• United States

Why some contracts don’t go as planned

Mar 31, 20044 mins
Enterprise Applications

* The dangers of service providers over-promising on deals

EDS, in a recent U.S. Securities and Exchange Commission filing, reported that another of its large contracts was in trouble. It stated that an unnamed customer might cancel the contract or demand other financial remedies for the provider’s alleged failures in the outsourcing relationship. EDS’ troubles highlight one of the fundamental truths of technology and outsourcing: There is no silver bullet.

Organizations often pursue outsourcing relationships in a bid to save money or to control IT spending. To attract these large contracts service providers may be tempted to bid aggressively and plan for the best-case scenario. Often, providers are under pressure to win such contracts, not only for the revenue, but also to be able to publicize these deals and attract smaller customers.

When a service provider considers the requirements for an outsourcing relationship, there is a focus on the potential for economies of scale when adding the new customer to the existing portfolio. Often, the common elements between customers are not as similar as was hoped, and the ability to make changes to accommodate the differences is difficult.  This is even the case as the contracts increase in value. As a result, many of the opportunities for profit and benefit to both the customer and the service provider are suddenly out of reach, and both find disaster only an arms-length away.

If there is even one unforeseen circumstance, service-level objectives (SLO) may be threatened, service-level agreements (SLA) breached, and the contract is suddenly in jeopardy. If these issues occur consistently, as it appears it has with a number of EDS’ key contracts (including the much-publicized U.S. Navy deal – see links below), it can threaten an entire business.

The antidote for the temptation to over-promise is structure, accuracy, analysis, and consistency. This is particularly important, even though it is difficult to maintain a customer-focused orientation while also requiring changes to merge the customer’s processes, procedures, people, and technology to the service provider’s common platforms. Furthermore, recognition that IT processes and procedures can be standardized to benefit the end-users, IT staff, and the service provider is a difficult but valuable insight. This is perhaps the most difficult challenge in IT today.

Historically, IT has maintained the perspective that each business is more unique than it is similar to other organizations from its own industry, for example. This mindset can give a false sense of security about the competitive advantages of an organization while also insulating IT from the accountability afforded by best practices. Those same best practices, however, can free IT to focus on creativity and real differentiators, by allowing the organization to use automation for maintaining and managing those best practices that follow more standard dimensions.

As outsourcing organizations like EDS have discovered accommodating all of the vagaries of their customers without enforcing a realistic set of common best practices is a recipe for difficulty and disappointment. However, it is not just the service providers that shoulder the responsibility. Typically, customers push for unrealistic SLOs and SLAs, knowing that their current IT organizations are unable to deliver services at those levels, but hoping that their service providers can. While efficiencies are sometimes a result of making fundamental changes to the IT practices, it is very rare that simply outsourcing IT without significant changes across the broader organization results in improved service and reduced cost.

As an industry, it’s time to learn from the challenges that expert organizations have faced. It’s time to create reasonable expectations and to be mindful of promises that seem too good to be true. As EDS and its customers are finding, those expectations and promises may very well come back to bite both parties. It is a greater service to guide customers towards realistic objectives, and it is of greater benefit to the customer long-term to understand that value is never free.