Contract LawNegotiationOutsourcing & Projects

7 Steps To Love Your Next Outsourcing Contract

Customers enter ICT outsourcing contracts for a number of reasons, including to save money, use the specialist skills and experience of a third party supplier, and/or transfer risk to the supplier. In an outsource, a customer will be generally transferring responsibility for non-core internal business functions to the outsourcing provider. It is therefore important to negotiate outsourcing contract terms that anticipate a two-way relationship with the supplier that manages risk appropriately over the evolution of the contract.

Even though outsourcing is not a ‘love-in’, a relationship between a customer and an ICT service provider is similar to being in a marriage. There are overriding commercial considerations for both parties, but in the end, neither party will come out on top unless both succeed.

Here are my top seven steps to make your outsourcing journey as smooth as possible:

1. Know what you want and ask questions

The initial step should be to consider what you need and what is on the table from the outsourcing supplier. Perform due diligence to understand the range of services that the supplier can provide, including what they cannot provide and what they can only provide at an extra cost. Ask to review any case studies that illustrate the processes and methods the supplier has used for other similar customers. Ensure you, or someone else who intimately knows your business, asks questions repeatedly, especially of those outsourcing suppliers who are promising to provide you with everything at a bargain basement price. There is no ‘one size fits all’ solution so query if the supplier can offer a tailored service and don’t forget to ask your own consultants and legal advisers what innovative approaches they can offer.

2. Only fools rush in – more haste, less speed

There will be pressure from many different stakeholders to sign the contract as soon possible so that your organisation can start the savings from the outsource and also limit the legal and other transaction fees. This, coupled with the stress of negotiations, means that parties can often forget the importance of the long-term relationship and ongoing service delivery. Ensure you spend enough time on the structuring and negotiation stage so that everything is perfect as possible at the first attempt. It is a far from ideal start to the outsourcing relationship to require a number of variations during transition-in or during the first few weeks of service delivery to correct errors that should have been picked up prior to signing.

3. KISS (Keep it simple solicitor)

Simple and straight-forward contracts save both negotiation time and money for both parties. It is impossible to draft a contract that addresses all contingencies. A well-drafted contract should be written in plain English, be clear to follow, and, from an administrative perspective, address how your business actual runs. It should also build in detailed processes that can be adapted to address different situations and problems. This approach is more efficient than including a myriad of different rules that attempt to cater for the unexpected and add hundreds of pages of details to the contract.

4. Propose as balanced a contract as possible

Whether acting for supplier or customer you should try to propose contact terms that are reasonable and sensible (as far as is practicable in the circumstances). Even though both sides should start as they mean to go on and work together collaboratively, I have often seen organisations propose contracts that are extremely one-sided. In reality, the lawyers acting for the party receiving this type of contract will rarely sign it unamended, unless they have instructions to the contrary or the other side has substantial commercial leverage. This one-sided approach actually wastes time and over rounds of negotiations the contract will usually evolve to contain terms that land somewhere near the middle ground.

5. Service Levels shouldn’t be all about punishing

In the non-legal world service levels are somewhat overvalued by customers. Service levels are important and necessary in an outsourcing contract but don’t guarantee quality of service. It is hard for the customer to ‘win’ by punishing the supplier through onerous service levels on an ongoing basis. Realistically, an outsourcing supplier will not agree in the contract to meet service levels that they are unable to meet on a regular basis in the real world. Even if there is service level breach the supplier may argue that the customer has contributed to the breach, which nullifies the payment of service level rebates (or at the very least allows the supplier to raise a dispute). If it is possible you should look at the actual service scope and your business needs and ask the supplier to create bespoke service levels that are appropriate for your business.

6. Collaboration and trust are key

Collaboration and trust are two of the key building blocks to a successful outsource. Collaboration can be required on tasks such as managing operations, resolving disputes and reviewing pricing and service scope variations. If the parties have different agendas or a poor working relationship the contract will likely fail. A typical outsourcing contract may take from three to six months from inception to signing, whereas the supplier will be providing services for anywhere from five to ten years. As the service term is substantially longer than the actual negotiation period both parties will need to provide suitable members to form a a strong governance committee that manages the contract and the relationship.

7. You can’t negate all risk – but you can manage it properly

All business has inherent risks that are present even prior to outsourcing. No matter how well your legal advisers negotiate and structure the outsourcing contract it is impossible to negate all risk in the transaction or shift all risk to the other party. Some of the key clauses to manage risk that you should carefully review include physical security, data privacy, confidentiality, business continuity planning and an up-to-date disaster recovery process.

Summary

A number of these steps can be summarised as follows:

For a mutually beneficial outcome it is in both parties interests to perform all of their respective responsibilities in the outsourcing contact to the best of their ability.

A optimally drafted outsourcing contract motivates parties through rewards and reasonable allocation of risk. If both parties are pulling in the same direction both parties succeed – the supplier will make a profit from proper performance and the customer will receive a good service and benefit of the supplier’s  expertise and ideally save money. There will also be less chance of expensive and time consuming disputes and the customer is more likely to renew the contract with the supplier at the end of the initial term.

 

Photo credit: Pixabay

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