Meeting notes: 20 October 2004

Beware imposing Draconian penalties and liabilities on your outsourcer supplier, as they will backfire on you.

Beware imposing Draconian penalties and liabilities on your outsourcer supplier, as they will backfire on you.

That was one nugget of practical advice from John Yard, who until August was IT director of the Inland Revenue and responsible for terminating an outsourcing contract with EDS in favour of a new one with Cap-Gemini.

Speaking to Computer Weekly's 500 Club, Yard also urged companies outsourcing their IT to accept that the first year can be the most difficult.

Prepare for problems by getting relationship management and governance processes right, expect the contract to change as business needs change, opt for open book accounting to see how much profit the supplier is making from you, and plan an exit strategy, he said.

"In the debate about penalties everyone forgets about delivery," he said. "The danger is that people focus on winning the penalty battle while losing the delivery war. You need serious admonition but also to apply balance and appropriateness. Nor should you try and impose penalties because you have changed your requirements."

"Overall, incentives are better, but you have to be a strong customer to ensure your supplier wants to earn them. They should also share them with you. (JY:How?!)"

"If you want to have a partnership relationship, then you need open book accounting, though you need to be skilled in spotting the supplier's internal transfer pricing [which distorts supplier's costs and therefore profits].

"Remember, suppliers do need to make a reasonable return on you. The key to successful partnership is for you to have equally weighted objectives - though different, failing to achieve them will impact just as badly on your supplier as on you. If you expect your supplier to take on risk, then the contract will be priced for that."

However, Yard warned that the first year of outsourcing will be tough, as outsourcers get to grips with the reality behind the bid.

"You get a two to three week honeymoon and then you're skiing downhill fast.  At about eighteen months you have a choice - either to fall off the slope or to start climbing up again slowly - it is a long, hard slog."

Early on one of biggest challenges is to learn to manage the expectations of your own Board, he said.

"Boards have paid a lot of money upfront to outsource and think they have solved the problem. So when things go wrong the board says pressure the suppliers - but that is short term."

"At the outset cut through the sales gloss and remember you are competing for resources with all the other customers the outsourcer supplier has."

Always plan your exit from the start.

"While you're negotiating you have the power to define your exit terms and identify what rights you need to take back with you. It's your pre-nuptial contract. Your supplier must know that you can and will exit at some point - so make sure you dig your escape tunnel soundly," said Yard.

Looking back, he remains convinced that outsourcing the IT for the Inland Revenue was the right thing to do because of the difficulty of attracting and retaining sufficient numbers of high calibre people within one government department.

"We couldn't have delivered a great deal of what we have, without outsourcing," he said.

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