5 Biggest Failures in Outsourcing Contracts

Outsourcing is recognized worldwide as a key business strategy. However, a lot of companies are still hesitant to join the bandwagon. It is thus not uncommon to hear the sentiment that "as many as half of outsourcing deals fail".

Let us look at some facts. A study by KPMG conducted early this year shows “ 89 percent of respondents expect to maintain or increase current sourcing levels while only 14 percent claim to have had a significant misalignment of financial and commercial expectations between provider and client.” These would show that the majority still see the great value of outsourcing as a business strategy.


What would be beneficial for us is to learn from where others have failed. It is a source of wisdom that would otherwise come at a great cost. Simply avoiding a strategy that had a red mark seems contradictory to the entrepreneurial nature of today's business world.

Here are the five top reasons why an outsourcing contract fails.

Client's Lack of Company Vision.

Before you even think of outsourcing, you should have a clear idea on what your core functions are and what your business is all about. No one knows your business better than you. If you can not determine your company's main focus, what more can you expect from an outsourcing provider? A simple but very insightful advise from any outsourcing insider: “You can outsource anything that is immaterial to your focal point.”. Outsourcing success will naturally follow.

Lack of a Formal Strategic Measurement Framework.

According to a recent study, almost half of the companies who entered into an outsourcing contract are clueless whether their endeavor was successful or not. Why? They did not bother to establish a measurement framework to test it. They fare no better than someone attributing his business success to a solar eclipse. Having a measurement framework from day one would allow you to know the exact impact of the outsourcing contract, address any potential issues, and enhance your outsourcing potentials.

Lack of Vendor Management.

A common misconception about outsourcing is that you will simply be getting someone else to do your job while reducing your costs at the same time. This mindset leads to an outsourcing nightmare. Layers of misunderstanding are rooted from passively waiting for the results. Outsourcing is a partnership between your company and your outsourcing vendor. This means that you need to manage the relationship if it has any chance to flourish. Again, you know your business best. Help your partner help you.


Heavy SLA.

At the end of the day, the bottom line of outsourcing is results. You reduce costs, you increase your productivity, you enhance the quality of your product or service. Service Level Agreements or Requirements (SLA or SLR) ensures that you and your provider are on the same page about the success of your business. Sometimes, the bottom line is lost and both parties are stuck at the SLA, trying to make the most out of the deal. This commonly leads to SLA's that are ridiculously improbable that they look like a prelude to disaster.

People.

Outsourcing is primarily about people. You don't normally outsource something that you can already automate. Finding the right people is almost an imperative for success. It is therefore not a surprise that it tops the list of difficulties encountered in outsourcing. Dealing with your outsourced team and the outsourcing provider dictates your day to day operations. Finding the right cultural fit, compatible language, and hiring qualified people, should be given due consideration to ensure a smooth relationship. Conflicting values and language barrier easily spells doom for any outsourcing contract.