Bullying outsourcers could be costly

Companies will get more value from an outsourcing deal if they built trust rather than impose punitive penalties for failure, according to new research

Companies that use harsh service level agreements to bully their outsourcing supplier could be missing out on a "trust dividend" worth up to 40 per cent of the total contract value.

Outsourcing based on mutual trust can create a 20 per cent to 40 per cent difference on service, quality, cost and other performance indicators, according to research by LogicaCMG and Warwick Business School.

Companies should agree a relationship charter with their outsourcing partner to set a benchmark for behaviour, and make sure regular health checks, balanced scorecards and senior executive dashboards are used to monitor progress.

The report said this means that the days of traditional outsourcing contracts, in which companies rely on punitive service level agreements (SLAs) and penalties to their service provider, are numbered.

"We found that contracts with well-managed relationships based on trust — rather than stringent SLAs and penalties — are more likely to lead to a 'trust dividend' for both parties," said professor Leslie Willcocks of Warwick Business School, co-author of the report, in a statement.

"Our study found a number of outsourcing contracts where adversarial behaviour, inexperience or lack of confidence led to the demise of a relationship," Willcocks added. "Ignoring the value of properly managed outsourcing relationships is tantamount to corporate negligence — simply because it has such a huge impact on return on investment and the potential value gained from outsourcing."

Andrew de Cleyn, senior vice-president for global service delivery at LogicaCMG, agreed.

"Power-based relationships are poor substitutes for trust-based partnerships given the high transaction costs of monitoring and imposing sanctions and the limited goals that can be pursued by both parties," said de Cleyn in a statement.