About eight months ago, I posted on the sudden concern for the weak dollar and how I thought this could be a good thingor at least not entirely bad. It looks like I was wrong on some predictions, and right on some others. Let’s check out some of what has happened:

1. Is the US now a low cost location? Yes and no. The auto industry, admittedly a mess, is running back to the US. GM and Ford are suddenly shuttering relatively new but suddenly “expensive” Canadian plants. Fiat (Fiat!) is going to build cars in the US “to take advantage of its lower cost of production“. My once solid theory that call center outsourcers should default to Canada until proven another location could outperform it needs to be revisited, with the Canadian dollar at $1.06 as of today. It doesn’t take much more than observation to notice the amount of European tourists in the US has increased significantly (but here is the study in case you need it). And what about other places? Chinese currency strength is making a lot of the products we sell and buy in the USA relatively expensivemost businesses importing manufactured goods from China are increasing prices or slashing margins. So because of pre-existing demand for imported goods (both b2b and b2c), it doesn’t really feel like low cost around here. This will balance out, of course, if the dollar stays weak. We haven’t seen an increase in job demand, which could indicate the economy is weaker than we think, or it could just be the lag timeit’s not easy to just repatriate operations overnight and it may take some time.

2. Has off shoring become expensive? Here the answer is a little clearer, but the explanation more subtle. All of the recent deals I have worked on are providing my clients with 20-30% cost improvement over their insourced operationsactually an improvement in savings from just 18 months ago when we were getting an average of about 16%. What gives? In 2005, of every dollar a company paid an Indian outsourcing provider, only about $0.06that’s right, 6%!went do direct, fully loaded labor. Now let’s imagine since then labor costs have doubled (they haven’t). The component of the fees paid to the provider that is represented by labor is still only 12%, leaving the seller 88% of their total fees to play with. There is an old McKinsey Institute Study which I am still fond of that outlines how each dollar of offshoring revenue is split up. Bottom line, only $0.33 cents stay in India, and the restthe majoritycomes right back to the US in the form of Computer purchases from Dell and HP, telecomm purchases from AT&T and MCI, salaries paid to local staff, taxes, etc.

   If you understand this breakdown, you understand why savings for outsourcing buyers are up and profits for outsourcing sellers are at least consistent but more likely up as well. Of the inputs required to deliver the service, two thirds are cheaper than they used to be, far outweighing the increase in the one third that has gotten more expensive. So savings are up. The “secret” nobody is talking about is that sales are up too. But that has an easy answer. Even if my recent experience is an outlier and surprises cut savings down the line so buyers only end up realizing half of the savings, that leaves 10-15% in “found” money through offshoring. Will the CEO who would not like to see her/his back office costs down by 10-15% please contact me?

   So far, it appears, the weak dollar is helping everyone except those of us planning a European vacation this Fall! OK, I exaggerate, there are always winners and losers in currency fluctuations. But being a low cost location isn’t so bad, is it?

By now everyone understands that the environment and its protection has bubbled up to the top of corporate agendas. Or has it? I hear a lot of lip service, but the actions aren’t always consistent with the wordsand there are a few senior executives out there that just won’t even entertain the notion that the greening of corporations is part of their job. There are a number of ways buyers and sellers of outsourced services can use this trend to their advantage while doing something that the vast majority of people now agree is worthwhile.

• Expertise. Outsourcers that develop “green” expertise should be in very good shape. Customers are now demanding environmental performance along with business performance. But since many are missing the boat, those that can make short-term impacts by knowing how to do what they do without further damaging the environment should be able to command price premiums. It is easy to see why in 2008, it might be a compelling proposition to an outsourcing buyer to say “Hey, not only can we manage your process or function more effectively and efficiently, we can reduce the negative impact your company has on the environment
• Green Operations. Green computing is just the start. There are hundreds of ways providers can clean up their act and their customer’s act in the process. Unfortunately, many of the outsourcing providers I deal with just don’t seem to get ittheir marketing materials don’t mention it, their presentations ignore it. But they do so at their peril. The Black Book of Outsourcing already compiles a Green 50 list. Enviro-friendly operations should be on every buyer’s criteria and every seller’s qualifications.
• Green Credits. Most Energy people I talk to believe we are headed for a cap and trade scenario in the US similar to what is already in place in Europe. If that happens, then outsourcing providers will be able to package valuable credits with their services (of course, they have to earn them first). Conversely, a green buyer could pay for portions of their services with earned emissions credits to a less green provider.

Not long ago, I advised a client who happened to own one of very few LEEDs certified data centers, which they were willing to dispose of as part of an outsourcing transaction. Only one provider (out of nine!) actually saw the opportunity to raise their profile by acquiring the asset. Keep in mind, this was an asset that could have been put to immediate use and probably at a decent profit, but the marketing value of the facility to an IT infrastructure outsourcer far outweighed the profits it could produce. In fact, the marketing value of owning the facility, in today’s landscape, would probably have outweighed the purchase pricethe productive operations from it would just have been gravy. Outsourcers need to get with it.

As a selection criterion, performance vis--vis the environment is already here. What other ways do you see to get outsourcing buyers and sellers collaboratingand succeedingon green initiatives?

A well known and somewhat over-used statistic in the outsourcing business is that about two thirds of outsourcing initiatives fail to deliver their promised benefits. That’s a huge failure rate. If any other industry broke its promises nearly as often it would probably cease to exist. So why is it that the industry continues to grow significantly year over year? But before we examine these “failures” there is a subtlety that both the pro- and anti-outsourcing camps fail to acknowledge when trying to make their point: Outsourcing often fails to deliver its promised benefits, which is quite different than delivering any benefits at all. A big portion of this issue would go away if buyers would lower their expectations and sellers would quit trying to raise them. That’s not likely to happen anytime soon:

For buyers, the decision to outsource is almost always an emotional onea decision that will be met with skepticism and derision by the organization. They tend to set very high hurdles, essentially to convince themselves that they are doing the right thing. So we get people seeking 25% savings, innovation, culture change, and higher overall performance all in the same deal. Sounds irrational when I put it in one sentence, doesn’t it? Well it is no less rational when you put it in PowerPoint presentations to Executives, or, worse, in the contract. Expectations like these are bound to produce disappointment, and in my experience they are quite common.

For sellers, the pursuit is grueling work. The cost of sales is so high that they are tempted to -and often domake outlandish promises. For a long time, the industry sent a sales person and maybe an attorney, with few delivery people with any power on the pursuit team. This seems to have been largely remedied nowadays. But even if the team is built right (with senior, appropriate and influential delivery representation) and compensated right (on margin, not on revenue), at the end of the day they know it’s a competition and the other team may not be playing fair. The remedy here would be greater transparency and a significantly reduced-cost selling model, but I don’t see either of those happening soon.

So, in my view, the main reason deals go sour is because of unrealistic expectations set by well-intentioned people doing their job in both parties of the transaction.

However, it doesn’t stop there, because, as I have seen several times, even unrealistic deals can be easily fixed when a good relationship exists. The provider can say “yeah, we screwed that one up but we have our best people on it and we’ll get it fixed” and the buyer can say, “you know, not even Superman himself could attain this service level we all agreed tolet’s adjust it to something reasonable”. Over time, the quid pro quo eases the disappointments on either side, service levels improve, and the attitude of the people managing the relationship becomes so positive that almost all challenges seem surmountable. Sadly, this is a rare scenario. I have experienced it myself, and it is liberating, empowering, and I am sure many other touchy-feely terms I don’t know how to use! It really works.

Of course, there are relationships that fail for other reasons: sheer incompetence, personality conflicts, inflexibility, chronic non-payment, outright fraud, etc But these are rare, severe, and the course of action (termination of the relationship) is usually crystal clear.

So it is simple, really. If you set realistic expectations and strive to build a productive, honest, transparent, forgiving relationship with the other party, your chances of success are far greater. What have you experienced?

It seems like every contract negotiation I participate in yields at least one totally surreal, completely unexplainable position taken by one side of the other. Some of my favorites:

• One service provider, in the middle of negotiations, quietly slipped in a clause increasing the price as volume increased! So the more you buy the more you pay for each unit! Now that’s a good business model–where do I sign up? It was fun to watch them explain that position though…
• One rather imperious buyer CEO demanded his team negotiate a deal in which the provider was forbidden from having turnover. It was fun to watch me explain to him why that was not reasonable!
• In one session, as we often do, we set up a private room for the provider to discuss their positions and strategy privately. This is common practice. What was uncommon happened in one negotiating session a few years ago. I opened the session at 8AM and we hit our first issue by 8:15. After some uncomfortable mumbling, the service provider team asked to go to their breakout room, which was ok since that’s what it was there for. They did and we waited…and waited…and waited. We ordered lunch and brought it in to make sure they were all still alive. And then we waited some more. At 3:15PM they were finally ready to return to the main negotiation room to offer their compromise. To the first issue! Needlessto say, we extended our negotiating schedule.
• One of the more common tricks, but no less infuriating, is for one side or the other to show up without the decision-makers. If you are reading this and you have ever done it, stop it! It is a guaranteed way to break the relationship before it even starts.

But this post is about my latest one, because I seek an explanation. In my experience, it isstandard to include mutual indemnification language in the contract. I am no attorney, but this basically means that ifParty Adoes something bad andParty Bsuffers a claim from Party C as a result, Party A will reimburse Party B for those damages. It usually is subject to caps and there is often discussion about exclusions, as well as some flexibility in the definition of “something bad”

In a recent negotiation, a provider refused to accept indemnity of any kind for any reason, essentially saying, “yeah, if we do something bad and you suffer a claim because of it, though, you are SOL”. What gives? We asked and asked for the logic of this, and eventually reached a less than ideal compromise. But why wouldn’t they budge? I told them that seemed like an indication they were planning to do “something bad”. They almost let a very sizable deal go to the #2 option because of this.

So my questions, dear readers, are the following:

1. Can someone explain to me the logic in this provider’s position? What am I missing?
2. Do you have some surreal moments of your own to share with the community?

Recently I had the opportunity to advise a group of investors considering a contact centerstartup in Managua. Clearly the government agency, ProNicaragua, is having some success in raising awareness. But are deals coming to the country? Press 2 has enjoyed some success, and Sitel is already servicing Virgin Mobile from its relatively fancy Managua site. I do find it odd that Sitel does not list it as one of its delivery sites on its website. What gives? Also came across this company which seems to be interested in helping clients develop captives at their site in Managua.

My impression after recent visits is that there is definitely some potential. English-language skills are far more abundant–and far less accented–than I ever imagined. The country remains the second poorest in th region so wages are likley to stay low for a whille. Politics and infrastrucutre–particularly telecomm, seem to be limitations but they also seem surmountable. A lot of people tell me it won’t happen, the conditions aren’t there, but those people tend to be Costa Ricans (or people with business interests in Costa Rica) who aren’t so keen on having new competition next door.

What are you hearing? Are you aware of other providers and deals? Successes or failures?

I am back!

After bidding farewell to my last employer (and wishing them every possible success), I am thrilled to return from my long blogging hiatus. I am even more thrilled to announce the creation of my new management consulting firm, NovaSphere Group LLC. The company’s mission is to optimize clients’ operations for their strategy. Initial service offerings include operating model design and outsourcing life-cycle consulting.

I am fortunate to have a running start, with world-class colleagues and a couple of Fortune 1000 clients already joining me on the journey. Generally speaking, after this post, I will refrain from using this space for marketing purposes, but I ask your forgiveness in advance if I sneak in the occasional plug.

As for the blog, you will see a new name but my commentary will remain the same (and, I hope, much more frequent). I look forward to continuing the discussion we had started earlier this year!

NovaSphere Group LLC