IT procurement can often seem like a daunting task for legal teams manage, given constant changes in technology and the introduction of new service delivery methods (e.g. cloud computing) that pose different business risks.
However, at its heart, the procurement process itself should remain the same irrespective of the technology in question. And a robust procurement process will help to ensure consistent business outcomes.
A typical IT procurement includes three key phases:
- Planning and scoping of services;
- The tender process itself, including the tender evaluation; and
- Contract negotiation and finalisation.
In this article we outline what’s involved at each stage and the different factors and choices that will need to be considered along the way. We have also identified common themes that we have seen emerge on recent IT procurement projects.
1. Planning and scoping of services
Planning is critical for any large procurement, particularly for complex IT outsourcing arrangements.
It is typical for the business (or procurement unit) to drive the initial planning discussions. However, it is critical to involve the legal team at this stage to ensure that there is common understanding of the key business drivers and to enable the legal team to assess the work required across the tender process and call out any potential legal obstacles or risks at the earliest possible stage.
Typical priorities for initial planning discussions include the scope of tendered services, identification of likely market interest, along with the proposed delivery model for the services. For IT outsourcing, these discussions may cover:
- an assessment about what functions can be effectively outsourced, and which should be retained in-house for strategic reasons;
- an assessment about whether it is best to use a single vendor (to provide a single point of accountability and potentially obtain volume discounts) or whether the range of outsourced services should be spread across multiple vendors (to spread risk and open up access to “best of breed” services, given that different vendors inevitably have different strengths); and
- an assessment on the benefits and risks of onsite, onshore and offshore delivery.
Working through these issues and making informed decisions can take a significant time. However, this is usually time well spent, as it will enable the remainder of the procurement process to run more efficiently and will minimise the risk that time and effort will be wasted on exploring service delivery options that ultimately do not prove to be in the best interests of the business.
As part of the planning phase, it is also important to assess likely market interest in the tender and identify potential vendors. While tender documentation can be widely advertised and open to all potential bidders, a more targeted approach is often recommended to avoid wide disclosure of company information and also to improve the quality of respondents – this can be particularly relevant in IT where there are a large number of smaller IT companies.
Managing existing vendors
Finally, it is important during the planning phase to consider how the business will manage existing vendors. For example, if terminating an existing service relationship, it will be necessary to consider what termination rights are available and what period of notice will need to be provided. In addition, it is important to consider what transition support will be needed from the existing vendor, and ensure that responsibilities for handover have been appropriately addressed.
Finally, from a commercial perspective, it will be necessary to ensure that the existing vendor remains appropriately incentivised to continue performing to an adequate level up to the point of handover – inevitably, there will be a risk of a drop in service quality once an existing vendor is told that its days are numbered. For this reason, it is important to consider timing issues carefully and avoid an extended period of reliance on a “lame duck” vendor.
2. Tender process
There are a number of decisions to be made regarding the tender process itself, including whether to conduct the tender as a single or multi-staged process and whether to tender different service packages separately or as a bundle.
Single vs multi-staged procurement process
The decision to carry out a single vs multi-staged procurement process is often driven by two things: timing and knowledge of the market. Where the business has sufficient time, and is perhaps uncertain about its knowledge of the market, it may be sensible to conduct an initial ‘expressions of interest’ (or EOI) phase to obtain general information on market interest and the availability of various services before embarking on the more formal ‘request for tender’ (or RFT) phase.
The EOI phase will effectively be an information gathering exercise to help position the business to run a more effective RFT process. During the RFT process, vendors who have been pre-qualified through the EOI phase will be asked to respond to a detailed statement of requirements (including a proposed service delivery model and set of legal terms) that takes into account market intelligence collected during the EOI phase. While this approach can extend the timing of the overall procurement, it may help the customer to make better choices about what service delivery model should be preferred and to choose the most appropriate vendors to take through to the RFT stage.
The ‘bundling’ approach
Another tactic that we have seen used in recent IT procurement projects is the bundling of a broad range of IT services into a single tender, typically with the intent to later separate these services into separate service packages with multiple vendors. There are a number of motives for adopting this ‘bundling’ approach, including:
- ensuring a high level of market interest in the tender;
- enabling an understanding of potential efficiencies that can be derived across the services; and
- supporting flexibility to structure the right mix of onsite, onshore and offshore options in the end outsourcing model.
While we have seen examples of larger IT service providers being selected across numerous IT service packages, customers are increasingly breaking up the initial larger bundle across a number of different vendors. This multi-sourcing approach helps companies access best of breed services and also retain close visibility and control over how it receives services. However, when taking this approach it is also important to ensure that:
- there is the right level of in-house resource and competency to effectively manage a multi-sourced model; and
- the agreements under which the different service packages are split up are appropriately designed to address key interfaces between the various IT service providers (including the potential for collaboration or dispute mechanisms to apply across outsourcing companies).
Involving key members of the business
As already mentioned, an RFT will typically include the proposed form of agreement for the chosen vendors to respond to. The form and content of the agreement will be largely driven by the delivery model and scope of services. While the legal team will carry the primary responsibility for preparing the document, it will be important to ensure that key members of the business have input into the nature and content of the proposed agreement.
For example, the business will clearly want to have input on management structures built into the agreement, such as controls over subcontractors and third party suppliers of software and other service inputs. The business should also be involved in designing formal governance and reporting requirements that will be written into the agreement.
Pricing and payment models
Another critical business input will be to determine the pricing and payment model. The price for IT outsourced services has traditionally been structured as either a fixed fee or as a fee calculated on a time and materials basis by reference to an agreed set of rates. However, our recent experiences have shown a drive towards alternatively pricing models with the objective of improving pricing transparency and providing appropriate incentives for suppliers to manage cost and take responsibility for service outcomes.
While painshare and gainshare arrangements have been around for some time with major IT projects (with companies seeking to offer bonus incentive payments for projects that are on time and on budget), we have seen similar concepts adapted for ongoing business as usual IT services with bonuses available where companies meet prescribed service goals.
The legal team will drive the evaluation of vendor responses to the proposed form of agreement included in the RFT. From a probity perspective, it is important to ensure that there is clear visibility for vendors on the evaluation process and criteria that will be applied at this stage. It is therefore important to note in the RFT that compliance with the agreement will be a key component of the overall tender evaluation.
To drive adequate information from tenderers on their non-compliance with the proposed agreement, we recommend requesting that they provide the following as part of their tender response:
- identification of ‘compliance’, ‘partial compliance’ or ‘non-compliance’ on a clause by clause basis;
- specific drafting changes for any departures where there is a ‘partial compliance’ or ‘non-compliance’; and
- a ‘top 10’ list of key issues.
This approach will ensure clear understanding of each tenderer’s concerns and early identification of potential barriers to entering into a future agreement. It also ensures that the tenderer has adequately considered and reviewed the agreement and supports a ‘no surprises’ negotiation phase.
Once the tender has been submitted, the legal team will need to assess the departures of each tenderer and provide an assessment of non-compliances with the agreement to input into the overall evaluation of each tender response.
To drive appropriate relativity ranking, it may be appropriate to produce some method of ‘scoring’ the legal responses. This can range from relatively crude systems, where each tenderer is scored by the number of departures raised, to more sophisticated systems where different provisions in the agreement are given different weightings and each individual departure is scored by reference to those weightings and whether or not the departure represents a material change to the customer’s preferred position.
3. Contract negotiation and finalisation
The final phase of the procurement process involves the negotiation and finalisation of the contract with the successful vendor (or multiple vendors in the case of a multi-sourcing approach).
Retaining competitive tension is critical to enable a strong position during the negotiation process. For that reason, while one vendor may emerge as the clear preferred provider for the services during the evaluation process, the initial down-selection process will typically retain two or three vendors for each separate service package.
We recommend that the legal team prepares a negotiation plan to ensure there is alignment in the negotiation approach across the procurement team. The negotiation plan should be used to identify the following:
- the proposed negotiating team for each vendor and/or service package;
- key issues to be addressed with each vendor;
- the intended negotiation approach, including timing for the negotiation and check points where further down-selection may occur; and
- where there are a number of negotiation teams, the proposed governance approach during negotiations to ensure continued alignment between the various teams.
Other options that can be considered include running a ‘best and final offer’ (or BAFO) process, where each tenderer is required to submit a final offer that includes agreement terms that can be accepted by the customer with no further negotiation. Provided this process is conducted while each tenderer still considers there is genuine competition for the work, this should drive the tenderers to put their best foot forward and offer the most favourable terms that they can agree to. This can help avoid having negotiations strung out through an extended process of offer and counter-offer as the customer attempts to drive their preferred vendor to their best and final position.
The final notification of the selected vendor should typically be delayed until all key issues (including pricing) have been agreed and the agreement is in a close-to-final (if not actually final) form. Early notification while there are substantive issues still on the table is not wise, as it can adversely affect the customer’s negotiating leverage and even encourage the vendor to revive issues that the customer may have considered resolved.
In order to generate the best possible business outcomes, it is important to take a strong strategic approach to any complex IT outsourcing. Most importantly, all members of the customer’s deal team (including the lawyers) should have a clear idea of the overall strategic objectives of the project, so that at each stage they can drive the process in a direction that will deliver on those objectives.