Mastering the Outsourcing Process

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In the negotiation phase, vendors will try to divide and conquer by using any contacts they have with senior management or the end users of the service being bid to try to get their support. Don’t let that happen, Rosetta advises. Insulate and empower the lead negotiator and negotiating team.

You need a good fit as well as a good performer. If the provider is out of touch with what drives your business and the dynamics of your marketplace, you will suffer, warns Art Prifti, principal of APC Technology, an independent consulting firm in suburban New York City. That might mean picking a provider who knows your industry, teaching them about your business, or putting an internal project manager on the case to work closely with the provider and supply the business savvy the relationship requires, he says.

When a technical process is outsourced, the provider typically will have great technical skill but not always understand the business model or the dynamics of the marketplace. Prifti once managed a project that was outsourced to a team of top-flight engineers. It worked very well, but only because he worked closely with them, explaining what was going on with the business, he reports.

4. Negotiate the Contract
Once the leading service provider candidate has been chosen, the provider must perform contractual due diligence and present their best and final offer, Lackow says.

Then it’s your job to evaluate that offer and negotiate any points you still don’t like. Perhaps the most important part of the contract—certainly the most detailed—will be the service level agreements (SLAs).

Both sides must think through the process in minute detail and specify exactly who will do what and when. Some of this will involve technology, file formats and security provisions. Much of it will involve identifying tasks within the process and how they will be performed by people under the outsourcing agreement, Lackow explains.
Prifti’s company once had a bad outsourcing experience because it issued vague specs that were later interpreted differently by the two sides. “We had a lot of problems with what was meant by certain language,” he recalls.
Don’t base your SLAs on averages, Prifti warns. Look at your peaks and valleys and write agreements that will accommodate them, he advises.

The contract needs to be very specific but also flexible enough so that both parties can live with it through circumstances neither anticipated, says Bob Galey, CIO of Amtrak in Washington, DC.

Every contract should contain healthy incentives and disincentives, Prifti insists, but not so large that they will make or break either party. “Certain processes are time-critical,” he notes. “If they get it done early, there should be a reward. If it comes in late, there should be a penalty. But those consequences should be reasonable and reflect the company’s priorities.”

If technology changes so that the process is cheaper to perform, Prifti is cautious about requiring the provider to drop its prices. “They have to make a capital investment to get that cheaper process,” he notes. “It doesn’t come free. They need to make a fair return on that investment.”
The contract will be built on baseline information that will have to come from the people whose jobs are jeopardized by the potential outsourcing. They will not be predisposed to cooperate. If the baseline numbers are off, the contract will be ineffective, Haider warns.

“You have to put in place a process that will provide valid, unbiased, accurate numbers,” he points out. “And then you have to check and recheck it to see that it has not been corrupted.”

While precision generally is good in outsourcing contracts, it can also become a stumbling block. In the IT world, for example, companies are rated on a scale of one to five by the Software Engineering Institute under its Capability Maturity Model (CMM). A five—NASA, for example—would operate at a very high level of specification, but you’d have to tell them in great detail exactly what you wanted them to do, Prifti explains.

While a 4 or a 5 rating might seem to promise high performance, it might pose a real challenge for a company with a 2 rating that tried to engage them as an outsource provider, Prifti warns.

“You might run into delays as they came back to you with more specific questions than you were prepared to answer. In the end, you might not be able to specify the job at the level of detail that they need to work at their level,” he says.

The communication might be better if a 2 shop engaged another 2 shop, he suggests.

With the stakes high, due diligence has to be thorough. If you contract with a company to perform an outsourced service and a few months later that company is taken over by a corporate raider, for example, you could regret the choice. It’s important to anticipate all these possibilities in the due diligence, Haider says.

The contract should include an assignability clause in case there is a change in ownership, Rosetta says. There should be termination clauses, not just for breach of contract but for convenience.

If there are software applications you will depend on, set up an escrow for the source code so you won’t lose it if the provider goes out of business, he advises. It’s possible to anticipate the most disruptive events and put protective provisions in the contract, he adds.
However, business is inherently unpredictable, so outsourcing relationships have to be built on agreements that can adjust to the unexpected, Prifti points out.

For example, if a company outsourced a key process on the condition that key members of the company’s staff will go over to the outsourcer and handle the company’s account, the contract might specify that those persons had to be retained.

But what would happen if the provider’s business declined and it had to lay off staff? Should those key people be protected from layoffs?

If so, it might saddle the provider with resources it could no longer afford. If not, it might saddle the company with new people who don’t understand its business. “If you need to keep those key people on the job, you should be prepared to pay extra so the provider can still take the necessary steps to cut its costs,” Prifti advises.

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