This week, we have been attending the Shared Services and Outsourcing Week in Orlando, Florida to discuss the question of how to drive value in outsourcing relationships, a topic that we find interesting and that means different things to different people.
Of course, there are the typical answers about how to drive value in outsourcing—lowering cost, improving process efficiency, and allowing key resources the ability to focus on high value issues instead of repeatable functions. Yet, there is a component of value that commonly is overlooked but that often is the reason that outsourcing relationships fail: transaction costs.
A deal could be delivering all of the benefits listed above, but if the transaction costs of the relationship are too high, neither party will realize the benefits. In fact, if transaction costs exceed other benefits, it is common to see a deal enter a “death spiral” that can result in disputes, failed service levels, termination, or worse.