Top 20 Do’s and Don’ts for Outsourcing Deals- the Customer Perspective
|Do allow enough time for the procurement and negotiation process |
If you run out of time, you will have to compromise on detail and thoroughness….which you will likely end up paying for many times over further on down the track.
|Don’t hide know service issues or defects |
Service providers don’t have a magic wand to wave; while they may be able to plan for dealing with known issues, anything which is hidden from them will likely trip them up, but then impact upon service quality…and ultimately you should want good service delivery, not a contractual remedy.
|Do remember that there are two sides to every business case |
While you obviously have savings targets to deliver, the service provider also has to make a profit; if it is squeezed too hard, it will inevitably either end up looking to cut corners/compromise on quality, or else look to recover margin by an inflexible attitude to change control.
|Don’t negotiate to “win” every point |
Of course, the contract needs to protect your vital interests, and not every contract can be entirely “win-win” on every single point (the size of the liability cap being a good example!). However, pushing the service provider to accept unnecessarily onerous provisions can lead to the loading into the price of excessive risk premium, and may force the service provider to “manage to the word of the contract” in future, for fear of falling foul of the sanctions which have been imposed.
|Do treat DD seriously and provide detailed information |
It is inevitable that the service provider will want to have detailed information concerning the services it is being asked to take on; rather than scrabble around later, it is best to invest the effort in gathering this information up front.
|Don’t forget about the people aspects |
If there are staff implications (e.g., redundancies or TUPE/ARD transfers), do you really want to be announcing them in the run up to Christmas….? How you deal with transferring personnel will inevitably influence how you are seen by your retained employees (and their Unions, where relevant).
|Do undertake “stress test/destruction test” sessions prior to contract signature |
No matter how well drafted or negotiated, there is a near inevitability that some points or potential scenarios will have been missed; by having Q and A sessions with people who have NOT been involved with the negotiations before and who will be involved with its operation in practice, you stand a chance of flushing some out prior to signature.
|Don’t allow for the opportunity of “executive side bars/unstructured escalations” |
You’ve sweated blood to negotiate a key point…and then get a memo from a senior exec who has had a briefing from his equivalent from the service provider as to how “unreasonable” the customer negotiation team is being, and how you should “show some more flexibility/stop being so hard”. Even if the perception can be reversed, the effect is both dis-spiriting and diverting.
|Do get key contract provisions (and ideally the main proposed contract terms) out to bidders as early as possible |
A customer’s bargaining leverage is never better than at the outset of the process, when there are multiple bidders “in play” who will be keen to differentiate themselves as against the other bidders; getting detailed contract responses also enables an early view to be taken as to what points can be fairly pushed for, and what might be beyond the boundaries of current market practice.
|Don’t forget that even the best deals will eventually come to an end |
The old analogy of outsourcing projects being like a marriage is a good one (i.e., they are – or at least should be! – long term, and both sides need to work hard at them). However, they then need to be marriages with a pre-nup, as all outsourcing projects must eventually come to an end, even if that ending may be an amicable one at the end of the day.
|Do plan to make effective use of executive inputs and escalations |
The core negotiation team should obviously look to resolve and agree as much of the contract as possible; however, once the outstanding points have been reduced to a manageable shortlist, there is a lot of merit in involving the executive stakeholders to gain an early resolution of them so that they don’t remain simply “parked”, and potentially slow down progress on the remainder of the negotiations.
|Don’t duck difficult issues by deferring them to later discussion/agreement |
Having some level of “agreements to agree” is probably inevitable in any large scale project. However, one should be wary of leaving any key points still to be determined on this basis, post contract signature (when the customer’s bargaining leverage can only be less than it would have been, pre-signature). In any event, one has to ask the question of what will happen if agreement CANNOT then be reached; will for example there then be a termination right or an ability to defer to an independent third party, or will there simply be a risk of deadlock?
|Do allow for as much flexibility as possible |
Nobody has a crystal ball, and much will change over the lifetime of an outsourcing deal. The contract should accordingly provide mechanisms for dealing with change as simply and transparently as possible; pricing regimes in particular are prime candidates to be set up to flex in line with volumes of demand.
|Don’t forget that prevention is better than cure |
Whilst having robust contractual remedies against a service provider will provide comfort and a level of assurance that the service provider will keep trying really hard, nonetheless investing in the services (and contract drafting) to make sure that problems are less likely to arise in the first place is always going to pay dividends; this ranges from taking the time to develop clear divisions of responsibilities in the Services Schedule, through to making sure that the business continuity services have been fully scoped (and funded).
|Do ensure that you fully understand the supply chain and subcontractor dependencies |
Having the prime contractor “on the hook” contractually is one thing, but from a business continuity perspective, it is much better to understand where the potential vulnerabilities and dependencies lie, and what the contingency plans are to deal with them (e.g., if a smaller – but key – subcontractor were to go broke).
|Don’t refuse to accept/close your eyes to your own ongoing responsibilities |
It genuinely does take two to tango; even though you may have outsourced the core delivery responsibility, the service provider will inevitably still have dependencies upon the customer, if only for the provision of information or direction. If you would not have refused such assistance to a colleague, why refuse it your service provider?
|Do ensure that there is a robust (but not unnecessarily complex) governance structure |
Management of both the contract AND the wider relationship is key; it is almost inevitable that some issues will arise, and the contract should help ensure that there is sufficient transparency for them to be surfaced early, and to the right people.
|Don’t put the contract in the bottom draw |
Living to the letter of the contract can be destructive and unnecessary. However, even worse is simply setting the contract to one side and forgetting what it contains (and which may have taken months to negotiate). You may think that you will be able to manage through any issues on a “relationship” basis, but you will likely then have an unpleasant surprise if this doesn’t work out in practice, and you then find that you have effectively lost rights you would otherwise have had, simply by not following a contractual process.
|Do ensure that you have sufficient skills and resource to manage the contract once signed |
It is a mistake to assume that just because you had people who were performing the outsourced tasks previously, then logically they would be the best people to manage it post outsourcing. In fact, vendor and contract management is a much under-rated (and rare) skill.
|Don’t slavishly live to the exact word of the contract without exception |
The flip side of the equation. If you keep the contract at your right hand and quote from it every day so as to keep the service provider tied to the strict letter of its every sentence, then do not be surprised if the service provider responds in kind, and your relationship becomes one of conflict rather than collaboration. If you know what is in the contract, then you can decide when to enforce, when to defer, and when to simply waive.
Top 20 Do’s and Don’ts for Outsourcing Deals- the Supplier Perspective
|Do ensure that you have a properly constituted deal team from day one |
This will mean people who understand the numbers, those that grasp the wider commercial arrangements, the right technical people, legal people, a really good “deal lead” who will face off to the customer….and don’t forget the actual delivery team!
|Don’t ever say that a deal is “must win” |
Obviously there are projects that would be extremely good to win and also extremely painful to lose….but a bad deal will be bad news for years to come.
|Do understand the customer perspectives and objectives |
If you keep on trying to sell something that the customer doesn’t really want to buy, the process will inevitably be longer and harder. By the same token, if you have a better grasp of the customer’s “hot buttons”, you’ll be better able to fashion your solution to show how you will address them.
|Don’t forget that the negotiation process is still part of sales |
The negotiation approach needs to be tailored to the overall dynamic; an aggressive or un-coordinated approach may worry or off-put the customer, or do damage to the longer term relationship or changes of winning the bid.
|Do say “no” when you need to |
You may feel pressured to agree to positions during negotiations, but agreeing to obligations which will be difficult or costly to comply with further down the line is a considerable risk. Remember that it is not always about what you say, but how you say it.
|Don’t give in to “deal fatigue” and forget that some deals SHOULD be walked away from |
When negotiations have been dragging on for weeks or even months, there is a tendency for both service providers and customers to get to the point where they just “want to make the pain go away” (!); at that late stage, poorly thought through concessions may be made.
|Do insist on full DD or else consequential assumptions |
Many contracts will try to pass the due diligence risk on to the service provider; however, even the best run process won’t be able to make up for information which is simply missing or even wrong. If you need to explain the basis of assumptions, then do so clearly and invite the customer to provide the relevant information so as to remove the need for the assumptions, if possible.
|Don’t kick known issues into post contract discussions |
Tempting though it may be to try to push through to finalization of negotiations and signature, what would make you think that it will be any easier to revolve a tricky issue later on, if it can’t be resolved up front? The risk is that the parties then get into the “deadly embrace” of deadlock.
|Do ensure that there is proper customer sponsorship for/engagement with the project |
We have seen projects go all the way through to finalization of the contract documentation, but then fail to be ratified at Board level simply because senior decision makers had not been properly involved in the process.
|Don’t agree to contract risk provisions simply as a means of trying to increase a procurement score |
If the bidding process is perceived to be close, it may be tempting to make contract concessions as a means of improving the overall “score” for your bid. However, the reality is that in most processes, the degree of weighting given to the legal provisions is much less than for price, technical capability etc., but concessions made on the contract can carry disproportionate risk, once services are underway.
|Do ensure that your key subcontractors have bought a ticket for the full journey |
If you are dependent upon a particular subcontractor, are you sure that you have their contractual commitment to do what you need from them, at the price you can afford, and for the duration of the contract term? Just assuming that they will be willing to sign up to a deal once you have committed to your own contract with the customer is fraught with risk.
|Don’t allow emotion to get the better of you |
If negotiations get heated, emotions can run high. However, antagonizing or alienating customer representatives with rash words or emotive behaviors will rarely work out well.
|Do realize the power of having executive endorsement and involvement |
The customer may take a great deal of comfort from a level of personal involvement and commitment from senior executives from within your organization; quite rightly, they may surmise that directives from your own chief executive may carry more weight than a warranty provision in a contract
|Don’t forget to have an independent review of your proposed solution and risk profile |
It can get difficult to see the woods for the trees after a while, or to appreciate the cumulative salami slicing of risk and reward that can occur over the course of a long negotiation. Having an independent review and sense check is worth its weight in gold
|Do focus on the strengths and weaknesses of your key competition |
Ask “what would we need to do to offset their strengths and capitalize on their weaknesses”? Your bid can then be tweaked accordingly.
|Don’t lightly agree to exclusivity or surrendering IP |
It will often be argued that the creation of new IP is not “core” to an outsourcing transaction and so this can easily be given up to the client/customer. However, at the very least you may want to consider whether to reserve some form of reverse licensing or independent rights of use, so as to make sure that new developments can be applied for the benefit of future customers.
|Do ensure that you have appropriate sponsors/supporters within the customer business |
At the end of the day, it helps tremendously to have someone senior within the customer organization who is acting as your champion/supporter, and who will promulgate positive messages about you and also help to prevent any false or derogatory impressions from gaining purchase.
|Don’t backslide from previous commitments UNLESS there is a correlation that can be drawn to a change in facts/customer positions |
Customers will usually (and understandably) react very negatively to any perceived reversal of positions which were agreed earlier in the negotiation process (especially if they were part of the reason for an original down-selection decision). If changes ARE to be made however, it may be legitimate if they can be linked to changes in the customer’s own position, or new data which can justifiably be said to have not previously been available.
|Do ensure that the delivery team have a full involvement in the solution design/negotiation |
Possibly one of the MOST important practical bits of advice. Sales teams inevitably have closing of the deal as their prime driver; as such, there is a natural risk that they might over commit. As the delivery team will need to live with the contract for the duration of its term, it is essential that they are aware of – and sign up for.
|Don’t make commitments which you will need subcontractors to comply with unless you know in advance that they will do so |
There is a difference here between being willing to take on the liability “gap” (e.g., where you are agreeing to a higher service level than the subcontractor is willing to step up to, or accepting a higher liability cap), and being actually dependent upon the subcontractor (e.g., where you can only comply with customer security policies if the subcontractor does as well). You may find that they are a lot less willing to agree to such provisions if you have already signed up with the customer and have little if any bargaining leverage!