The honeymoon is over — What happens when sourcing projects escalate

Butterflies in the stomach Optimizing the degree of vertical integration is nowadays indispensable for a lastingly competitive setup. There is huge cost potential in particular in the fields of back office and IT by means of outsourcing tasks to specialized service providers. The advantages of outsourcing projects are hailed—especially in the beginning of a project—and encounter a generous offer of service providers, that are good at embracing customer needs and at enhancing positive expectations. During the RFI and RFP phases, competitors enter a courtship ritual for the bride and promises are made which may not be able to be fulfilled.

Always test the ties that bind

For the long-term success of a business relationship with a sourcing partner, it is decisive to keep a cool head already at the early stages of negotiations and to not rush into any decisions. In order to make a well-founded decision, the promises made by the individual providers must be compared in depth. Here the client has to resist the temptation to submit to—actually often tempting—processes and procedures of the seemingly friendliest provider. The client has to remain in the driver’s seat during the entire selection process and must strictly specify structures for contracts, services agreements and price models. The underlying assumptions are to be clearly documented in order to develop a common understanding of the service portfolio, supply duties, etc. A carefully performed selection process represents an ideal background for a long-lasting business relationship, which is profitable for both sides.

Wedding and marriage contract

Long-term working relationships are based on clear and comprehensible contractual basis with an equal distribution of opportunities and risks. The attempt to safeguard benefits for the client at the last minute by means of a false negotiation ambition or to claim excessive supply duties on the part of the sourcing partner by unrealistic assumptions may be tempting for a short time. However, in the end, it is a one-way ticket to an escalation with significant disadvantages for both sides. The contract should rather be well structured and developed in a transparent way in order to prevent unpleasant surprises during the long-term business relationships as well as unnecessary discussions about the interpretation of contractual clauses. Integrating a competent neutral entity ensures the required fairness and significantly accelerates the negotiating process by means of tried and tested structures of contracts and services agreements. Not least because of this, costs for legal advice are reduced, which can reach a significant scope in large-scale projects. If everyone agrees to the contractual terms, this should be celebrated appropriately. This spirit of optimism that this brings is important for overcoming together the first difficult time of the transition.

Hangover

Careful preparation lays a solid foundation for the cooperation, but cannot completely prevent disappointments. After the initial enthusiasm and spirit of optimism, a phase of disillusionment follows in all sourcing projects during day-to-day life: Simple quick wins have been leveraged, the transition is exhausting and misunderstood assumptions or the withdrawal of initial promises weighs heavily on the relationship. Whether this leads to a small quarrel or a real crisis significantly depends on the stakeholders involved. Especially, if the team of the provider changes, the ties from the initial phase will quickly get lost. This is the case for e.g. structural changes, that often exist at large sourcing providers, or if a so called “B team” appears after a successful contract conclusion. If this missing personal tie occurs alongside unfulfilled expectations in terms of service provisions, an escalation is inevitable. If the new stakeholders on the part of the provider do not know the history, which has been considered to be positive, the situation will be blown up and a widespread hangover is the result.

Relationship therapy or marital war

The most critical phase for the success of the sourcing project begins: The business relationship has to be stabilized until both sides feel at ease again—Otherwise, there is no chance of a long-term business relationship. As both sides believe they are in the right, there is a high risk of a withdrawal to formal positions. Whereas service providers are usually willing to negotiate in order to maintain a good business relationship, the clients often feel a high pressure to actually realize the effects, which have been promised in the run-up of the sourcing project. Although the situation is emotionally charged, it is advisable to keep a cool head and to assess the situation impartially: If there is still a basis for maintaining the business relationship despite the current differences, both sides should seek reconciliation, possibly even by means of a specialized mediator. In the end a compromise solution is face-saving for all stakeholders. An exit, however, would typically entail significant sunk costs. Only in—in all objectivity—hopeless cases is a nasty divorce the only viable solution. Regardless of the contract, both sides will have to expect damage. This is the case if a compromise solution has already failed or the provider has “gambled” during the proposal phase and the providing company does not support the deal anymore.

A good witness can help

The success factors for sourcing deals particularly comprise carefully structured RFP, RFI and contract phases. Always retaining control is the best prerequisite for implementing a common project. Furthermore, it is decisive to keep a cool head even in crises, to try to understand the other side and always aim at compromise solutions. A specialized expert can offer significant added value in both decisive phases: Processes can be accelerated by using proven procedures, while viable compromises can be found for both sides with the help of an “unbiased” view of a competent mediator. A trustworthy “marriage witness” can reduce problem potentials in the run-up and thus successfully overcome crises.

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