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Service Effect: The future of outsourcing contracts?

by sourcingfocus.com

Outsourcing is an industry which thrives in a recession. Now more than ever end users are focusing on the bottom line, making slashing costs a decisive factor in the procurement process.  However despite this ‘cost is king’ approach, we are seeing the rise of a particular outsourcing model that treats suppliers as strategic partners rather than external cost cutters. 

The ‘service effect’ model is being used by end users in an effort to detach themselves from how a supplier delivers their services, which allows the user to focus on end objectives.  This outsourcing model has become prominent enough for the National Outsourcing Association, the UK outsourcing trade association, to hold a seminar dedicated to the topic.

So what is service effect?  How can end users feasibly sit back and let the supplier work their magic?  Essentially the service effect model boils down to end users identifying exactly what their strategic outcome should be in an outsourcing arrangement.  The supplier’s job is to then meet the outcome using whatever tools are needed.  Srikanth Iyengar, Global Head of Business Development for Strategic Global Sourcing at Infosys, summarises, “In service effect models, customers focus on an overall outcome which helps us run our operation in a very efficient way.” 

It seems like an interesting way of conducting an outsourcing deal and it means that both supplier and end user must, above all else, trust each other to work towards the agreed objective.  Mr Iyengar highlights the importance of the end user trusting the supplier and adds that “setting clear expectations and objectives for the supplier to work to is essential” he also goes on to say that the supplier becomes much more of a “strategic partner” rather than just simply a vendor.  This strategic partnership is salient for both user and supplier.  Suppliers will need to ensure that teams working on the end user account are fully briefed on the way the user operates and well versed on the market the user operates in.  End users will need to incorporate the supplier in key board-level decisions in order to properly align the strategy or modify objectives. 

This level of trust and partnership surely would not be obtained over night.  Mr Iyengar reinforces this by saying that “prior relationships help”, so do service effect models fall into the realm of contract renewals rather than brand new outsourcing contracts?  Suppliers and end users would certainly be taking a bigger risk entering into these contracts. Suppliers could be left with a bloody nose if objectives are not met, end users could face a situation where money has been ploughed into a partnership with nothing to show for it, so surely a prior relationship is essential rather than helpful; And what of ongoing communication to ensure things are going to plan?

Service effect models have the potential to work well.  However, as with any outsourcing deal they need to be thrashed out properly in order to reap the benefits.  George Wheeler-Carmichael, partner of law firm NABARRO LLP, warns end users that only focusing on outcomes can lead outsourcing deals into trouble, “Contracting for an outcome or a ‘service effect’ puts a new perspective on an old issue with outsourcing contracts, rather than creating an entirely new challenge.  Whether a customer is starting out on a new outsourcing relationship or is renewing an existing one, if the aim is to achieve a business outcome, scoping the service requirements is still as important as ever.  Focusing on the end point of the journey and allowing the supplier greater flexibility in the technical means of getting there must not distract the parties from setting out required characteristics of the journey and from contract and service management in general.”

Mr Wheeler-Carmichael also commented that there needs to be regular ‘touch-points’ where users can monitor the progress of the outsourcing arrangement, he also commented that key milestones should be set and reached in order to properly maintain the relationship.

What does the future hold for service effect models in outsourcing?  According to Mr Iyengar, clients switching to service effect models with Infosys are in their tens rather than hundreds suggesting a gradual change rather than a sharp shift. While Mr Iyengar expects these types of contracts to be more prominent in the future, it remains to be seen which vendors have built sufficient trust with clients to make such a strategic leap.

So the service effect model is one to keep an eye on as a trend for the future.  It appears that there are those who have felt comfortable enough to adopt this strategy with their suppliers; however, the model may not be for everyone.  Those in multi vendor relationships may find the service effect model very challenging and possibly not the right solution.  The model does add another dimension to outsourcing and it will be interesting to see whether those that begin their outsourcing journeys through downturn cost cutting, find themselves in a service effect relationship a few years down the line.


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