The Failures

Not all transformational outsourcing initiatives are successful. Every company in our universe of 20 examples proceeded through implementation with enough success to call the program effective up to that point. None was perfect, but the processes and the systems that the partners intended to put in place were actually implemented. Where, then, do these initiatives fail? In using the capabilities the partners have created to achieve their strategic aims. Out of 20 examples, it’s too early to see the results for three of them, and three (15 percent) ultimately failed to meet their strategic goals.

By the way, this is a remarkably small number when it is compared to other types of large organizational change initiatives. Whether we’re talking about acquisitions, alliances, major systems implementations, or even conventional outsourcing, the statistics are fairly consistent. Fifty to 75 percent of the initiatives ultimately fail to achieve their objectives.^[7] Compared to other big organizational moves, then, transformational outsourcing is remarkably successful.

But let’s talk about the failures. There is one dominant reason for the three failures. These companies accomplished the organizational transformations they set out to make, but the changes they made did not—or were not perceived to result in competitive success. While none of the implementations were problem free, tactical setbacks were surmountable.

The real failures were issues of strategy, not of execution. For example, in 1997, the group chief executive of a large insurance company in the UK laid out an aggressive strategy for driving growth through door- to-door agents. He knew this would involve investments in information technology, but he was skeptical that the IT organization had the capability to deliver. Two major development projects had incurred frightening budget overruns before being canceled. He concluded that the company needed an infusion of expertise to develop the new tools its strategy required. He contracted with an outsourcing partner to take over and run daily information-technology operations, to improve IT processes and services, to ready the company for the millennium, and to launch a major program of strategic development.

Through three years of effort, the information-technology capabilities of the company were dramatically improved. Operations were streamlined and brought under control. Y2K-related improvements were made on time so the company passed into the new millennium without incident. And the new systems for supporting door-to-door agents were implemented. Unfortunately, by the time this work was completed, the company had changed business direction. Instead of outfitting 2,000 agents with new technologies, it laid them off and announced that it was withdrawing from direct sales. In other words, the outsourcing initiative did what it was designed to do: clear away the barriers to growth. However, by the time they were cleared away, the game had changed. As a result, the strategic impact of this transformational outsourcing initiative was minimal.

A start-up Web exchange that prefers to remain anonymous also failed to achieve its objectives through transformational outsourcing. Again, the culprit was strategy, not execution. The exchange was launched by a consortium of large oil and chemical companies in the late 1990s to provide a portal for online procurement in these industries. The consortium’s intention was to preempt any pure Internet upstart from taking all their business, and as we all recall, the heat was on to do it quickly. At the outset, the company planned to connect buyers and sellers in both tendering and auction processes. In order to get to market quickly and scalably, the exchange’s executives elected to outsource finance and accounting, human resource management, customer contact, and information technology. They reasoned that the only way to create a capability to handle high volumes of transactions with complex pricing quickly and effectively was to rely on established operations available through outsourcing.

Unfortunately, the transaction volumes the exchange anticipated never materialized, the pricing never became complex, and the way business was conducted among oil and chemical companies never changed much. The exchange had implemented all the capabilities its parents thought it needed; it just never used most of them. An executive explained: ‘‘It was not a problem with the outsourcing; it was a problem with the business model. The business model we took to market did not hold. If we knew then what we know now, we never would have done it.’’

The third failure is the Spanish bank. Recall that it was a Spanish subsidiary of a bank headquartered in the UK. After five years of losses as a narrow-line mortgage lender, the Spanish CEO took a hard look at his options. He concluded that he should either sell the bank or transform it into a full-service operation to enable it to compete head-to-head with the other institutions in its market. Given only nine months by headquarters to show improvement, the CEO lined up a transformational outsourcing partner and started to work.

On a local level, he succeeded. The bank stopped hemorrhaging red ink and broke even within two years. However, his growth strategy sent his organization off on a direction that was at odds with that set by headquarters. He wanted to continue to grow as a full-service bank, and the folks at the top wanted to consolidate and refocus on mortgages alone. Eventually they fired the Spanish CEO and sold the subsidiary. Again, the transformational outsourcing initiative was effective, but the strategy it enacted was not perceived to be the right one.

What can we conclude from these three stories of failure? Transformational outsourcing can be dangerous. But that danger is very different from the one executives usually face with big strategic change initiatives. Normally, they do not implement the changes they intend. In fact, I would hazard to say that many executives are so accustomed to getting less than they set out to achieve that they barely consider the consequences of actually succeeding.

Transformational outsourcing is different. The changes executives initiate will be made. The organization will transform. Like being beamed out to some unexplored planet, however, executives must be inordinately thoughtful when they set the coordinates lest they find themselves surrounded by hostile aliens when they get there. Most strategic maneuvering takes effect incrementally. This pace gives executives more time to judge competitive response and tweak the direction. Transformational outsourcing involves a bigger, faster leap forward. As we said in Chapter 5, executives will want to look before they step out.

^[7]One study, for example, found that three-quarters of managers in firms surveyed believe that outsourcing outcomes have fallen short of expectations (E. R. Greenberg and C. Canzoneri, Outsourcing: the AMA Survey [New York: American Management Association, 1997]). Another study found that 20 to 25 percent of all outsourcing relationships fail within two years and that 50 percent fail within five (Marq R.Ozanne, D&B Barometer of Global Outsourcing, 2000). M. Clemente and D. Greenspan find that merger and acquisition transactions fail more than half the time (Winning at M&A [New York: John Wiley & Sons, 1998]). According to the Gartner Group, half of all strategic alliances fail to deliver the desired results.