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CEOs must be aware of the 'winner's curse' in outsourcing partnerships

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CEOs in the process of evaluating new outsourcing partnerships should look beyond physical resources such as people and technologies and concentrate instead on companies' ability to turn those resources into capabilities such as leadership, behaviour management, governance and process improvement.

This is the main finding of a new paper The CEO guide to selecting effective suppliers by Leslie Willcocks|, Professor of Technology, Work and Globalisation at LSE, Sara Cullen of Cullen Group and Dr Mary C Lacity of the University of Missouri, St Louis. The whitepaper was sponsored by LogicaCMG, a leading IT services company. The whitepaper also highlights the risks associated with the 'winner's curse' - deals that excessively favour the client at the expense of the supplier but do not work to the client's advantage in the long run.

The whitepaper identifies twelve capabilities that supplier companies should be able to display from the outset that can be combined to create high-level competencies to achieve business benefits for the customer. They include the capability to retain and apply professional knowledge, the ability to access resources as needed and the aptitude to design and implement successful organisational arrangements.

Professor Willcocks warns CEOs not to choose suppliers on cost alone: 'Many of the organisations that we analysed for the whitepaper discovered hidden costs later into the contract. While the supplier might provide lower costs, competencies such as adding value to processes or managing governance typically remain the responsibility of the client company. The original benefits gained through lower rates were subsequently eroded by the cost of management time required to fix problems further down the line. This so-called 'winner's curse' affects as many as one fifth of all contracts.'

Ends

Contact: Isabell Horvath, tel: +49 (0) 89 65112136, mobile: +49 (0) 171 6546152, email: isabell.horvath@logicacmg.com|

Notes

About the whitepaper
This whitepaper, which is entitled i.e. The CEO Guide to Selecting Effective Supplier is the third to be released as part of The Outsourcing Enterprise series of white papers targeted at CEOs, that draw on a series of interrelated research studies conducted by Professor Leslie Willcocks, Sara Cullen of Cullen Group and Dr Mary C Lacity of the University of Missouri, St Louis, three leading authors on outsourcing. The findings are sourced from over 1,200 organisations located throughout Europe, the USA and Asia along with ongoing, un-published research. The Outsourcing Enterprise series, sponsored by LogicaCMG, provides leading edge thinking from the perspective of the chief executive and suggests the nature of the involvement the CEO should have, as well as those issues which should be considered in order to ensure the success of an IT or Business Process outsourcing decision. The two previous whitepapers is this series are:
'The CEO role in delivering strategic advantage', published July 2005
'The power of relationships', published November 2005.

The research base used for this third whitepaper, of 450 sourcing case histories held by the researchers at Warwick, Melbourne and Missouri, St. Louis Universities, covers all major economic and government sectors, including financial services, energy and utilities, defence/aerospace, retail, telecoms and IT, oil, transportation, central, state and local government, health care, industrial products and chemicals, and is drawn from medium, large and multinational organisations based in Europe, USA and Asia Pacific.

Leslie Willcocks has an international reputation for his work in outsourcing, IT and change. He is Professor of Technology, Work and Globalisation at the London School of Economics, and also Associate Fellow at Templeton College, Oxford, Visiting Professor at Erasmus and Melbourne universities, and Editor-in-Chief of the Journal of Information Technology. He has written 25 books and over 160 journal articles. In 2001 he won the PriceWaterhouseCoopers Michael Corbett Associates World Outsourcing Achievement Award.

Press cuttings

IT Business Edge, USA
Outsourcing: In Some Deals, Nobody Wins (14 Oct 06)
Article refers to the term 'winner's curse', in relation to outsourcing contracts. The term was coined by Professor Leslie Willcox.

IT Week
Cheap outsourcing deals bring unexpected costs (26 Sep 06)
Firms that select outsourcing providers on the basis of price alone face a greater risk of problems, according to a white paper published last week by the LSE. The authors of the white paper, entitled The CEO guide to selecting effective suppliers, looked at 450 sourcing case studies and found that many firms still select suppliers based on price. They found this approach was contributing to a situation where one fifth of deals cost customers far more than originally expected.

One Stop Click
Firms urged to avoid low-cost IT outsourcing deals (20 Sep 06)
Companies in the process of evaluating new IT outsourcing partnerships should look beyond getting the lowest price, according to a new whitepaper from LSE. The research urges CEOs to avoid the 'winner's curse', in which cheap deals appear to favour the client initially but ultimately cost in the long run. Leslie Willcocks, professor of technology, work and globalisation at the LSE, found that low-cost outsourcing deals often ended up costing companies more due to problems further down the line. 

IT Week
LSE warns cheap outsourcing deals pose risks (19 Sep 06)
Firms that select outsourcing providers on the basis of price alone face a greater risk of problems, according to a whitepaper published this week by the London School of Economics (LSE). Report co-author professor Leslie Willcocks said that in offering low prices to win contracts many suppliers fall victim to a 'winner's curse' whereby the deals excessively favour the clients. This imbalance often damages the clients as suppliers then struggle to provide the required services that may need to go beyond the initial contract terms, he added.

PR Newswire
CEOS must be aware of the 'winner's curse' in outsourcing partnerships (19 Sep 06)
CEOs in the process of evaluating new outsourcing partnerships should look beyond physical resources such as people and technologies and concentrate instead on companies' ability to turn those resources into capabilities such as leadership, behaviour management, governance and process improvement. This is the main finding of a new research-based whitepaper by Leslie Willcocks, Professor of Technology, Work and Globalisation, LSE and sponsored by LogicaCMG, a leading IT services company.

Posted 19 September 2006

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