The SLA Trap

"Innovation and operating margins go hand in hand," says Alsbridge's Trowbridge. And US-based outsourcers are getting squeezed. If you edit out the short-lived reprieve of Y2K and the dotcom days, outsourcing margins have been declining steadily since the mid-1970s and have flatlined at 6 percent, with just 9 percent annual revenue growth, according to Alsbridge. "When the crunch hits," says Gartner's Anderson, "outsourcers do the bare minimum to succeed."

The financial pressure on domestic providers is the result of offshore competition, primarily Indian vendors who are riding high with double-digit profits. But don't count on them to fill the innovation gap. "They didn't get where they are by innovating," says Kobayashi-Hillary, author of Outsourcing to India: The Offshore Advantage. "They got there by repeating the same processes over and over again." Plus, they have their hands full managing their own growth.

Thus, outsourcers around the globe are loath to do anything that might affect their ability to meet their service-level obligations and thereby reduce their margins. "Providers are delivering to a contract, and it's difficult to build any kind of innovation into the language of the contract," says Kobayashi-Hillary. "There's a difference between what you sat down and talked about with the outsourcer and what's written in black and white. It's just not in the supplier's interest to proactively change anything."

Indeed, most outsourcing SLAs and pricing models deter innovation. Take data centre management. It's the outsourcer's responsibility to ensure 99.99 percent uptime or provide backup services. "The value add would be when the service provider looks at the environment and says: Now I understand how you support your business and I see that by leveraging this new technology or different hardware, we can improve the quality of the service or your costs," says Taylor of Fluor, which is on its fourth major outsourcing contract since the mid-1990s. "But you're paying the vendor X dollars per server so there's no motivation for them to reduce that number."