Spend Matters would like to welcome a guest post from Vantage Partners. Click for Part 1, Part 2, and Part 3 of this series. This is the fourth part of a five-part series focused on managing scope in offshoring relationships; it will discuss how scope challenges increase the difficulty in achieve the full value of a deal.
Scope management is a critical outsourcing activity--when it is not performed effectively, the consequences for customers and providers are significant:
- Time is wasted on conflict and revisiting decisions
- End users complain about service when providers aren't able to meet their commitments
- Critical deadlines are missed
- Staff moral wanes
- Costs increase; savings targets are not met
- Opportunities to add greater value or innovate are lost
- Quality suffers
Godfrey Pinto, based on his past experience as Director of Offshore Outsourcing at a gaming software company, says the missed deadlines he experienced as a result of ineffective scope management negatively impacted the business. "A lot of our model is delivery online and on time and we have liquidated damages associated with that," he says. "It magnifies scope issues." Ineffective scope management can have a similarly negative impact on providers that deliver extra services without getting anything in return. Write-offs for scope creep add up and hurt the bottom line.
The top four consequences of scope challenges--service complaints from end users; time wasted on conflict, revisiting decisions; scope overruns; and missed deadlines--are not merely results of the mishandled scope discussions that plague any outsourcing deal. They can be directly traced to the extent to which commitments, tolerance for ambiguity, directness of communication, and acceptance of risk pose challenges. A cultural reticence to say "No" to out-of-scope requests, for example, can easily lead to missed deadlines. When these cultural challenges are not adequately addressed, the impact of service complaints, wasted time, scope overruns, and missed deadlines is significantly higher than in onshore deals. In fact, respondents who noted challenges across all four dimensions in their offshoring relationship are approximately three times more likely than those who face none of those challenges to describe the impact as being greater than in their onshore deals (see Figure 1).
Figure 1: Cultural challenges contribute directly to undesirable results
The extent to which culture impacts scope management also affects the parties' ability to achieve the value set out in the contract. When scope management is a relatively insignificant challenge, a majority of respondents report that the impact on annual contract value is 10% or less. But when cultural differences make scope management relatively difficult, 77% say the percentage of annual contract value at stake is greater than 10% (see Figures 2 & 3). It is no surprise then that effective scope management also contributes to higher levels of satisfaction with the relationship. When scope is not much of a challenge, 44% are very satisfied with how their partner manages the relationship. When scope is a challenge, only 25% are very satisfied.
Figures 2 & 3: Scope challenges have a significant impact on the percentage of contract value received
In the next and final part of this series, I will discuss best practices for managing scope effectively.
- Danny Ertel, Partner at Vantage Partners