Why do some outsourcing relationships succeed and others fail? One key lies in the day-to-day management — and that management can be facilitated by defining effective communications mechanisms early in the planning process and including those mechanisms in the contract.
“The working relationship is the most important thing in successful outsourcing,” said attorney Bill Deckelman. “Everyone knows that the key to a good relationship, assuming all the other factors are there, is good communications. An outsourcing contract should be structured so that there are mechanisms in it that require that type of communication on a regular basis between the customer and outsourcer.”
Deckelman is a shareholder with Munsch Hardt Kopf Harr & Dinan, P.C., a law firm specializing in outsourcing, with offices in Dallas and Austin, Texas.
He said an entire section of an outsourcing contract typically is devoted to the communications structures within a relationship, with those structures usually divided into three levels.
At the lowest level is an operating committee made up of representatives of both the customer and outsourcer. That committee meets frequently to deal with the day-to-day issues of operation. Some relationships will have a mid-level or executive committee that meets every quarter to deal with higher level problems.
Finally, what frequently is called a steering committee, composed of high level executives, meets once a year.
“Some contracts call for the outsourcing vendor to come to the steering committee with a strategic IT plan for presentation to the executive level of the customer,” said Deckelman. “That’s obviously an opportunity for the outsourcer to present some value-added concepts, and more than likely, they’re going to be selling services behind those concepts. That’s okay. It lets the outsourcer come in and meet with the executives at least once a year and have an overall look at where the company is headed strategically.”
Avoiding Ad Hoc Decisions
The contract frequently defines not only the existence of the committees, but the level of the participants within their respective companies, when and where the committees will meet and the subject matter for which they’re responsible.
“We all know that problems come up day-to-day,” said Deckelman. “This is the way to put in place the infrastructure to deal with those problems effectively.
If a company goes into outsourcing without having thought of that, more than likely they will have serious problems in the relationship. Decisions will be made ad hoc. They will be making up the structure as they go, and that gets political. It’s not a good way to do business.”
Another element that Deckelman recommends be dealt with in the contract is the structure for contract disputes. Internal escalation procedures typically are built into contracts. Resolution of the dispute can begin at the project manager level, with some specified time limit set on negotiations at that level. After that time, the contract can call for the dispute resolution to be kicked up one level to either an executive level person or the chief information officer, depending on the size of the company.
“The same thing needs to be happen on the side of the outsourcer,” said Deckelman. “The idea is to be sure the problem is getting attention put on it at the right level of the organization.”
When internal resolution fails, the parties involved typically go either to mediation with a third party or directly to arbitration or litigation.
“The point is to make sure the mechanism is in place ahead of time, so you’re not making this up as you go,” said Deckelman. “When the problem has already occurred and both parties are in dispute is not the time to be figuring out how you’re going to solve it. The structure should already be there.”
Another element that should be stipulated in the contract is the primary contact for both sides of the relationship.† That not only facilitates communication, it also identifies the person who has legal authority for each company. In situations where certain level decisions are allocated to lower level managers, the contract can help the outsourcer understand where the legal authority resides on specific decisions.
“A lot of things happen day to day,” said Deckelman. “A lower level person might say, ‘ yes, we’ll do that,’ and later have an executive come back and say, ‘no, we won’t.’ It’s important to identify the person who has legal authority.”
Early Teamwork Pays
Customers should have their contract management team in place when they enter the contract, according to Deckelman. “The management team needs to communicate with the outsourcer as they’re negotiating,” he said. “Then the outsourcer understands what’s being done internally to manage that relationship and can make sure that the customer’s structure meshes with the outsourcer’s account management structure.”
He also recommended that the customer let the outsourcer know if they expect executive level attention. The customer may even want to put that stipulation in the contract as part of the communications structure.
“It’s a good idea to do all of that ahead of time,” he said, “and make sure you have the outsourcer buying in to that kind of structure. Then it’s a two-way street, with mutual commitment to that communications structure.”
Lessons from the Outsourcing Primer:
- Define communications mechanisms in the contract.
- Spell out number of committees, their participants and responsibilities.
- Identify internal escalation procedures for solving contract disputes.