Outsourcing: Dirty tricks and hidden agendas

Outsourcing deals can become dangerous territory for the unwary IT manager. Here Nick Huber outlines some of the hazards that can...

It is Sunday afternoon and as you are slumped in front of the TV, a supplier is discretely undermining your authority at work. The supplier, a household name, is pushing hard to extend a lucrative outsourcing contract with your company. As the IT manager of a department which has recently laid off staff to cut costs you are sceptical about the need for an expensive new customer relationship management system - the second in five years. You advise the board not to go ahead with the proposed deal. The supplier is not amused and over a round of golf with your executive director dismisses your concerns, adding that you have failed to grasp the strategic benefits of the deal. The above scenario is a fictional one but, according to industry insiders, it is representative of the less-publicised tactics to which suppliers will resort in order to clinch a deal. Dominic Connor, IT manager at bond broker King & Shaxson, has witnessed these tactics first-hand, although not in his current role. "Outsourcing agreements are big money," he says. "The whole point of them is that senior management don't like or understand the details of IT. So when you raise an issue [with a supplier] they will often have access to a more senior level of management, and will start whispering 'concerns' about your obsession with 'technical' issues while ignoring business drivers. "Once a mega-deal is signed, it is damn hard to change, and the manager who spots trouble is likely to be blamed for it. The supplier knows details you don't, and will use them to make you look foolish. They are good at this, they do it for a living. You do not, and you will lose." Other hardball tactics include incomplete contractual information, secret offshore outsourcing deals and stealth e-mails. According to seasoned outsourcing advisers, one of the tactics used by suppliers is to largely ignore a company's senior IT staff during negotiations by focusing on winning boardroom support. "The large suppliers are brilliant at this," says Bob Aylott, principal consultant at Orbys, an outsourcing advisory firm. "They maintain a very good relationship with the company board, who are sold a concept about the deal before it happens. The board instructs the IT manager to sew up the deal, but the supplier still has pipeline access to the board." Problems emerge when there is a gap between what the board wants from the deal and the practicalities of actually achieving this grand vision. Senior IT staff who question the supplier's promises can struggle to persuade executives that all is not well with the deal. "The supplier can say that these IT staff are just nit-picking and urge the company to get on with it," says Aylott. Colin Beveridge, an interim IT director who has worked for a range of blue-chip companies, was once on the receiving end of this tactic. While working for a multinational, Beveridge was evaluating a bid from a well-known supplier for a £50m outsourcing contract. Midway through the three-month technical evaluation, the supplier began to put pressure on the board to sign the contract before the technical evaluation was completed. "The stakes were high and the supplier was trying to short-circuit the technical evaluation," recalls Beveridge. Late one night the supplier tried to catch the IT department off-guard by sending an e-mail, at 11pm, to the business directors of the project, outlining its case for signing the contract without technical evaluation. Beveridge believes this was a deliberate stealth tactic, but as he happened to be at his desk at the time he read the e-mail. Within an hour he had fired off a rebuttal to the business directors, before work on the negotiations began the following morning. Another supplier tactic is to cherry-pick the best IT staff from the customer, sketching out the lucrative career they could have with them. Again, this is understandable, and perfectly legitimate, but it can make it harder for the user to effectively monitor the performance of the supplier after the service is handed over. "Suppliers will snuggle up to the best IT staff in IT departments and enthuse them in all kinds of ways, for example by talking about career opportunities," says Aylott. "If you get a good deal and you don't manage it properly, it goes bad." But other outsourcing experts argue that more often it is the corporate user that resorts to dubious practices. A classic ploy, according to John Yates, chief executive of technology law firm V-Lex, is for the user to give their supplier an incomplete record of the total cost for delivering the service - staff costs, hardware and software - it will be taking on. This is likely to push up the costs for the supplier, which will have already worked out a detailed budget for delivering the service to the user. "You can almost always guarantee that the cost base for delivering the service is either incomplete or inaccurate in the customer's favour," says Yates, who has advised major companies on outsourcing since the late 1980s. "The customer may disclose 80% to 90% of their contracts [involved in delivering the service] but they may forget the remaining 10%, such as reporting tools and database management systems, or something like middleware that is easy to overlook." And if the company forgets to transfer the relevant software licenses for the outsourced service, this can present their outsourcing provider with a further unwelcome surprise. "If the outsourcing supplier has incomplete information when it takes over a datacentre, someone like Computer Associates will come knocking on the door to ask for the licences for all the software," says Yates. If an atmosphere of mutual mistrust continues, the supplier may also decide to withhold important information on the cost of delivering a service. Many users, for instance, will not be aware that their supplier is running part of their service from an offshore outsourcing centre, and is not passing on any savings it may make. Users can also be manipulative over staffing issues when entering into a deal with an outsourcer. "The question of which staff are going to be transferred over to the supplier is a very difficult one," says Yates. "Sometimes, before outsourcing takes place, IT people suddenly get new job titles that don't have IT in the job title. Staff are given an excuse not to transfer over to the supplier." This gameplay goes on for a variety of reasons - an outsourcing deal can break up closely-knit teams and workplace friendships going back decades. And whatever the supplier says, most outsourcing deals are viewed initially with suspicion by the staff affected. "It is a bit like turkeys voting for Christmas," says Yates. "If you are an IT manager with a big budget and 100 staff, do you want to end up with a skeleton staff and a big [outsourcing] company running things?" Another area where sharp practice can occur in outsourcing is the contract for the deal itself. Suppliers will often push for the "holy grail" of being able to undertake the usual due diligence checks after, rather than before, the contract has been signed. This will allow the supplier to audit the costs of delivering the service to the user, and adjust the price of the deal if necessary. "I can think of one or two examples of this, and big suppliers will have post-contract price adjustments written into their contracts," says Yates. "The customer has burnt their bridges and the supplier is running their service. You are then dependent on a supplier and locked into a five- or seven-year deal. Trying to unravel that and go onto another supplier means you are looking at least another 12 months of procurement." The outsourcing market is thriving on the current downturn in the economy and slump in IT spending. But for all the claims by suppliers and users that outsourcing creates a happy corporate marriage of equals, the everyday reality is very different. The ploys outlined above are not unique to outsourcing, of course; but IT managers need to be fully aware of the smoke and mirrors that can lurk behind even the most alluring contract. Outsourcing deals can become dangerous territory for the unwary IT manager. Here Nick Huber outlines some of the hazards that can seriously affect your IT health

Outsourcers' tricks of the trade
  • The supplier attempts to isolate dissenting voices in the IT department by appealing directly to the board and their "strategic vision" for the deal

  • The user will give the supplier an incomplete list of all the costs - staff, software and hardware - involved in delivering the outsourced service

  • The supplier attempts to get the user to agree to post-contract due diligence, which allows it to raise charges for delivering the service if it unearths extra costs

  • The user's IT staff are mysteriously given non-IT related job titles shortly before they are due to transfer to a supplier, in order to retain them.

And How to Avoid Them

  • Try to ensure constant communication between the company board and the IT manager/IT director to minimise misunderstandings and differences of opinion that the supplier could exploit

  • Be wary of post-contract clauses that allow the supplier to increase its charges

  • Make sure the list of IT assets and costs given to your supplier is as comprehensive and up-to-date as possible; it just creates headaches in the long-run if it is not

  • When taking legal advice, find a law firm that has outsourcing specialists.

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