Making Room for Endings and Renewals at the Beginning

There is no such thing as a good exit in the middle of transformational outsourcing. Executives will want to exit before they start or find a way to make the relationship work. After the partners have executed the transformation, however, the relationship can change its character. At that point, if the partnership holds no continuing strategic promise, executives can consider retendering or repatriation.

To prepare for this eventuality, executives will want to do several things. First, as they make the decision to transform through outsourcing, they should decide whether or not they would cut off the option to bring operations back in-house. They should think through this decision as if it were irrevocable. NS&I, for example, decided it would never again own the operations it outsourced. It could conceivably change partners, but it could not repatriate the processes. Thomas Cook reached the opposite decision. While it does not anticipate bringing its co-sourced center back in-house, it has not ruled out the possibility. This decision makes a difference in the retained staff. Every company will want to retain the ability to set strategy, but Thomas Cook will also want to keep high-level operational executives on staff. These individuals will work jointly with the outsourcing partner’s staff during the transformation, but would form the kernel of an in-house capability if need be.

Second, executives will want to make process documentation audits a regular requirement of the initiative. At least annually, a knowledgeable internal or external auditor should review the process flowcharts, data descriptions, role and responsibility definitions, and key decision criteria to make sure these are up-to-date. This kind of annual review will give the partners a regular occasion to look for process improvements. And it takes the heat and emotion out of some of the tasks that are required to hand the process over to another operator.

Third, executives should incorporate provisions in their agreement to reset the partnership to adjust to phase changes. Whether these provisions take the form of structured breaks or opportunities to renegotiate the contract or whether they look more like collaborative strategic planning programs, they act like expansion joints in a concrete surface. They create room for a partnership to move instead of breaking under the pressure of change.

Finally, they should construct the financial obligation of ending the relationship to align with their partnership objectives. For example, the CEO of the Spanish bank recognized that his outsourcing partner would be making a substantial up-front investment in his company’s infrastructure. He agreed to pay a very large penalty for terminating the agreement early to keep his parent company’s ROI interests in favor of continuing. Organizations that may repatriate outsourced activities will want to avoid incurring a large cost for new software licenses in that eventuality. And they certainly will not want to pay a fee to obtain an up-to-date copy of their own data.