Before you negotiate an outsourcing deal…

While it is true that a solid contract is at...

While it is true that a solid contract is at the heart of any successful outsourcing deal, this can only be negotiated effectively once the initial process of due diligence and clear strategy development has been executed thoroughly, writes Harry McDermott, chief executive at Hudson & Yorke.

Too many companies cut corners and fail to build in sufficient timeframes for a comprehensive strategy review, which leads to downstream problems and cost-escalation as contracts are negotiated and delivered.

This is because, all too often, contracts are negotiated without a full understanding of the environment to be outsourced, exposing both the client and the vendor to undesirable and unnecessary risk. Conducting a carefully structured due diligence programme provides a comprehensive understanding of the contracts, assets, people and costs currently in place, allowing businesses to better mitigate risk and improving the quality of the outsourced deal for all stakeholders.

There are two common reasons that outsourcing deals generally go wrong: either the contract was badly structured from the outset, or the contract was well architected but the parties failed to deliver the expected business benefits.

The first scenario suggests the parties negotiated a bad contract and were always going to struggle to deliver any form of business benefit, regardless of how well-intentioned they were. In the second scenario, the existence of a fit-for-purpose contract has been undermined by poor governance of the contract.

Whereas the introduction of IT industry standards into the governance process, such as version 3.0 of the Information Technology Infrastructure Library (ITIL) and Control Objectives for Information and Related Technology (Cobit), has the potential to create solid frameworks for the automation of contract lifecycle management, the deployment of these standards is still in its infancy.

Even with well planned outsourcing projects there will inevitably be some frustrations if expectations are, for whatever reason, not met. The inevitable outcome of a contract signed without a solid foundation for reliable negotiations is, at best, a full re-negotiation within 12 to 18 months and, at worst, a collapse of the deal.

In either scenario, the costs incurred are likely to cancel out any financial benefits of outsourcing in the first place. If this happens, there are really only two effective ways of addressing the problem: either terminate the contract (for cause or for convenience) and re-start the process over again (possibly with a new supplier) or, alternatively, commission an independent review by a third party to objectively assess the root causes of the problems in the customer-supplier relationship and to agree a mutually beneficial way forward for both parties.

Read more on IT outsourcing

Start the conversation

Send me notifications when other members comment.

Please create a username to comment.