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Despite the maturity of outsourcing practices, a surprising number of outsourcing contracts are poorly negotiated, leading to outsourcing relationships that do not provide benefit to either the client or the provider.
Whether you are negotiating an outsourcing contract for the first time or renegotiating an existing contract clients must continuously evolve, improve, and innovate to develop stronger, longer-term, and more trusting relationships with their service providers. Outlined below are some key success factors in negotiating (or renegotiating) a contract that can help your firm avoid or recover success from a poor outsourcing relationship.
First, hire an outsourcing advisory firm to work with you throughout the process. These advisory firms eat, sleep, and breathe outsourcing. They know which providers can meet your needs and what is happening in the market. With their deep industry expertise, these advisors have the essential processes, knowledge and experience needed to acquire a market leading deal. Also, these advisors have knowledge about pricing, services considered standard in the industry, service levels, and all other business aspect of outsourcing.
Second, hire an external counsel that specializes in outsourcing. A solid outsourcing contract is important, standard purchasing terms and conditions are not enough. Similar to outsourcing advisory firms, outsourcing legal firms understand the nuances of contract language and often have experience understanding how courts have interpreted contract language. Hiring an external counsel that specializes in outsourcing will help you avoid issues should your outsourcing relationship start to deteriorate.
Third, dedicate time from your most knowledgeable people for the services that you are outsourcing. Outsourcing advisors understand the business. Outsourcing lawyers understand the legalities. It is your top people that truly understand the details and nuances of your particular environment. They need to be available during preparation, provider selection, negotiations, and transition.
If the advisors or counsel seem to be pushing a point that really does not matter, point that out to them. It could be that their past clients viewed something as all important while it is low priority in your particular environment. The inverse is also true so be sure to indicate what is critical to you.
Fourth, when you have your negotiations team built with members of the above three groups, you have to establish your approach to negotiations. Taking a Genghis Kahn approach to negotiations is not likely to get you what you need from your sourcing provider.
Fact-based, business focused negotiations have the best outcome for all of the parties involved. Rely on the outsourcing advisors to provide facts about the current state of the market and legal advisors know the current Master Service Agreement (MSA), terms that are being agreed upon.
Occasionally when a provider deals with a client that does not have advisors, they will claim all sorts of things to be either unheard or always done in the industry. Your advisor and counsel can cite specific examples of how something has been done in other contracts.
Fifth, keep your services as close to industry standards as possible. Pushing for unique services may limit the providers’ ability to leverage global capabilities, utilize leveraged (as opposed to dedicated) resources, and cause you to pay a higher price. An outsourcing advisor can help you determine what is standard and in the industry and what services my cost you more.
Sixth, understand and insist upon transparency in pricing. There is value in understanding how the provider comes up with a price. For dedicated environments, you want the services priced separately from the infrastructure required to provide the services. Unless you have more buying power than your provider for hardware and software, consider having them procure these for you in a pass through model where they have some small mark-up or transaction fee. As providers are coming online with cloud/utility pricing, you want to be sure that you are not funding their entire infrastructure. You only want to pay for your fair portion of the infrastructure.
Seventh, keep it professional. When your negotiations are fact-based and business focused as mentioned above, there is no real need for the histrionics of negotiating. Keep in mind that you are contracting for a critical partnership that has a huge impact on your business. Although it may be clichй, it’s true that an outsourcing relationship is like a marriage – and the outsourcing contract is akin to a prenuptial agreement. Contract negotiation is an opportunity to begin building a trusting and mutually beneficial relationship.
Whether you are negotiation an outsourcing contract for the first time or renegotiating an existing contract, you can increase the probability of creating a successful outsourcing contract by following the seven key factors above. Having a contract that details the services you need, the governance that is required, and an agreement as to what happens if things go wrong is critical in the outsourcing industry. Getting it done right is worth the time and effort required to do so.