements of the customer to drive renegotiation when the vendor’s knowledge of the requirements and negotiation leverage is significantly greater. Of course, advisory firms love to play a role in renegotiation, so maybe fees are of interest?

We know of one situation where the vendors bid in a competitive process on a commercial contract for data entry worth $4M annually, deciding to not charge implementation fees. After winning the contract, the client then issued over 150 change orders in the first three months of the project. Total charges for changes: $1.5M. Total increase to cost per transaction rates initially negotiated: 15%. The percentage of service levels achieved in the first 3 months? 0%. In Texas’s case, Grant Thorton has suggested the State of Texas has saved a mere $500,000, compared to the goal of $24M of annual savings.

What’s the problem? Undermanaging offshore outsourcing vendors results in underperformance. Advisors seek contract renegotiation as a means of resolving non-performance of contractual obligations. Undermanaging internal stakeholders results in erosion on offshore outsourcing ROI.

You’ll never mimic Texas’s problem if you get it right up front, manage the vendor effectively, and govern changes.