Three factors that fuel successful outsourcing projects
Posted May 7, 2012on:
The success or failure of an outsourcing project can hinge on certain qualities in the relationship between customer and supplier. Outsourcing projects are complex beasts with a nasty habit of punishing any latent flaws. And there are of course numerous reasons why things might turn sour – many of which lie outside the control of those involved in the negotiation process or even in a project’s day-to-day management. However, some clearly identifiable factors can significantly increase the chances of a successful outcome, so let’s look at some of the most prominent examples.
Trust in these types of engagement is hard to define. In practice, it’s far less prevalent than parties on either side of the divide between customer and service provider like to admit. Let’s look at some examples. A customer provides due diligence information, which it has spent little time or effort gathering and which may well be inaccurate. Yet it gives no indication of this issue to the bidders. Instead, it uses its bargaining power via the competitive procurement process to require the bidders to take the risk associated with their analysis of the documents. Is this approach a sound basis for building trust for the future?
To flip the coin, a supplier has mispriced a deal, perhaps underestimating either the scope or the complexity of transformation or transition. However, it seeks to claw back lost margin by adding additional costs into estimates for dealing with change control, and over-egging the impact of some of the customers’ own failings.
Sound familiar? In each case, those of us who have lived through these kinds of situations know that any resulting advantages gained by one party or the other in drafting the contract tend to be short term.
These situations engender ill feeling and resentment – and once the essential trust has gone, it is very difficult to win back.
By way of contrast, when the two parties have genuine trust, there is a sense that neither is trying to profit unduly from the other. When difficulties arise – as they almost inevitably do at some point – it is more likely that collaborative solutions can then be found, without needing the day-to-day involvement of the legal teams.
A key contributor to trust but also a major factor in its own right, transparency is an essential component of a healthy outsourcing deal. But what does it involve in practice?
Essentially, from a customer perspective it means there is a readily accessible means of validating the information provided by the service provider, most importantly but not exclusively about the calculation of charges and performance against service levels.
Sounds easy enough, and yet strangely many organizations complain that their service provider’s pricing mechanism is like a black box that’s closed to them, making it difficult to predict the impact of business changes and to budget with any certainty.
Equally, there are cases where service-level reports have all been good, suggesting that the SLA is being complied with, but when users are complaining about significant service problems at the coalface.
However, transparency also goes two ways. It’s hard to understand the reluctance of some organizations to share plans and timetables about changes that affect the business with their outsource service providers.
Yes, they are third parties, but they need to be able to cope with potential surges in demand. It will hinder their ability to do so if they aren’t given adequate warning. Service credits arising from service-level breaches are most definitely not what the customer should be focusing on in such circumstances.
An old – but accurate – saying is that no battle plan survives the first shots intact. The same might be said of any large outsourcing engagement.
Experienced advisers – both legal and otherwise – will hopefully have mitigated the problem by seeking to future-proof the contract and to incorporate a range of provisions to enhance the parties’ ability to deal with change in a structured way.
These provisions should include a robust and well-documented change control process, backed by an appropriate governance structure; rate cards and charges that account for future fluctuations and service requirements; and rights of partial termination.
Having pricing structures that allow for fluctuations in volume, in particular, will help significantly with further changes in requirements. The successful contract will be the one that does not attempt to predict the minutiae of what these eventualities might be, but which sets out a coherent and clear manner for addressing them.
These provisions could include, for example, elements of book pricing for the costs of dealing with new services, senior executive and main board escalation, and revised rights of termination if terms for material additions to scope cannot be agreed within reasonable parameters.
Successful outsourcing projects
It will immediately be apparent that the characteristics of successful outsourcing projects can – and indeed should – exist outside the confines of any legal agreement. However, it is also true that contract provisions can shape the behaviors and attitudes of the parties, and can accordingly either help or hinder both sides in their endeavors to achieve that most desirable of conclusions, the successful outsourcing project. For that reason, those involved in the creation of these contracts would do well to have these concepts in the forefront of their mind.