The SOW Paradox

You reap what you sow is a common idiom. But in the outsourcing business you will sub optimally reap if the focus of the work is simply what is said in the SOW. While the SOW (Statement of Work) is a very important piece of document in the outsourcing business, the client and the outsourcer are often handcuffed to the SOW to the detriment of the business.

The literal execution of the SOW is the exact antithesis of any sound process improvement (PI) function. A mature outsourcing relationship requires that the expertise of the outsourcer be fully exploited to the betterment of the process. However, quite often this does not play out.

The client often dictates that the outsourcer perform the outsourced tasks in exactly the same way as the tasks were being executed prior to the outsourcing. The client and the outsourcer then go about documenting these steps in excruciating detail in the SOW. But there is a serious flaw in this expectation. Let me explain. When the task was previously performed by the client, it was being processed by John or Jane who had many years of experience. Often it did not matter whether the process steps were flawed or inefficient because from a customer's perspective, John or Jane got them done so effectively after years of experience that the flaws were often overlooked.

With outsourcing John and Jane are no longer around and the new processors do not have the length and depth of John or Jane’s experience. So now in order to get the work done in accordance with the SOW and avoid being hit by SLA credits, the outsourcer throws in additional individuals to compensate the absence of John or Jane. The outsourcer is then able to “justify” the additional individuals because of the low cost sourcing. This then turns out to be a vicious cycle as the additional individuals start eating into the outsourcer’s margins.

A better alternative to this would be to ensure that once a process is outsourced, it is subject to a very rigorous process review applying sound PI principles. Here are some suggestions:

• The client and the outsourcer bake into the outsourcing contract a PI requirement.
• To further accelerate PI activity, the use of technology should be seriously considered and adopted.
• To provide an incentive to both the parties, some sort of cost or gain sharing be also baked into the contract. There are many variations of this; however, one option that works well is gain sharing with a sliding scale.In the initial period, the client has a higher share with the outsourcer reaping all the benefits after the initial period.
• The outsourcer must engage PI experts and incentivize them based on margin improvement

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