So by now, God help us all, we should know that the correct answer to the question: “Who can make returns year-on-year that always beat the market?”  is:  Nobody.

Clearly this phenomenon doesn’t end with Madoff. This is a human nature thing.

And it makes you look for other current examples.  Especially interesting are the situations where part of a process is conducted with a great deal of rigor…while another part is handled in a much less analytical spirit…you might even say with childlike credulity.

A perfect example of this blind spot in-action occurs in the lifecycle of an outsourcing agreement. We’re all familiar with the process that usually begins with an executive mandate followed by teams of the best and brightest convening  for months to source and negotiate enormously complex agreements with total contract values in the hundreds of millions or even billions of dollars.

The amount of resolve and determination that goes into the negotiations is impressive and the amount of process rigor that goes into the development of these agreements is impressive. So…after all that care and attention… what happens when the service provider shows the client/advisor a fee structure with unit costs that decline by 50% over the term with words ‘trust me’?

Instead of asking “Show me how you’re going to do that” the client/advisor in effect just leans back in their Aeron chair and says: “Cool!”

Here’s the thing.

Required change begets the cost of change.

If tremendous efforts of standardization and retooling are required to literally double a supplier’s efficiency over the term and the client’s business case completely relies on the supplier fulfilling this remarkable accomplishment , why are so few client/advisors curious about how that is actually supposed to happen? Does it make sense for us to just say: “I’ll leave that part to you guys; you’re the experts”?

Or, even more blithely: “ It doesn’t matter if they can’t figure out how to deliver at those rates, that’s what I’m going to pay because it’s in the contract.”

Oh dear.

It needs to be an axiom of the real world that If the deal is no longer a moneymaker for the supplier, neither a sense of honor nor an enforceable contract will keep them performing. A way out will be found: it won’t be pretty and it won’t be cheap.

Show Me

Our suggestion is not merely that clients/advisors greet someone making these extraordinary claims with skepticism, but that it is prudent for clients/advisors to insist on:

1.      Having the details of the Transformation plan demonstrated for them by the supplier and set forth in the negotiated agreements

2.      Independently validating for themselves the feasibility of the detailed Transformation roadmap provided by the supplier

Validating the plan means being able to:

1.      Define the current environment in detail (and I’d better not hear anyone saying: “Don’t worry, there’s a sweep clause”)

2.      Define the future state in detail

3.      Define the path in detail from here to there.

The figure below shows a sample of the detail required to identify the ‘who and what’ details of current service delivery and to map them to the ‘who, what and when’ of the future state.

Fig 1. Sample Transition/Transformation Service Tracker Worksheet

The Gap in the advisory process

It’s not unreasonable for clients to rely on their outsourcing advisors to usher them through this thought process…considering that without it, their business cases will fail.

However, Transformation Planning remains a shameful gap in the process led by most outsourcing advisors.

Maybe the most useful way to state our point about this gap is that clients should grasp the following “Let the Buyer Beware” message:

· Appropriately detailed Transformation Planning requires technical resources who understand the complex sequencing of and dependencies among activities. Most advisory firms are sourcing focused and don’t have technical depth to do the job;

· Typical advisory firms perceive involvement in Transformation as too risky to (due to the inherent messiness, complexity and high failure rate);

· Typical advisory firms are going to tend to be focused on getting a contract signed within the allotted timeframe, not always completeness with the detail required for success

The bottom line impact for clients is that a service provider’s reaction to the normal lack of detail in a Transformation Plan will be to do some or all of the following:

· Fail to perform

· Ask for more money because they didn’t realize the needed efficiencies and can’t survive at the contracted revenue

· Prepare themselves to approach uncertainty through change orders and other contract ‘safety valves’ that allow them to charge clients for the unplanned work they’re going to have to do

· Challenge the client and wear them down with discussions of the meaning of ambiguously worded Transformation commitments

· And so on

All of these reactions will erode the client’s business case, will result in the provision of inadequate service, and eat away at their relationship with the supplier.

The short message to take away is that if it seems too good to be true, it is too good to be true. Magical thinking may be an error we’re all prone to at times, but magic is not one of the things that ever happens when you outsource. The only responsible approach is to work out all the details prior to entering into a relationship. Leave no planning to later.

Understand where you are, where you want to go and exactly how your provider plans to get you there. Know what is expected of you and make it a point to meet with the resources from their side that will be assigned to guide you along the always challenging Transformation path. As difficult as this task seems, it is easier than the alternative.

NEXT TOPIC– The Fundamentals of Transformation Planning 

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