Prepare to streamline lengthy outsourcing talks

Companies are spending too much time and resources in negotiating outsourcing contracts, the director of a leading outsourcer...

Companies are spending too much time and resources in negotiating outsourcing contracts, the director of a leading outsourcer claims.

"The procurement cycle for negotiating an outsourcing deal can drag on for up to a year," says Tom Marsden, divisional director of outsourcing at Cap Gemini Ernst & Young.

Highlighting a trend in the outsourcing market, Marsden warned that users may get bogged down in negotiating a raft of detailed service level agreements (SLAs) before signing a contract. This highlights the complexity of contract negotiations at a time when IT outsourcing is back in vogue.

SLAs offer the user minimum guarantees for the quality of a contracted service, offering targets for key areas, such as system availability and cost reduction. In practice it can be hard to prove whether a supplier has met its SLAs, particularly when the user's business demands changes to the contract.

"Much time is spent on service level agreements and they are important," said Marsden. "But the procurement cycle is perhaps getting too long and expensive for the user and supplier involved."

The focus should be on key indicators to measure the performance of the outsourced service when negotiating contracts, Marsden added.

Outsourcing experts agreed that companies could focus too much on overly prescriptive SLAs and added that they could be agreed after signing the contract.

Before signing on the dotted line, it is equally important for users and suppliers to agree a system for managing changes to the outsourced service during the contract, they added.

These agreements will, for instance, outline how much extra a supplier will be able to charge a user - if the user requests new functions for the outsourced service.

"The model for change control has to be agreed before outsourcing starts, it could only take a few days for user and supplier to agree," said Robert Morgan, chief executive for sourcing consultancy Morgan Chambers.

Outsourcing contracts often break down when a company restructures or makes an acquisition. The scope of the contract changes overnight, but the contract cannot accommodate this.

Earlier this year, CGNU scrapped a seven-year £124m outsourcing contract with IBM after only two years. The insurance giant said its decision to abandon its Perth datacentre was part of its IT systems' consolidation.

The legal implications of service level agreements can also slow contractual negotiations. "The reason is because the legal teams from both sides get involved. You want to make sure you're not building a bad contract," said Margaret Smith, director of business technology and delivery for financial services firm Legal & General.

Companies should be wary of general SLA targets given by suppliers, which may not reflect the priorities of their business, Smith added.

"If a Web-based service has problems at 2am it's different [and probably less serious] than if the same problem happens at 8.30am, when everyone logs on," she said.

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