At the point where outsourcing service providers or their customers have financial conflicts that will result in a monetary loss to either party, they’re walking a fine line. If they manage to resolve the issue with a mutually beneficial solution, their relationship will be even stronger than before the conflict. If not, the party that loses in the solution will harbor resentment, causing a rift in the relationship, which erodes the anticipated return on investment.
Outsourcing Center studied 112 relationships among those nominated for its annual Outsourcing Excellence Awards program during the past three years, which provided information about how they resolved financial conflicts.
We found a similar path to conflict resolution among relationships where the conflict – if unresolved – would have caused a financial loss to the service provider. The following examples describe the approach the parties took to arrive at an agreed-upon solution for their financial conflicts.
Relationship #1: When they negotiated their contract and pricing model, the customer and service provider in this relationship established four “buckets” or types of services, with a predetermined number of hours annually in each bucket for free services around projects not anticipated at the beginning of the year.
Their conflict arose when they disagreed on terminology (such as the difference between a system update and a system upgrade) as well as what kinds of projects actually qualified for the free hours. The conflict lasted eight months.
In resolving the conflict, they reached a compromise, with each party bearing half the cost of the questionable hours and jointly clarifying the arrangement in their contract.
Relationship #2: In this outsourcing relationship involving global services, the parties ran into a problem because of using multiple currencies, which created a tax liability they had not foreseen. While the liability was not large, it was significant. Seeking to resolve the issue without damaging their relationship, they decided to split the tax cost.
Relationship #3: The financial services customer in a relationship became unhappy because the service provider did not implement newer technologies that were available. To do so would have blown the business case for the provider because of the way they had structured their contract five years earlier.
After four months of conflict, the solution they reached involved restructuring their arrangement and adding incentives to their contract and pricing model that would ensure a win-win outcome from implementing newer technologies.
Relationship #4: In another relationship with a conflict around implementing a new technology, the buyer requested the new solution and tried explaining the request from the perspective of a mutually beneficial opportunity around a new service that the technology would support. The service provider stated it didn’t agree that the new service was an opportunity and, although it didn’t refuse to implement the technology, it delayed committing to the investment for many months.
The buyer then went to market with a Request for Proposal for the requested solution – but also invited the provider to bid. The service provider at that point recognized the opportunity, bid on the work, and was awarded the contract.
Relationship #5: The customer in this large-scope outsourcing relationship for both IT and BPO services benchmarked the provider’s IT services a year before contract renewal time and confirmed its suspicions that the services were overpriced. At the negotiating table, the provider refused to lower its prices.
However, the provider opened its books and in a very transparent manner shared its perspective – that it was not making a profit on a BPO service for the customer.
Their conflict resolution involved negotiated lower rates for the IT services, a higher rate for the BPO service, and implementing improvements and labor arbitrage to another outsourced process to help make up for the provider’s previously lost margin and the customer’s future lost savings for the BPO service’s higher rate.
Relationship #6: Here, the parties decided to implement a technology system to support added scope of services. The provider wanted the buyer to purchase the system the provider recommended, but the customer disagreed as it would have made it difficult to switch to a different provider if the relationship were not successful.
In resolving their conflict, they jointly assessed various systems and ended up using the buyer’s existing infrastructure. This was a win for the buyer cost-wise, and the faster time to market brought new revenue to the provider sooner than they anticipated.
Relationship #7: The gain-sharing incentive clause in the contract became a conflict in this relationship for BPO services. The service provider needed to outperform in order to achieve the gains that made its financial model work. However, the parties had a conflict regarding the clarity of the contract around the defined level of performance.
The customer did not want to pay gain-share for what it perceived was not out-performing. It took seven months to resolve their conflict. They both came to the table with each giving the other something that benefited the other party but didn’t cause too much pain to give. By each giving on a couple of things and adding to the mix from other service areas, it helped them move to a compromise on the gain-share issue that both could live with. They also restructured the gain-sharing clause in their contract.
Compromising
The buyers in all seven cases stated that reaching agreement on a solution to their conflict involved the following four factors:
Transparency of both parties regarding their financial position
Level of mutual trust that the parties had developed prior to the conflict that was high enough to enable them to trust each other to work through the conflict in a manner that would not end up with one party losing and the other winning
Willingness to seek to understand each other’s perspectives on the issue
Approach to conflict resolution built on a strong desire for a mutually beneficial long-term relationship
Factor 2 above was especially crucial, according to the seven buyers in the relationships Outsourcing Center studied. They explained that, until the issue is resolved, a conflict causes a lot of stress and anxiety for both parties. As was the case in these seven relationships, where the conflict means a potential financial hit to one party, the conflict – with the associated stress on the relationship – can last for many months.
Factor 4 above enabled the buyers to agree to resolutions that involved the buyers splitting the costs or taking on some portion of the liability in a financial conflicts solution. In each case, it resulted in strengthening the relationship, which then led to a higher level of satisfaction for the buyers.
