The problemWe are looking at outsourcing our datacentre to a major
services provider. Can you advise me on the vital areas that must
be covered by any contract? What types of contract are open to me?
When would a risk/reward contract be appropriate?
The solution
Consider the long-term implications
A good saying to keep in mind is "hope for the best but prepare for
the worst". Books are written on this subject and you need
specialist assistance. At the very least you should employ
independent consultants with expertise and a good track record in
outsourcing IT, and lawyers specialising in IT services contracts.
Do not forget that the outsourcing suppliers have such people on
their payroll doing nothing else but negotiate deals like yours.
I would steer clear of the word "partnership" with reference to an
outsourcing agreement. Yes, in an everyday meaning of the word you
will be partners in providing the datacentre service. What you will
not be is partners in terms of sharing risks and rewards.
You will each take certain risks, but they will be different risks.
Likewise both of you will aim to gain rewards, but they, too, will
be different. This may seem obvious, but in negotiating being aware
of what is in it for the other party is just as important as
understanding your own position.
Datacentre outsourcing is a mature market which means that there
are not likely to be any loss-leader deals available. You should,
however, get a keen price because of competition between suppliers
and economies of scale. Be warned that what looks like an excellent
saving in year one may not be so good as the years roll by, the
cost of technology falls and your requirements change - profits are
made on variations.
Last but not least, you should consider, in negotiating the deal,
what happens at the end of the contract. You may never be in such a
strong negotiating position again.
Roger Marshall, Elite
Remember to look beyond cost
You need to
understand why you are making this move. Usually the primary driver
is cost reduction, but many other issues should be taken into
account, such as access to additional skills, efficiency
improvements, and increased management control.
You need to identify the key stakeholders in the business and
understand their different needs and expectations. The business
drivers must be clearly agreed and these should be reflected in the
performance measurement criteria that you set.
You need to consider both critical success factors (what the
measures of achieving a successful transition will be) and key
performance indicators (how you will measure success on an ongoing
basis).
Key questions to ask include:
- Can we state the business objectives clearly and
quantifiably?
- How much control are we prepared to hand over?
- How will the outsourcing arrangement fit in with or affect the
business plan?
- Is there widespread agreement to the change or strong
resistance?
- Will we require new processes to support the
arrangement?
You need to cover the whole user-focused lifecycle, from
identification of need to fulfilment, including project management
and development. Although you only mention the datacentre, you need
to be absolutely sure that as little as possible falls through the
cracks between the identification of need and the delivery and
support of systems.
Typically there are two contract types: fixed and variable. In
fixed-price contracts the supplier pegs his price according to
pre-agreed criteria, as opposed to charging for services as
requested and delivered.
Clearly, the first type is more limiting, as changes have to be
renegotiated, whereas the second needs to be supported by a high
degree of trust between the parties. In the end it all depends on
what kind of relationship you want and how much you are prepared to
put into it. Risk-reward type deals are always appropriate, but
particularly in the case of variable contracts.
David Taylor, Certus
Set up a "menu" for the contract
Before you
enter into an outsourcing deal you need to make sure that the
following areas are considered:
- Service level agreements - such as "time to service resume",
helpdesk, availability of service and provision and measure of
service indicators
- Costs - payment profile, return on investment, costs of
"add-ons" such as any increase in users
- Ownership and responsibilities - who owns the data, hardware,
software, and who is responsible for it
- Duration - length of contact, termination clauses,
renegotiation criteria
- Scalability - the ability of the systems to cope with an
increase in users and demands on capacity
- Future-proofing - software upgrades policy, roadmap for
software and/or hardware, additional functionality
- Staffing and management - changes to staffing requirements,
staffing of the supplier; management style and structure
- Boundaries - the interfaces must be clearly defined and the
implications for connection addressed
- Scope - the functionality included in the system
- Security - the handling of data and any connections with other
systems; affects of legislation such as the Data Protection
Act.
Which contract you choose will depend whether you want total
outsourcing or a joint venture. Joint ventures pose a greater risk,
but also a potential benefit from providing a service to others. It
is down to the strategic requirements of your organisation - does
it want to be involved in IT?
Roger Rawlinson, NCC Group
Don't forget the exit arrangements
Ensure
the contract deals with the three stages of any outsourcing
project: set-up and implementation; service delivery; and exit
arrangements.
It is tempting to focus on implementation and service delivery but
it is a mistake to skimp on the exit provisions. Look for
mechanisms to migrate the services back in-house or to another
service provider - and this includes the ability to requisition
information which the new provider needs in order to formulate a
sensible tender.
If it is a long-term deal, look for built-in flexibility to cater
for events such as business acquisitions and disposals as well as
the more obvious changes in technology and market conditions.
Make sure the contract expressly reflects your business drivers,
especially if it is based on the supplier's standard terms. Beware
of signing a contract with too many matters "to be agreed",
especially as a result of postponing problem issues which are
holding up negotiations. Look for clauses that ensure continuity of
service even during periods of change or dispute resolution.
Your question about sharing of risk and reward is a question of
degree that must be influenced by your particular business drivers
and imperatives. Start the contract negotiations early.
Paul Williams, Andersen