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It is all about incentives

Co-workers need to know and understand each other’s drivers or motives. When they don’t the likelihood of successful cooperation is average at best. Nevertheless this is the default cooperation model in many outsourcing engagements: mutual insight in (individual) incentives is rarely a given.

The average outsourcing contract usually contains a chapter on penalties which describes the financial and contractual impact if vendor performance is not on par. In a limited number of cases some more creative models exist. The goal is to create incentives for activities above and beyond ‘business as usual’ again quantified in percentages and amounts.

The literature will tell you

In his book Freakonomics Steven D. Levitt distinguishes between economic, social and moral incentives. He provides many examples illustrating that a focus on the economic/financial stimuli alone is a poor prediction of human behavior. This is relevant for outsourcing engagements since outsourcing is people business. For a successful outsourcing engagement it is important that parties recognize and appreciate each others interests and incentives. This is especially true since in most cases these are not aligned.

A client focusing on cost reduction and a vendor focusing on margin improvement seem to have contradicting interests.  Nevertheless can they come up with creative incentives to unleash vendor creativity even if that decreases vendor’s revenue. In a transition business stakeholders will likely be very risk averse. An incentive for a transition manager to keep time-lines no-matter-what may cause preventable issues. In cross-cultural engagements e.g. when offshoring is involved the need for transparency may not be aligned with the social standard of ‘keeping face‘.

There is no real alternative for discussing the interests of all stakeholders to make these explicit and designing in detail the incentives of the key-players in the engagement. Being open about the goals and drivers and translating that to tailor-made incentives on all levels is essential in creating the right behaviour and with that a successful outsourcing engagement.