From cost to value

Outsourcing has been around for some time now. After the mega deals in the late nineties, the industry developed quite a bit. Deals became smaller, engagement are now mostly multi-vendor, in some cases with a prime vendor responsible for service integration. Over the last couple of years parties added another dimension. Outsourcing goals expanded from reduction of cost to freeing up budget for innovation. This change in focus from cost to value is much more than marketing semantics and potentially will have a huge impact on the dynamics of an engagement.

A vendor who needs to focus on driving down cost has to ensure the scope of the services is clearly described. A contract based on competitive pricing has little room for flexibility. To ensure a profit it is important for a vendor to be strict about what is to be delivered (and anything more costs extra). Clients in these type of engagements have learned the hard way that any change is a potential conflict about price and therefore they try to limit making changes as much as possible. An engagement focused on cost will always be static and inflexible in nature. It is a zero sum game that creates opposite incentives for client and vendor.

Win-win solutions

How different is this when the focus is on value! Moving away from the negative discussion about reduction of cost, the focus can now be on how to create value. Innovation becomes a necessity when optimizing on value and both parties will easily agree on a governance model that facilitates change. When implemented correctly, a contract focused on value tends to be more flexible. And it has the ability to create win-win solutions by taking into account the interests of all parties involved.

Due to their static nature cost-driven contracts will be quite predictable but so are the issues incurred by this approach. Shifting the focus from cost to value takes some courage and creativity from both clients and vendors. As the benefits greatly outweigh any potential issues, it should be an easy decision to try and make it work.