Outsourcing may be one of the fastest-growing parts of the IT industry, yet unhappiness with outsourcing deals is surprisingly common - and growing.
Last month, IBM quietly settled a major lawsuit with Cable & Wireless, one of its biggest outsourcing customers. C&W sued IBM, alleging more than £115m in overcharged fees from the £1.8bn outsourcing deal it signed with IBM in 1998. IBM, unusually, counter-sued its customer. Neither party commented on the settlement, and the deal itself is being quietly terminated.
The dispute between the two companies was extraordinary, and complicated by the client's much-publicised financial difficulties. But it is hardly unique. Only half of board-level European executives are satisfied with the business benefits of their outsourcing deal, according to research published this year by Gartner, the IT analysts. Two years ago, that figure was closer to 90 per cent. Something is wrong.
A major problem is "lowballing", a common negotiating tactic among outsourcers. The outsourcer agrees an extremely cheap price to win the deal, hoping to sell profitable or even overpriced add-ons later, once the customer is locked in. The result too often is guerrilla war, as outsourcers desperately claw back margins against determined opposition. Unsurprisingly, client/supplier relationships become soured.
"It's like having someone build you an extension. If you decide after agreeing the price and starting work that you want something else as well, they can build it for you. But it will cost you a lot," says Fons Kuijpers, a senior manager at PA Consulting, which advises outsourcing clients.
Suppliers often meet the terms of contracts, yet users are left feeling dissatisfied or even cheated. Roger Cox, a vice president at Gartner, says most contracts are designed for cost-cutting and are incapable of responding easily to users' changing needs. But clients believe that their contracts are more flexible than they actually are, and therefore expect much more than suppliers are legally bound to deliver. "Of all the things that go wrong in contracts, the top item is management of expectations," Mr Cox says.
National Savings & Investments, a UK government-owned financial institution, had to renegotiate a £1bn outsourcing deal it struck with Siemens Business Services in 1998. "There was certain over-zealousness from both sides at the beginning," says Helen Hawkley, head of business and service excellence at NS&I. "On the Siemens side, there was a willingness to agree to more than could sensibly be expected. On our side, there was too much eagerness to develop the business as quickly as possible, rather than as a steady transformation." The deal was saved after the two sides created a more collaborative working relationship and some problematic contract clauses were re-written, she says.
Another problem is that after the contract is signed, negotiators usually hand responsibility over to operations staff, creating discontinuity in the customer relationship. "Outsourcers' account management teams sometimes have no idea of what was promised by their sales teams," says Alistair Maughan of Shaw Pittman, a law firm specialising in outsourcing contracts.
Signs that a deal is going wrong include unexpectedly high costs, regular escalation of minor issues, disputes over service quality, and high turnover of staff, especially on the outsourcer's side. Saving deals is hard work: the entire relationship must usually be recreated from scratch.
"The first step is to put the contract on one side and to agree a realistic and pragmatic set of objectives . . . remember that you didn't buy a product, you bought a marriage," says Javaid Aziz, chief executive of niche outsourcer Aspective and former UK chief of the biggest outsourcer of all, IBM. People, not technical, issues are the key. "You need a cultural fit, good communications and a high degree of trust between the two organisations. It's not always easy," admits Paul Griffin, a business director at outsourcer LogicaCMG.
The trick is to involve senior staff closely. "Most serious problems are solved when senior executives from the two sides talk to each other. Senior executives spend far too little time keeping outsourcing relationships going - especially vendors' executives," says Robert Morgan, chief executive of outsourcing adviser Morgan Chambers. Mr Morgan says he often has to cajole executives to meet for the first time.
Sometimes contracts just are not worth saving. PA Consulting advises some clients to terminate contracts if suppliers are overcharging or appear unwilling to improve the quality and flexibility of services. "One client had a telecom contract with a terrifying termination penalty that was in the millions. They broke the contract and recouped the penalty within a year," says Mr Kuijpers.
Most disputes over outsourcing contracts never get to court. Yet neither do they "surprise and delight the customer", as IBM once exhorted its staff. Outsourcing is still a young industry, and experts say clients and outsourcers alike must develop a more sophisticated approach to contract negotiation and management if its remarkable growth is to continue.
