Innovative Outsourcing – how’s that going for you?

Traditional outsourcing and innovation are in some respect ‘odd bed fellows’. Not because buyers don’t want to see their outsourced relationship move past optimization and do some really great things – and not because providers don’t possess the necessary vision about where IT and the industry is moving.  But I would just bet you that this beautiful synergy gets stalled by the vehicle that sets the tone of the relationship and establishes the rules of the engagement.

Indeed, most of your typical outsourcing contracts, SLAs and pricing models stand in the way of innovation. I don’t want to over simplify the problem but we all know that most firms decide to outsource for four primary reasons – Cost, Focus, Flexibility and Innovation.  We also know that without discipline and attention to business outcomes, at the final negotiating table the drivers quickly become COST, FOCUS, FLEXIBILITY and innovation.  Cost and Innovation – they are diametrically opposed.  The negotiating dialog of the past went something like this – “It costs my firm this much money to do this much work — please manage my mess as well as I do for less money”. And as much as I hate to say it, in order to compete with all of the other potential providers, the one you eventually select tells you it’s all about innovation.  It’s all about what they can do for you because they are immersed in your business and committed to your success.   It sounds like an incredible idea at the time but since you aren’t about to consider funding that innovation as a part of the arrangement, not all of what the salesman tells you makes it into the contact. And therein lies a very big problem.

Bottom line, your typical outsourcing contracts are built to manage cost and standardize services. Once those two are “done” neither party has any incentive to change anything.  To matters worse, most contracts hold the provider to service targets and schedules with steep penalties for failure and very little opportunity for reward.  It’s a counterintuitive posture in a contract, but just for discussion’s sake – say the contract says that the dollar benefits of innovation will be split 50/50. That makes a lot of people nervous, but it drives the right behavior, doesn’t it?

Enlightened buyers and sellers (and the advisors who help guide them through the journey) must understand that 1) innovation costs money, 2) innovation requires accepting that you might sometimes fail, and 3) innovation requires a contract that rewards the innovator. So for the business that determines outsourcing can be an enabler to IT and business performance, it is on them to make sure that they don’t put shackles on their partners—or themselves– but rather incent and reward them for helping them get to the next level.

Outsourcing Negotiations – Lessons Learned

Having participated in outsourcing contract negotiations over the past decade as both provider and client rep (not at the same time mind you but rather in different phases of my career), I maintain that when all is said and done, there are five decisive steps to ensuring successful negotiations. Each party needs to:

1. Bring the decision maker to the negotiations
2. Do their homework and planning prior to the meeting
3. Know their negotiating position; its’ reasoning and how it might affect pricing/contract terms
4. Be equipped to ‘fight the fight’ yet strive for a partnership that makes sense over the long term
5. Be fully prepared to articulate and then execute their walk away position

I’d like to say that each session I have been a part of has been a model of negotiation, but the truth of it is most service providers initially come to the table with ‘boiler plate’ positions, they don’t always bring folks that understand what the relationship is trying to achieve, and you’re right, many do not come to the table with their decision makers so a decision can’t be reached anyway.

On the other hand, clients (buyers) often come to the table armed with stories and anecdotes of what other businesses, friends, colleagues and neighbors say can be achieved – and of course they typically start out wanting it all.

Under the category of “I can’t believe I heard you say that”, I had any opportunity a few years back to help a client negotiate an ITO arrangement for the work then delivered by 150 or so folks. They wanted 25 service metrics captured, measured and reported on monthly as SLAs with penalty. 25 highly ‘aspirational’ SLAs ranging anywhere from the usual suspects of resolution, availability and reliability, to things like ‘no provider service locations will be closed, moved or relocated’ and ‘no attrition (for any reason) of key personnel’ over the 5 year contract term without penalty. Well, the service provider essentially responded that the sheer magnitude of SLA measurement and reporting was tantamount to a project and suggested it be priced separately (and quite heavily) as such. This didn’t sit well at the table but it does help support my response to your question around Mutual Indemnification.

I have found that when buyers try to force a montage of “it would be nice to have “ terms and metrics that are so far beyond what their current environment is capable of, the service provider will protect himself in other ways. Enter Mutual Indemnification. When business terms are so tight the service provider can’t breathe he will find other ways to limit his exposure. I have heard service providers essentially say “we are agreeing to current (in-house) team responsibilities … so if they somehow have to agree to indemnification internal to your business, then we will as well. If not, it’s off the table as we will not be your insurance policy”.

My bottom line is that a balanced set of contracts need to coexist. The MSA, Statement of Work and SLAs need to work together, with business and legal terms supporting a mutually beneficial arrangement between buyer and service provider. This takes a lot of hard work, coordination and commitment on both sides, but if you get it right you’re positioned to manage the relationship as I hope it was intended – as partners.