Is outsourcing just a sophisticated Ponzi scheme?

Outsourcing service providers are operating in a world that is evolving at breakneck speed and best practice a few years ago is outmoded today. The reality is that without important pivots and an evolution in thinking and contract negotiations, outsourcing runs the risk of resembling a sophisticated Ponzi scheme.

To illustrate this, take the view of a service provider: the provider must continually add volume to an engine that continues to grow. If it doesn’t, it will run out of room to manoeuvre.

Let’s say a partner signs a three- or five-year deal with a customer, sets the price at a fixed level and runs the project over that period. After three to five years – because technology evolves as quickly as it does – the commoditisation potential of the delivery elements ends up reducing dramatically. The outsourcer is in a position where it has fixed costs that come with the project and if it doesn’t keep adding volume to the game it will run out of room and eventually enter a death spiral.

In other words, outsourcing which follows this trend resembles a sophisticated Ponzi scheme: if the outsourcer keeps adding volume the people at the bottom of the pyramid continue to be fed. The minute the outsourcer stops adding volume, the pyramid flattens out and nobody gets fed.

Let’s flip the coin and take the view of what the customer wants. The customer wants an outsourcer that is continually driving costs down. Instead of contracting a partner at a fixed cost over a few years, customers want to contract in a way that delivers a cost reduction to them over a given period. This is a contradiction to how an outsourcer would generally work, and they need to pivot.

The evolution of outsourcing is an outcomes-based contract and not set against an hourly agreement or labour arbitrage understanding.

Let’s consider how this pivot would look. Instead of contracting a service-level agreement around a working desktop service, for example, the better approach would be contracting a desired business outcome, such as a productive employee. A working desktop service is essential, but the actual desired outcome is a central pillar of the agreement. From a customer’s perspective, they would need an outsourced provider to have the capability to measure this desired outcome.

How does this look in the real world? Imagine a customer in the mining industry that would like to improve their yield. We would typically enter a contract with this miner, as part of our data and analytics service, to improve their yield. Technology – data mining, analytics, artificial intelligence – is how we do our job, but the outcome is a measurable improvement in yield or efficiency that comes from the processes we put in place.

These outcomes-based outsourcing and project-based services are the future of our industry. Gone are the days when customers would pay for services for services’ sake and not link the work back to a direct business outcome they wish to achieve.

The contract must be underpinned by a high level of trust, transparency, controls and relationship management parameters.

Of course, this relationship needs to be rooted in fairness. There cannot be an unachievable outcome that stacks the odds heavily in favour of the customer who still gets the service but against the provider who runs the risk of not being paid. The contract must be underpinned by a high level of trust, transparency, controls and relationship management parameters.

There are four pillars that should be in place as customers and service providers negotiate partnerships that result in fair agreements that will not send the project down the slippery slope of resembling a Ponzi scheme. There are:

1. Honest discussions around reducing costs. The customer is upfront about their current costs and together with the partner, they develop a business plan to drive those costs down. Remember, it takes two hands to clap. Ever imagined one hand clapping? You don’t want your project to resemble that.
2. Develop a clear understanding of the business outcomes the customer wishes to achieve, demonstrate how your services will achieve and measure these outcomes, and then contract it.
3. Agree to develop human capital. The goal should be that at the end of the outsourcing contract, the people the supplier inherited that wish to play along have been upskilled, reskilled and are employable.
4. Contract at a behavioural level. There needs to be trust underpinned by honest disclosures. Leadership author Dr Tim Elmore writes: “We must build the bridges of relationships that can bear the weight of truth.” Approach outsourcing relationships with the commitment to build bridges to bear the weight of honest disclosures.

Those that are courageous can add a fifth pillar. As a result of the pandemic, not many businesses are sitting on huge piles of cash, and a partner can demonstrate that it is prepared to walk a journey with the customer and drive a joint outcome of improved business competitiveness and top line, and negotiate how to share in the rewards. This is compelling but it will only happen with transparency and an investment in a rock-solid relationship.

An outcomes-based approach to outsourcing will not only avoid a fatal pyramid, it will also deliver the value needed to help businesses claw back lost ground and thrive in a post-pandemic world.