Relational Outsourcing and The Role of Service Level Agreements (Part 3)

Particularly, these attributes appear to play a major role in the context of IT outsourcing relationships in that successful management of an outsourcing relationship today requires a highly interactive, flexible relationship between two organizations in order to sustain over the strategic planning horizon.

from the Relational Governance section of the The Role of Service Level Agreements paper

While the above excerpt from the paper we have been discussing would seem to be both obvious and a given, within the realms of the procurement profession as it applies to the IT Outsourcing contracting process, nothing it would appear could be further from the truth.

In fact, and referencing Williamson’s (1985) conceptualization of “relational” governance, the paper recounts how economic weapons such as hostages and credible commitments to keep opportunistic behavior at bay, have long been the order of the day.  In essence financial inducements such as penalization for missed SLAs were considered the only means through which a contractor could ensure vendor performance.

It is not until recent years that this sledge hammer contract management methodology has been gradually usurped by a socially oriented enforcement of obligations, promises, and expectations that  according to Poppo and Zenger (2002) promote norms of flexibility, solidarity, and information exchange.

In this regard one cannot underestimate the critical importance of the emergence of social networking and social media in terms of facilitating this new age of buyer-vendor detente.  This is due to the fact that the Internet has added the element of convenience to the practical and sound principles of real-time collaboration.

What is especially encouraging about the socially oriented approach is that it creates an environment of trust between key stakeholders.  This means that potential problems can be recognized, acknowledged and dealt with effectively as opposed to remaining either hidden or alternatively justified, which ultimately results in little if any meaningful action being taken to remedy the situation.

Eschewing the blame game as IACCM’s Tim Cummins once called it, leads to greater cooperation within a contract’s framework encouraging  stakeholders to actively seek potential problem areas with the intent of coming to a mutually beneficial resolution for all concerned.  Or to put it another way, the economic levers championed by Williamson inadvertently rewarded the wrong behavior by punishing disclosure as opposed to rewarding it.

Therefore and as it relates to the establishment of SLAs, the more logical alternative is to not place the sole emphasis on SLAs being missed per se, but instead on the importance of full disclosure of the delivery process capability under the umbrella of a Collins autopsy without blame approach.

In this regard, vendor selection is based on the ability of the parties to effectively and successfully address problem areas as they arise instead of how effectively they can be avoided, which with the latter is a virtual impossibility in a complex global marketplace.

Of course the above creates a chicken or the egg scenario in that one might reasonably argue that because formal contracts inherently hinder the meaningful formation of collaborative or relationship-driven interaction, they are no longer a viable mechanism for achieving the desired contracting organization’s objectives.

However, there still exists a reluctance on the part of buyers to rely solely on the relational attributes of what the paper refers to as a trust arrangement.  For those advocating the traditional means of ensuring performance, the belief is that the vendor must first prove themselves capable of delivering to SLA requirements and that until such time the economic leverage of the Williamson approach serves as a safety mechanism that protects the interests of the Buyer.

Much like the analogy that you cannot steal second base with your foot firmly planted on first base, if formal contracts hinder the ability for the parties to openly and transparently communicate about both the good and the bad then the relationship as it stands would stagnate.  In other words, it would not likely progress to the point that the prerequisite performance would be achieved to warrant a non-contractual trust arrangement.

Within this context, the real question that needs to be answered is whether a hybrid approach in which some of the elements of a traditional contract can be successfully incorporated into a relational governance framework.

Referencing Baker et al. 1994; Mayer and Argyres 2004, such a merging of approach ideals is not only possible but is actually preferred.  Specifically, the paper contends that “the process of developing a comprehensive and complex contract itself requires parties to engage in joint problem solving.”  This in turn purportedly enhances the relationship building process between parties to the contract that might otherwise not have been possible.

The key obviously is to find the desired and/or needed balance.

In the next installment in this series, we will examine the specific contractual/SLA components of a blended approach that will help stakeholders to achieve the desired balance.

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