Recession Strains Outsourcing Partnerships

Troubled economic times tend to take their toll on relationships. That's no less true in outsourcing partnerships than it is in your personal life. Financial straits have a not-so-subtle way of bringing the flaws in any union to the fore.

That's exactly why so many outsourcing customers are miserable right now, say outsourcing attorneys and consultants.

In many cases, customers are unhappy because they're waking up to substandard conditions that existed all along in the relationship. "All purchases are under more scrutiny today, and IT leaders are looking for more value for dollars spent," says David Rutchik, a partner with outsourcing consultancy Pace Harmon. "To the extent that outsourcers are not meeting expectations--which is actually the case all of the time--customers have less patience for suboptimal performance and other issues that they may [otherwise] take with a grain of salt in better times."

Consequently, some customers have begun to question why they ever outsourced in the first place, leading to "increased benchmarking, increased renegotiation, and increased angst," says Adam Strichman, a Mechanicsville, Va.-based independent outsourcing consultant. Those measures strain both parties in the partnership.

Sometimes the strain is simply a matter of perception. "The buyer may presume that the vendor is trying to cut corners, and the provider may presume that the buyer will begin to try to squeeze them on prices," says Ben Trowbridge, CEO of outsourcing consultancy Alsbridge.

In other cases, vendors may, in fact, be cutting corners to preserve their own profit margins during the recession, says Daniel A. Masur, a partner in the Washington, D.C. office of law firm Mayer Brown. Customers may notice the outsourcer reducing staffing levels, ignoring contract obligations, or generally underperforming in order to extract additional dollars from existing clients.

Some unsatisfied customers can't articulate exactly what's gone wrong with their outsourcing deal. They just know something's not right. "Most companies are fairly immature in governance. There is little or inadequate attention placed on it by customers," explains Rutchik. "A lot of times they may not be able to get to the root cause of why they're dissatisfied. And even once they understand why, they may not have the mechanisms in place to address it."

Whatever the underlying reasons for the discord, outsourcing customers must address it with dispatch. "Once the relationship goes bad, it only gets worse," says Trowbridge. "If the relationships go south in one area, it will quickly bleed over into another. Before you know it, the whole operation begins to unravel."

[ For more information, see How to Improve Outsourcer Relationships and Outsourcing Incentives and Penalties that Work. ]

Though the initial tendency may be to call in the lawyers, the problems are rarely legal in nature. They're usually about communication--or lack thereof. "People tend to forget that even big relationships between big players are still people-based," says Edward Hansen, a partner in law firm Morgan Lewis Brockius's Business and Finance Practice. "The longer the people with bad relationships on both sides stay entrenched, the more likely it is that the damage will become institutional."