Make sure you know where the exits are before outsourcing gets off the ground

Terminating an outsourcing contract can prove to be an expensive process

Terminating an outsourcing contract can prove to be an expensive process

Outsourcing contracts go wrong for many reasons. Needs change over time, services decline, prices become uncompetitive, or the relationship may be poorly managed on either, or both, sides.

We all prefer to plan for success, but in contracts we must plan for failure as well. A good contract should contain a termination clause. This will include appropriate break points and/or a "termination for convenience" clause.

Users should be aware, however, that suppliers charge the user for costs incurred under early termination of the contract, in some cases including a charge for the loss of projected future profits. IT managers may expect suppliers to be flexible about these matters, but this does not always happen. It is notoriously difficult to predict the "loss of profit" element. Many suppliers cannot show how, and by how much, profit will be affected - it is simpler to allow them to profit from what they did, not what they might have done.

Another escape route is to set up an exit plan that must be agreed before the contract is signed. Such clauses should cover the cost of transferring staff and IT assets.

Switching suppliers is another option, but one that can generate new problems. The new supplier will be cautious, aware that a previous relationship has failed, and may push up its pricing to assuage any doubts. Similarly, the challenge of ensuring co-operation between two suppliers through transition is often difficult.

Taking a service back in-house is complex, although it can be done successfully. The challenges are many, depending on the services in the deal, but should include finding suitable accommodation for datacentres.

Organisations that have taken services back in-house are generally those that have not responded well to the disciplines of managing suppliers and business users, and also operate services tactically, rather than strategically. Some have lost their focus on the rationale for outsourcing, or the original objectives have become irrelevant.

It is almost always better to make a relationship work than to exit a contract. Suppliers look for long-term revenue streams and, in most cases will respond better to attempts to repair relationships through third party mediators, renegotiations or repositioning than they will to termination.

The wise IT director will engage both business and supplier stakeholders to solve problems and carry out repairs. Once gaps between perception and reality are understood, the parties are better placed to bridge them and return to delivering and receiving good services.

If all else fails the IT director should review the market, seek advice on other options and consider the pros and cons of each. Exiting an outsourcing contract that has not been adequately set up is expensive, time-consuming and risky.

Even when exit planning exists the exit will be fraught with risk, but at least the risk can be quantified and managed appropriately.

John Mackie is senior outsourcing consultant at Morgan Chambers
This was last published in February 2004

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