Don't just sign on the dotted line

Recent IT press headlines illustrate the increase in outsourcing over the past few years, and the trend is likely to continue....

Recent IT press headlines illustrate the increase in outsourcing over the past few years, and the trend is likely to continue. Gartner Group estimates outsourcing in Europe will grow at an annual rate of 14% until 2005. Butler Group predicts that global spending on outsourcing will increase from $75bn (£53bn) in 2001 to $175bn in 2005.

And everyone appears to be at it. Last year alone saw AstraZeneca, Air Canada and Cendant each enter multimillion-dollar IT outsourcing deals with IBM, BAe Systems with CSC, CGNU with Cable & Wireless and AT&T with Accenture, to name a few.

In addition to IT outsourcing, one key growth area over the next few years will be business process outsourcing. Increasingly firms want to concentrate on their core competencies and outsource their non-core business processes, such as accounting, finance, human resources and procurement. However, a recent survey suggests that, for the time being, IT still tops the list of operations that companies most frequently hand over to a third party.

So why outsource IT functions? Appointing an external supplier to run part or all of your IT systems can reduce costs and this remains the most popular driver for outsourcing, particularly so in times of recession.

Alternatively, companies may, following merger activity, outsource the combined firms' IT functions to standardise and consolidate operations. Outsourcing can also be used to improve customer service and efficiency by taking advantage of new technologies. Recent research carried out by Morgan Chambers in association with Computer Weekly's portal reveals that strategic outsourcing can add 5.3% to a company's share price.

However, outsourcing transactions should not be entered into lightly. These transactions are among the most complex commercial deals being undertaken at the moment. Here are some of the issues that should be addressed:

  • Analyse carefully the current state of the function being outsourced, and the benefits you are looking to obtain by outsourcing

  • Undertake a competitive procurement strategy and do not downselect too early, as this will improve your leverage in negotiations

  • Use a request for proposal that clearly details your requirements to ensure the suppliers properly focus their proposals

  • Term sheets addressing issues at a high level are a useful tool before detailed contractual documentation is prepared. This will enable a like-for-like comparison between the various suppliers. Remember, scope and performance standards may be cut to offer a better price

  • Create a contract that works for both parties. Outsourcing is an ongoing relationship, and an unbalanced contract is in no one's interests

  • Plan for the transition to the chosen supplier, analysing the assets, contracts and personnel that will need to be transferred

  • Transparency in the pricing structure and performance metrics will enable you to obtain best value for money and the ability to monitor the service you are receiving, together with well-organised contract management processes to oversee the operation of the contract

  • Flexibility will enable the services to adapt as your business changes to remain aligned to your business needs and strategic objectives

  • Certainty as to scope, performance levels and price is vital both to ensure you get the service you require at a predictable cost, and to reduce the potential for disputes in the future

  • Negotiate realistic limits on liability, noting that the usual supplier exclusion of consequential and indirect loss may rule out the majority of the losses that you would suffer in the event of a breach by the supplier

  • Do not allow the supplier to be able to hold you to ransom by ceasing the services at any stage without good reason. Retaining business continuity after outsourcing such a critical support function is essential

  • Remember the contract is not simply about ensuring satisfactory service provision. Address the required exit arrangements on termination of the contract, allowing sufficient flexibility to bring the service back in-house or transfer it to a new supplier - you may no longer have the experience to scope your requirements and analyse responses in a future tender process

  • The contract is the deal. Allow sufficient time to get it right and use experts in outsourcing transactions to level the playing field with suppliers and protect the business

Elizabeth Weir is an associate and Chris Holder is a partner at Shaw Pittman, a law firm specialising in technology

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