Warning Signs: Is Your Outsourcing Agreement in Trouble?

As the months and years go by and the contract lawyers, advisors, solution architects and salespeople who were involved in your outsourcing agreement become distant memories, it is not unusual to find that some of the original sourcing objectives you envisioned are not being met.

Frequently, it’s hard to figure out exactly what is wrong, but you know that something is. There are key warning signs that you should look for to determine whether it’s time to take some sort of corrective action. By understanding and acting on these warning signs early, you can maximize your upside opportunities and minimize the value leakage.

1. Age of the Agreement

Outsourcing agreements are typically multi-year contracts ranging from three to five years in length, with some of the older ones going beyond that to ten years. Good outsourcing agreements are designed with flexible terms and governance processes to handle changing conditions, but even with those in place, agreements can become outdated over time.

In the last few years, legal provisions have changed in the areas of data privacy, data security (e.g., PCI-DSS), force majeure / acts of terrorism (think “Mumbai”) and service provider financial covenants (think “Satyam”). Because of this, many clients choose to start renegotiation discussions prior to the end of the contract term. In some cases, the discussions may start as early as half-way through the contract term.

Since you and the provider know each other well, beyond changes in the latest legal provisions, there may be obvious modifications that should be made to improve the contract for both of you.

2. Changing Business Conditions

Your business conditions may have changed considerably since the outsourcing agreement was signed. For example, you may be smaller now and require a reduced set of services.

Perhaps your business model has changed and you are now more willing to exchange higher risk for lower costs (e.g., lower service levels, less availability, less disaster recovery times are now palatable), or maybe speed and agility are now more valued than consistent and repeatable services. Review your contract and see if there are any provisions for handling these.

Sometimes there is language allowing for contract or pricing adjustments when certain events occur (e.g., merger, drop in company revenue).

3. Higher Costs

Are your current costs higher than you anticipated? If so, there may be several reasons why. Generally, higher-than-expected costs are the result of unforeseen consumption, incomplete transformation, or a misunderstanding of service scope. Depending on your particular situation, it’s possible that some of the issues may be within your scope to resolve or mitigate.

For example, perhaps you can reduce consumption (such as number of help desk calls, number of servers, etc.) through improved end user training or streamlined technology requirements. If the transformation program has not yet been completed, investigate and see if the roadblocks are yours to fix. For issues regarding scope of services, make sure you understand exactly what is documented in the contract.

If you do not agree with the provider’s position, there may be an opportunity to at least partially correct the situation through dialogue. Regardless, if your contract is more than a few years old, ask yourself this question: Do we know what the going “market price” is today for each outsourced service?

4. Lack of Innovation/Thought Leadership

While the terms “innovation” and “thought leadership” may have been part of the sales process, often these expectations and commitments are not effectively described in the outsourcing agreement.

Because of ambiguous contract language and lack of well-defined measurements, innovation and thought leadership often get overlooked or only partially addressed. Review your contract for any mention of these types of commitments, and then through your contract governance process insist on what you need the provider to step up to.

Many agreements have language describing how the provider will help document the current technical architecture, keep the environment up-to-date, provide education on new technologies, and propose new technical strategies and platforms periodically to help achieve client business objectives. Don’t be bashful

5. Relationship Disconnects

Over time, the relationship you have with the provider will change. Oftentimes, after 18-24 months, the first account manager for the agreement – the one who understands the background and intent of the contract – will get reassigned as part of his/her career progression. When this happens, the next account manager may delve into the contract and interpret it differently than you and the previous account manager.

Also, as reorganizations, mergers and acquisitions occur within the provider company, the executives aligned to you will change. This can cause issues with your executive relationships as you lose the ability to easily escalate issues as you did in the past and lose the “history” and synergy between key stakeholder executives. These issues frequently work themselves out, but sometimes a change in leadership causes issues that cannot be easily corrected.

6. Provider Personnel Changes

The provider’s personnel, especially those that sit on site with you and interact with your team on a regular basis, are very important to ensuring the success of the outsourcing agreement.

Some of these people probably came from your previous IT organization as part of the initial transition and are the keepers of much of your company’s institutional and “tribal” IT knowledge. Some may be covered under a key personnel section of the contract, which gives you some say in if, when and how these folks move on to other opportunities.

However, many are probably not noted as key personnel, and the provider may start moving them out and replacing them in order to achieve internal cost reductions or to support other accounts. While it is important to provide career growth opportunities to people, it is more important for you to ensure that the risk of change is managed properly.

If you are starting to see these types of personnel moves without your advice and consent, bring up the issue with your provider executive and see if it can be resolved.

In conclusion, you should be on the lookout for these warning signs, and others in order to determine if it’s time to take corrective action. There are many options you could choose, including overall renegotiations, tower-by-tower renegotiations, sourcing some work to other providers, or selectively bringing some or all services back in house. A sourcing advisor can help you evaluate your current outsourcing agreement and relationship and recommend the best course of action for you.


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