Terminating a Failed Outsourcing Relationship: Key Points to Consider

By Allan Watton on
Photo Credit: Justin Cozart
Photo Credit: Justin Cozart

Failed outsourcing relationships are a really painful experience to go through.

If you are in a strategic relationship that is not achieving your business outcomes then you will have tried many actions in an attempt to encourage the vendor to ‘up its game’ and achieve your objectives. If it is still not working, despite the encouragement, cajoling and incentives (perhaps you’ve even had to resort to threats) then there is a point at which you have to face reality as to whether the relationship will ever work.

Whilst it is of little comfort to you, be aware that you are not alone in having to deal with these challenging vendor relationships.

The Worrying Prevalence of Outsourcing Failures

Just two weeks ago we reported on the failure of Southwest One to achieve its wider community objectives and the subsequent settlement reached between Somerset County Council and IBM. It served as a stark reminder that outsourcing relationships can fail holistically despite the best intentions of both sides at the outset.

Over the last year, we have seen an ever-growing increase in the number of problematic strategic outsourcing relationships that are unable to be re-aligned and put back on track. Worse, we are also seeing that the great majority of these relationships are being advised to be terminated early, but with an incorrect focus in both the contractual approach and appropriate evidence in order to terminate un-recoverable relationships safely. This is leading to significant financial damages claims from strategic vendors towards their clients. In the majority of cases, where providers have not been achieving your business outcomes, these financial claims from them can often not only be avoided, but usually, should result in you being able to reclaim substantial fees from them.

With the above in mind, we have published a white paper that covers the 10 step process you should take to terminate a failed outsourcing relationship safely and quickly. If you do consider your outsourcing relationship to have failed, and you have tried everything you can to get it back on track but with no consistent increase in results, then I urge you start by reading this post. If you are subsequently convinced that terminating the agreement you have with your provider is the only option left, our white paper will help to point you in the right direction for the key points you need to consider.

Can You Recover a Failed Outsourcing Relationship?

Although Southwest One was arguably a great disappointment for both the public sector partners and IBM, some might consider it an advert against outsourcing. However, not all agreements meet such an end — even when performance is initially poor.

Consider for instance the case of Morrisons and Birmingham City Council. In late 2011 the gas repair contractor was heavily criticised for its poor performance — in December they left 1,000 households without heating and fixed just 70% within a week. Fast forward to early 2013 and the improvement was dramatic, with 99% of central heating services being carried out on time and 82% of all repairs being carried out on time. Chairman of the council’s Partnership and Contracts Committee, Coun Majid Mahmood, said, “They can only be congratulated on turning around their contract…They are now performing well.” (Source).

This is due credit to both Birmingham City Council in demonstrating strong management of the contract, but let’s not forget its vendor, Morrisons, who put in significant efforts to review its service provision quickly. It didn’t do what some vendors do; just produce a report trying to void itself of all responsibility. No, it actually changed its on-the-ground behaviours, accepted its responsibilities to the wider community of Birmingham, and put both resources and processes into place to (a) fix the immediate problem and (b) ensure that any repeat of this type of service failure was minimised.

So the first question you should ask yourself when considering terminating the relationship is, “Have I reasonably exhausted the main avenues for improving the relationship’s performance?” You should only move on when you are positive that the answer to that question is yes.

Is it the Provider’s Fault?

Although providers can fail their clients in terms of delivering on quantitative goals, it is not always the provider that should be blamed. For instance, 30% of respondents in an Aberdeen Group survey reported ongoing issues with outsourcer management processes, such as inadequate governance and conflict resolution procedures. This can be as much the fault of the client as it is the provider.

One example of a common sticking point within an outsourcing relationship is a lack of innovation. There can be many causes for this, but one would be a rigid contract that actually prevents the provider from innovating. Another example of issues within an outsourcing relationship that are not directly caused by the provider would be the client dealing with sub-vendors directly rather than through the proper channels. This undermines the relationship with the provider and compromises the protective qualities of the contract. If you do go directly to sub-contractors, then be aware of the contractual consequences of doing so. They aren’t pleasant.

In deciding how to approach the issue of poor performance it is important to carefully analyse the reasons behind the issue(s) at hand. Deciding to terminate a contract is a huge move and should only be explored when all other options have been exhausted.

Common Causes for Failed Outsourcing Relationships

In addition to ambiguous issues that may not be the fault of the provider, there are plenty of ways in which your outsourcing partner can fail you. These include:

  • The vendor not delivering on their promises (leading to increased costs and/or poor service)
  • KPIs being met but business outcomes not being achieved
  • Financial difficulties on the part of the vendor leading to poor performance
  • A seemingly singular focus on profits above all other priorities
  • A lack of innovative thinking.

These are just a few examples — in reality there are many more – and some far more serious. While many of them can be addressed and managed in such a way that performance is turned around and outcomes are met, contract termination can occasionally be the only solution.

If you have any questions regarding difficult outsourcing / PFI relationships, then please do not hesitate to contact us for further information or download our free white paper.