Size matters!

Ask any large client organization if it would be willing to outsource a key function to anything other than a major service provider and the answer will invariably be in the negative. There are a number of sound and obvious reasons for adopting this view but even taken together they do not prove that client and service provider should be of a similar size, or that a small service provider could not do a first class job for a much bigger organization, if the circumstances were favourable.

Most of the original IT outsourcing service providers such as EDS were already in existence as sizeable internal IT departments of major corporations. These internal departments were then re-invented as companies in their own right to take on a wider role to meet the outsourcing opportunity. Other early IT outsourcing service providers were often quite small organizations who just happened to have the right mix of skills at an opportune time. However, even these small providers were normally in a position to demonstrate that they had greater in-depth skills than the IT department that was being transferred to them.

The early IT outsourcing market grew rapidly but sometimes not as quickly as some of the service providers might have wished. During slack times some of the big providers took on clients that they would now consider too small. A couple of years ago EDS claimed to have a number of satisfied UK clients in the £10,000 a year range. Presumably, the contracts having been in existence for a long time and both EDS and their clients must find the arrangements profitable. Nevertheless, it is difficult to imagine that any of the larger providers would normally go out of their way to obtain a £10,000 per annum contract these days.

’Normally’ is the key word in the last statement because sometimes executives make decisions that they would not contemplate at other times. This frequently happens in the outsourcing market when sales are down because anticipated major wins have failed to materialize, key existing contracts have unexpectedly not been renewed or someone is tantalizingly close to an end of year sales target and a lucrative bonus. Rules, they say, are made to be broken and most major providers break their own rules on minimum contract size when it suits them.

most major providers break their own rules on minimum contract size when it suits them


Clearly, a large client organization will still be in a strong negotiating position even if it is outsourcing a small department. However, if a small or medium sized client with a relatively small area to outsource should be ’lucky’ enough to sign a deal with a major provider because that provider has suddenly become desperate for an additional contract, the result will be difficult to forecast.

Hopefully, the provider will treat small clients as well as it does the large clients and new clients as well as it does existing clients. But resources are always scarce, so guess who usually gets priority if a specialist is urgently needed at both a large client’s site and a small client’s site? I accept that there might be exceptions to this natural law, but I doubt if there are many.

If the last twenty-odd years of outsourcing experience has taught us any lessons, then I suggest that the following are amongst the most important.

  1. It is essential in an outsourcing arrangement that key elements such as the Service Level Agreements (SLAs) are adequately written up in the contract because they provide the legal structure by which the provider’s performance can be measured. Nevertheless, even where the contract documentation has been found to be watertight from the client’s point of view, there have still been numerous cases where the provider failed miserably to reach the desired targets.

  2. Although some of these failures may have been due to simple incompetence, it has become apparent that the most common reason has been that at some stage the provider has become convinced that concentrating on other more lucrative contracts would produce a better return. Once that happens, it would appear that even the tightest of contracts can do little to safeguard the client’s position.

  3. For that reason, it is now believed that the wise client will build an element of risk/reward motivation into the arrangement so that there is always the opportunity that a special effort on the provider’s part will produce an adequate reward.

  4. Sadly, even these partnership arrangements have been known to fail and the reason put forward most often for this situation is that yet again the provider has found other, even more lucrative contracts.


The question of size is therefore very important. Apart from owning or taking an equity stake in the provider, the best thing a client can do when entering into an outsourcing arrangement is to ensure that the continuation of their arrangement is always going to be of prime importance to the provider. I appreciate that this is easier said than done, but clearly it is much more likely to be achieved if the client is a key player with a provider who has a small number of clients, than if it is a small player with a provider with many clients.

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