Why Managed Services and Outsourcing Fail

It doesn’t take long to find articles and research discussing the high failure rate of outsourcing agreements.  Some sources indicate that the failure rate is as high as 50%.  I’m not sure that I agree with all of the information I’ve read on the matter, especially since very little context is provided on how these rates have been calculated. 

However, managed services and outsourcing agreements certainly can collapse.  In most cases, the path to failure is clearly marked and one can predict early in the relationship whether the arrangement is going to work.

In the next few articles, I’d like to provide my perspective on some of the common reasons that managed services and outsourcing arrangements fail.  Specifically, I will cover:

1. Poor Service Transition – Getting an agreement off the ground during the service transition process is the most critical part of the contract.  There are many reasons the transition process can go off the rails and once it does, it is very difficult to get the process back on track


2. Poor Adoption of Services – To get the most out of an outsourcing or managed services agreement, an end user must fully leverage the service and capabilities that are brought to the table.  If services are not properly adopted, failure is inevitable.


3. Poor Definition of Expected Functions – An outsourcing agreement is leveraged to perform a specific job or set of jobs.  If there is any ambiguity in the expectation around those jobs, or if the client fails to adhere to its obligations within the arrangement, it’s a sure bet that trouble is on the way.


4. Poor Partnership – An outsourcing or managed services relationship is much more intimate than other buyer-supplier engagements.  Much like a good marriage, both parties must be open and honest for it to be successful.  Otherwise, expensive counseling sessions and contract termination will be the end result.


5. Poor Objectives and Analysis Performed – Why did you enter into an outsourcing agreement?  Who signed the deal?  Were all of the objectives communicated?  Did everyone buy in?  Were the costs of the retained functions fully factored in?  Were employees able to make the leap to the new operating model?  Both parties must understand the intended business outcomes from the agreement or it’s likely that the agreement will not be successful.

This is not an exhaustive list, but the five issues above are extremely common.  In the coming weeks and months, we will explore each of these items in detail and outline ways for buyers and suppliers to work together to increase the probability of success.  Ultimately, a properly structured service contract can provide unparalleled competitive advantage and positive business outcomes.