Successfully managing an outsourcing contract requires customers both to include the right governance tools and mechanisms in their contracts and then to use those tools appropriately.
Outsourcing contracts are not all created equal — the relationships they create can range from that of a customer purchasing a service from a supplier to something more akin to a partnership. The governance tools that the customer should include in its contract will vary significantly, depending on the type of relationship being created (see section 3). Even where governance tools are included, the extent to which the contract needs to deal with each tool, either in particular detail or relatively short-form, will also vary depending on the tool’s relevance to the relationship type. Section 4 of this whitepaper describes the types of issues that will be addressed in the short- and long-form of each contract term.
While these contract tools provide the customer with leverage in managing the contract, they should be used knowingly, with a view to their potential impact on the relationship. Part 2 of this whitepaper (to be provided in the next edition of Middle East & Africa Technology, IP and Sourcing Focus) will analyse the potential impact on the relationship of actually using the tools.
- Types of Relationships
In Section 3, we have divided the outsourcing relationships into three categories:
Transactions involving interchangeable products, priced on a commodity basis, with highly specified deliverables. Typically, these will be standard (or close to standard) supplier offerings.
Transactions involving greater flexibility on the part of the supplier, with the supplier needing special knowledge of the customer’s business. The transaction will involve customisation of the supplier’s standard solution to meet the customer’s specific requirements as they change over time.
Transactions involving a transformation of the customer’s IT environment or business processes. These transactions involve a highly customised solution where the supplier works within the customer’s environment to transform it. These transactions are solutions orientated, often with shared rewards and a high level of integration between the supplier’s and customer’s teams.
Importantly, customers should recognise that most Enhanced outsourcing relationships include commodity components and that most Collaborative outsourcing relationships include Commodity and Enhanced components.
Range of Functionality
The table in section 3 also groups the tools vertically by functionality (colour coded) and these are arranged in a continuum from top to bottom, showing whether and the degree to which the tool enhances value realisation or risk mitigation:
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- Analysis of Contract Tools
Which contract tools are essential to the transaction (and the extent to which the contract should focus on each) depends on whether the relationship will be transactional, enhanced or collaborative:
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- Summary of Contract Tools
The following table describes the different types of governance tools, both in their basic form as well as the more detailed versions that should be covered if they are central to managing the particular type of agreement.
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- Using the Contract Tools
As stated above, while these contract tools provide the customer with leverage in managing the contract, they should be used knowingly, with a view to their potential impact on the relationship. Part 2 of this whitepaper (to be provided in the next edition of Middle East & Africa Technology, IP and Sourcing Focus) will analyse the potential impact on the relationship of actually using the tools.