Long-term Information Technology (IT) relationships have always been fraught with challenges. Today, long term relationships patterned after those of the past don’t have a prayer for success. Why? Because the static nature of the agreements dooms them to failure.
Look at the IT market. It is constantly changing as new technologies are introduced, new opportunities are revealed, new business practices push the envelope of excellence higher and stronger and faster.
The long term contracts of yesterday take none of that into consideration. They are predicated on a set of business assumptions that immediately begin to change. Then the deal that works becomes something other than the deal that was negotiated. When two parties find themselves in that situation, one of them usually will end up a loser, and a relationship between a winner and a loser is not sustainable in the long run.
Even the provisions for change within the old relationships are not adequate. Outsourcing traditionally has been a step change. You identify a service level and determine the cost of delivering that service. That standing cost mean is then held constant for a period of time.
That won’t work in today’s marketplace. We operate in a very competitive environment. In order to prosper, companies need to have continuous improvement built into their IT outsourcing relationships. As the industry moves ahead, you need to be moving with them, not holding constant to service levels that are no longer adequate.
The final reason that old-style relationships don’t work is this: people have not spent the time and money to establish methodologies to measure financial and service levels objectively. Everything is assessed subjectively, which means that make-or-break business decisions are being made on an inconsistent basis.
Even worse, some contracts have only penalties with no rewards. That can lead to what I call the five o’clock whipping phenomenon: It’s five o’clock, bend over and take your whipping. Regardless of what you’ve done, you’re still going to take your whipping, because it’s Friday and it’s five o’clock.
The key to success today is moving away from those old dysfunctional relationships and structuring agreements that allow the relationships to ebb and flow to meet the customers’ needs and move with the industry as it becomes increasingly sophisticated.
The relationships themselves should last longer than they do now, with the actual contracts shorter range to accommodate the constantly shifting industry. The relationships also should be based on a win-win approach.
To accomplish that, hold out investment as a separate issue from performance criteria. As the suppliers generate value, share that value with them. Remember that value depreciates, and the owner is always the customer. Over a year — or, at most, two years — the value of that specific work should belong entirely to the customer. The vendors must then offer a new source of value to continue to share in the winnings. With this approach, continuous improvement is built into the structure of the relationship.
Remember that the measurements must be objective. Use one of the frameworks and methodologies available in the industry to establish real financial, business-oriented, and diagnostic measurements of performance.
Long-term outsourcing relationships can be beneficial to both customers and vendors in growing their businesses. The vendor becomes an integral part of the customer’s business, lending technical expertise, offering insights into new opportunities, and providing support when and where it is needed. The customer views the vendor as a partner deserving of reward for the value generated. That mutually advantageous relationship creates the environment for long-range success.
