IT and business process outsourcing has become an ever increasing feature of the airline sector but outsourcing industry surveys have estimated early deal re-negotiation and termination rates at over 50%. Marcus Evans, a lawyer in the International Outsourcing Group at international legal practice Norton Rose, offers his opinions on how customers will increasingly be able to avoid being in the deal re-negotiation half.
Since 1960 when IBM and American Airlines installed SABRE, the first real time computerised airline reservation system, the airline industry’s use of IT-enabled business process solutions and third party partners to deliver them has become ubiquitous. The internet and customers’ willingness to embrace self service through online sales, cargo tracking, e-ticketing and self service kiosks has only increased the industry’s use of, and dependence on, technology.
Severe costs pressures coupled with unexpected demand troughs caused by events such as terrorism or SARS have led most airlines to partner with suppliers who can provide an ever wider array of services with a lower price, greater ability to scale up or down quickly and better service levels.
However, the promised benefits don’t always match reality and outsourcing industry surveys have reported for a number of years that over 50% of outsourced services deals end in early re-negotiation or termination.
When these deals go wrong the consequences can reach beyond the outsourced service itself and can risk damaging the airline's reputation for a particular level and standard of service. In addition, the management time required to maintain service levels and organise a re-tender followed by transition to a new supplier when a deal is going sour can be very significant indeed.
Going forwards, we think that the number of unsatisfactory deals will fall. The principal reason is that the outsourcing industry is becoming more diligent in managing its relationships which in turn will allow it to anticipate problems more effectively. To this end, we have seen more experienced customers focus on the following areas as part of the contracting process:
- Greater awareness of suppliers’ business drivers. After observing that overly tight deals fail because the supplier’s margins did not justify putting the “A” team on the project, customers now spend more time questioning and understanding the supplier’s business model.
Where such dialogue is successful, invalid supplier assumptions about future work flow volumes are flushed out before the deal is struck.
- Better memory of customer’s concessions. Conversely, customers that have not involved operational teams in the negotiations and/or failed to communicate the rationale for concessions to their own business have recognised that disagreements can arise later in the deal when demands are made to suppliers that ignore such concessions. Contract user manuals and training before implementation of the deal is used to avoid such misunderstandings.
- Committed communication. High profile commitment from a customer’s senior executive can be used to ensure the deal ranks high amongst the supplier’s other deals. Customers are ensuring that contracts have workable governance structures with appropriate hands on involvement from both sides. Acknowledging that the supplier’s bottom line will affect service delivery and that in order to encourage service improvements, meetings are scheduled specifically to discuss potential new areas of work that a supplier may be able to bid for.
- Less exclusivity, more multisourcing. Although mega deals still exist, where they are used, greater attention is paid to workable early break points and partial termination provisions coupled with non-exclusivity wherever practically and economically possible.
Customers have become much more willing to manage interfaces between suppliers and break up a block of services so that non-performing suppliers can be swapped in or out of a discrete service area without a massive re-tender exercise.
In conclusion, the outsourcing market is responding positively to the findings of surveys and other self-analysis and if you can take advantage of past experience the chances of a successful outsourcing can be significantly improved.
Source: Flight Daily News