Take Your Loss During an Outsourcing Project

When two parties decide to cancel their agreement, both will be affected by this decision. In an outsourcing project, it is under most circumstances the sponsor who will decide to break the contract. This is always a difficult decision. Breaking the contract too early could mean a lack of commitment, but waiting too long may cause even more harm, for either parties.

The start of such an outsourcing transition is a phase where the contract has been signed and where the sourcing partner starts to configure their systems according to the requirements that have been outlined. The project / transition has really started…

During such a phase there will always pop up issues that haven't been addressed in the contract. When such an issue-list becomes too large, the project becomes unmanageable and it is better to call it off. Under what circumstances this should be done is hard to say and specific for every situation.

Examples of problems during such a transition are:

• lack of functionality offered by the sourcing partner. The sponsoring party will feel that it will loose too much functionality. This issue must have been addressed somehow in the contract, but a project on paper is different from a project in real life: people will feel what the lack of functionality will mean for their business. Standardizing is one of the issues here. A sourcing partner must offer standardized functionality so it can reuse similar components on a larger scale and to other companies. Otherwise, it is not in the interest to start the in-sourcing. The outsourcing partner must be aware of this
• Time-to-market. During a transition delays are an indication of the time-to-market of the partnership business. This comes from both sides, but is one of the indicators that shows the success of the partnership.

Somewhere along the line someone has to take the decision to call it all off.

The sponsor, who started the outsourcing, should manage the incident and should report the problem to the rest of the organization. There is always a cause that gets communicated, but one should check whether it is the real cause. Outsourcing affects the organization which causes stress. Was the change well managed? Were people not informed about the changes? It is possible that the resistance to continue the outsourcing grew over time during the project?

Take your loss means also that this problem must get addressed. Blowing the whole thing off doesn't solve the problem the organization was dealing with. The decision to outsource requires a cultural change from "Do It Yourself" to "Manage A third party." The new dilemma now is whether this was a management problem - the transition could not be managed - or really the problem of the sourcing partner (not able to offer the right functionality, time-to-market and on budget).
This is one of the main issues and if this doesn't get cleared out, the organization will drag the same management problem with it.

Take you loss solves the investment problem. It doesn't solve the management problem. How do you know whether you will not make the same mistake again? If it was the first time than it is all part of a learning process. If more outsourcing projects have been canceled, it might be a symptom of a more profound problem.

In either case it affects the image of both parties. The sourcing partner will have a negative publicity towards new projects and clients, unless it is able to communicate the problem and learn from it. It is very likely that the sourcing partner is able to solve the problem and use the knowledge of the "failure" in next projects, so this gives the organization more experience.

The Sponsor will have to deal with a new problem. What now and how does this affect our strategy?

The economic situation (outlook) could also have influenced the failure. Many companies decide to outsource as part of a growth strategy, not only on refocusing their business. When the forecasts change this could impact the strategy and negatively influence the sourcing decision.

H.J.B.