Traditional Asian outsourcing model

Switching to an outsourcing standard in Asia has been a tedious process, we have dubbed this the “penguin effect”: penguins gather on the edges of ice floes, each trying to jostle the others in first, because although all are hungry for fish, each fears there might be a predator lurking nearby.

In the traditional Asian outsourcing model, contracts are usually put together in haste.  The outsourcer takes over a distressed situation in which service levels cannot easily be agreed upon.  Consequently, very few meaningful service levels are defined.  The outsourcer provides limited information to the customer in terms of its cost for providing services, and any inquires made by the customer are given the cold shoulder.  The result is a poorly understood relationship in which both parties blame each other for increasing levels of non-performance in terms of service and cost reductions.

These relationships historically result in a win/lose adversarial type of relationship where both parties seek to win at the loss of the other—the customer seeks to reduce the outsourcer’s profits, and the outsourcer seeks to maximise its profit structure in opposition with the customer.

These contracts tend to be commoditised in nature and focus on a single element of a process such as the data centre. Once the pricing is determined, normally at the start of the contract, it only changes to adjust for the cost of living adjustment.  For example, a company outsources its data processing department in which it is spending $20 million a year, and the outsourcer agrees to do the same functions for less—$15 million a year.

However, costs rise with inflation and increased usage. Over the next three or four years, it creeps back to $20 million or more because there are no requirements for continuous improvement in pricing.  The pricing is stated in technical terms that are difficult to relate back to the business.  These contracts tend to be long term—between five and ten years—and have significant early termination costs.

Service levels are typically not well articulated in outsourcing contracts. Firstly, they tend to be defined on highly technical parameters, which are not well understood by the customer. Secondly, they often have no consequences associated with failure to meet minimum standards. Thirdly, they are negotiated between the parties and are usually not up to the customer’s standard. Finally, the customer’s needs change during the term of the contract, but the outsourcer is reluctant to change the contract without concessions or price increases. This makes outsourcers frustrating to the Asian customer community and of limited value over the life of the contract.

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