Contract Health Check—Supercharge Your IT Outsourcing Now

The market is fraught with analyst spiel and vendor literature on artificial intelligence, cognitive solutions, robotic process automation (RPA), digitization—often used interchangeably and typically clustered in the same frame. The analysts seldom encounter the contracting realities of a next-gen solution and generally package insights based on vendor-provided vaporware. And for obvious reasons, vendors tend to push overwhelming literature that can obfuscate the enterprise buyers. Every few months, this group attempts to propagate new jargon and marginalize previous ones. Remember the blog that declared RPA dead?

All noise aside, here are the three essentials of automation-led contracts that any advisor should apprise you about, no matter how big or small the scope.

1. Even your well-performing contracts can be significantly better

If you haven’t calibrated your contract since 2016, then there’s a high likelihood that you are missing out on cost and performance improvement opportunities. And, the more you delay, the more opportunity deficit you accrue. Robotic process automation (RPA) started becoming a meaningful contracting tenet primarily in 2016, and since then it has evolved beyond siloed task-level automation to broader process-level automation. Consequently, the associated performance metrics continue to change. Base rate cards were recalibrated as arbitrage-led providers had to compete with RPA-led providers to stay in the game while playing catch-up. Alongside, as-a-Service models and cloud solutions also underwent significant maturity and competitive tension in the last three years. Not one IT-BPO contract signed in or before 2016 yielded substantial opportunity realization.

2. Delineate run transformation from business transformation

It is imperative that you don’t blend the two charters, nor let your vendors muddle their solutions whereby you lose clarity between tangible operational gains and aspirational business outcomes. Most contemporary contracts suffer from a buyer-provider expectation gap that only widens in time primarily because either party didn’t delineate and articulate their run and business impact KPIs.

Operational transformation is related to IT and business process (IT-BP) services, i.e., wherein factors such as FTE de-linkage, productivity improvement, error reduction, transaction accuracy, performance impact, and associated cost commitments can be tangibly contracted. Ninety percent of IT-BP outsourcing contracts are related to such operational scope, and yet, as of CY2018, only 28% of the outsourcing contracts had a clearly defined linkage between the automation solution, baseline commitments, corresponding performance metrics, and the commensurate cost glide path. It is also common to see KPIs such as days sales outstanding (DSO) or days payables outstanding (DPO), which are operational metrics, frequently misrepresented as business outcomes in outsourcing contracts.

On the other hand, business transformation in outsourcing contracts is where third-party technology or service directly impacts your top line, sales funnel, customer acquisition or retention rates, revenue realization, marketing traction, etc. Digitization currently belongs in this category and influences client experience, digital marketing, social media, analytics, IoT, product R&D, etc. However, most of these business transformation initiatives are being played close to the chest by enterprises via in-house innovation centers. In the few business transformation outsourcing contracts, the performance and commercial construct of the agreements are materially different. For example, a significant portion of stated outcomes is contingent on the provider’s ability to perform a thorough due-diligence of the current enterprise environment, for which it typically expects high congruency in the enterprise’s baseline data. Therefore, actual business outcomes are seldom contracted in absolute tangible terms (i.e., commonly positioned as KPIs, sans penalty bearing service levels or clear dollar commitments)

Third-party IT and business process operations contracts have tangible improvement potential, and if your contract is not among the 28% described above, then you are leaking tremendous value in real-time.

3. Be on the lookout for cost 

There is invariably some form of cross-subsidization in most automation-led IT-BP contracts. Ergo, enterprises need to review such contemporary proposals carefully to minimize cost bloat. Some common examples include:

a. Incorrect baselining: Very simply, if the starting assumptions (regarding users, tickets, workloads, etc.) are circumspect, then the associated improvement trajectory for automation is also questionable. We have typically realized an average of 10%-12% opportunity via an independent baselining exercise

b. Resource padding: Providers can attempt to recoup some of the revenue and margin pressures caused by automation via overskilling, overcharging, or overstaffing the residual delivery and support FTEs. We have commonly observed 15%-25% role, rate, staffing, and pricing model improvement potential in automation-led proposals

c. Efficiency leniency: It is possible to sign up for lenient RPA metrics if adequate due diligence aspects, such as the following, are not performed objectively.

• What’s the actual transaction processing throughput of an automation platform versus an FTE-led one?
• How many FTEs can be replaced per bot?
• What’s the fair service level of a post automated state?
• When in the five-year contract lifecycle should you start expecting disruptive improvements from automation?
• What should be the improvement glide path?

By minutely reviewing all aspects of a contract, we were able to consistently realize 10%-15% incremental gains in price and performance related to automation-led efficiencies as opposed to the hyperbole that fills the ether.

All said, there is a clear and present potential to optimize and transform your sourcing contracts by as much as 40%, or more. This statement is neither hearsay nor research tripe. It is the realized end state based on well over two dozen Contract Health Checks by Wavestone US and executed agreements in the past two years. Indeed, not all contracts present equal opportunities or similar improvement drivers, but just having clarity on your contract’s currency and competitiveness to plan next steps is a big win in itself.