Dealing with Conflict in Offshoring Relationships

Spend Matters welcomes a guest post from Vantage Partners. Click for Part 1 and Part 2 of this series on managing performance in offshoring relationships.

Dealing with conflict: an over-reliance on penalties may contribute to provider defensiveness and the allocation of disproportionate resources to areas not critical to the customer.

Of 2010 survey respondents who said cultural differences impact their ability to effectively manage performance, half also noted that dealing with conflict poses a challenge in their relationship (Vantage Partners, Managing Offshoring Relationships: Governance in Global Deals, 2010). Customers believe they confront conflict directly, but that their provider defers conflict for the same reasons it shies away from direct communication. For example, 63% of U.S. customers said their provider tends to avoid conflict, while only 21% of U.S. customers described their own organization that way. Providers that deliver to the U.S. see things differently--only 28% believe they defer conflict (see Figure 1). This perceived difference may result from providers' reluctance to report a problem before they have attempted to resolve it internally. What a customer experiences as avoidance of conflict may be a provider's attempt to generate potential solutions before alarming the customer with an unresolved issue. Failure to align around expectations for timeliness in reporting service delivery issues results in frustration and makes it difficult to resolve them to both parties' satisfaction.

Figure 1: U.S. customers view their offshore provider differently from how providers view themselves

While the tendency to defer conflict can contribute to poor performance in ways similar to those described for indirect communication, dealing with conflict directly can prevent many of those same issues. But if dealing with conflict directly means issuing blame and imposing penalties, then customers may actually exacerbate the problems they are trying to address. Penalties are intended to make the provider take its service level obligations seriously. Many customers rely heavily on them to try to deter lapses, or at least make the provider experience pain from service failures such as high defect rates or outages. Some customers even employ penalties to deal with common provider challenges such as attrition, for instance developing metrics that stipulate churn in the relationship must be lower than the provider's overall attrition rate. Such penalties, though, may not fulfill their intended purpose. "I think it's worth considering why you need the churn data and what actions or decisions this drives," says Verity Billson, senior vendor manager at Capital One. "We have tended to move away from micro managing to these metrics, as they are internal measures or challenges to the supplier--more important are the underlying drivers and trends (i.e., do they have retention issues or are other programs offering more attractive incentives)?"

Penalties may create some incentives to perform to a minimum standard, which can be important, but they often do not fix what is broken. Penalties may not only obscure larger issues but also contribute to an adversarial relationship in which the customer focuses on enforcement and the provider tries to avoid punishment, instead of working together to understand and address root causes. In practice, relying heavily on penalty application fosters a culture of blame and defensiveness, rather than effective and creative joint problem-solving. And if the metrics are not fully aligned with the business objectives of the deal, the penalty-avoiding provider may begin allocating resources disproportionately to achieve things that aren't really important to the customer. The imposition of penalties is sometimes appropriate and useful, but more long-term value can be gained from collaborative performance management and effective service delivery--after all, most customers outsource to get business results and greater service, not to generate revenue by collecting penalties.

The next part of this series will discuss performance management challenges in offshoring relationships, and begin to share best practices.

- Danny Ertel, Partner, and Sara Enlow, Principal, at Vantage Partners

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