When Partnerships Make Sense | Article

Signing an Outsourcing Contract“Partnership” is a word that is used frequently in outsourcing, but is used in different ways depending on who is using the word and in what context. When Dr. Robert Klepper, professor of computer management and information systems at Southern Illinois University, talks about partnerships, he is referring to long-term deals where both sides are willing to take one for the team in both the rewards and the risks department.

Klepper says that partnerships are quite common and are becoming more popular in outsourcing relationships. Business process outsourcing (BPO), in particular, the information technology (IT) component of BPO has been the vehicle that has led a lot of vendors and clients to enter true partnership deals. Redefining certain portions of the business, such as the IT function, has the potential to save substantial sums of money. And saving money results in the generation of additional revenue. The new technology essentially redefines the way a company will do business and the vendor shares in the gains and the risks of the new technology that is being integrated or installed.

The Complications of Contracts

According to Klepper, most problems in an outsourcing relationship are rooted in the contract, which is one reason to consider a partnership. Essentially the task at hand is predicting the future and not too many corporations can predict all the likely changes that will occur. But Klepper says that creating an outsourcing partnership can potentiality resolve critical and delicate issues that arise because of changing circumstances that occur during the lifetime of a relationship.

When a company begins writing a contract with a third-party vendor they have to anticipate change in several different categories. A company has to consider how technological and business changes might impact its outsourcing relationship with the vendor. And because technology change invokes business change and vice versa, one also has to consider how the two work together. So whether a company is signing a contract for just a couple of years or ten years, organizations have to consider many changing factors that occur during the venture.

“Even if a company were able to anticipate every possible situation that may arise,” Klepper says. “It is difficult to put together a contract that would encompass every change in a logical way.”

In partnerships there is still the idea of a contract, but they don’t necessarily play the same role. Contracts in partnerships are essentially a safety net. “The contract basically says ‘here is our intent, here is our direction, and here is where we want to go,'” he says. “And it also specifies what happens if things turn sour or for other reasons the partnership terminates. In other words ‘who gets what and what are the conditions.'”

Other Conditions That Favor Contracts

Another condition that favors a partnership is when either the client or the vendor is going to make a substantial investment as part of the contract. If the relationship falls apart it is often difficult to recoup this investment, which is frequently knowledge. “A vendor makes a tremendous investment, for example, in learning about the clients organization, how it does business and how to apply particular services to the client’s situation; and if the deal should suddenly terminate the vendor can’t recoup all that investment under the terms of the contract,” Klepper says. “So there is a need to extend the relationship so that it endures for a considerable period of time and the initial investment is regained.”

The third situation that favors a partnership is when two businesses enter into an outsourcing engagement, which can’t be handled in one contract, primarily because the nature of the work extends beyond the normal terms of a contract. For example, there are two businesses that really want to go into business with each other and the outsourcing relationship is the vehicle for doing that. But neither company knows at the offset how long the engagement will last, thus multiple, consecutive contracts will be necessary. “Partnership arrangements then become more important than contracts in terms of the way in which the client and the vendor organize their relationship,” Klepper says.

For a company who chooses a contract over a partnership, Klepper offer some advice. Change is easier to anticipate in short-term contracts, in which case you may be able to specify everything in the contract that the vendor is to do for you and not leave any loose ends. If a contract period is going to be longer, then a company should try to build mechanisms in the contract that will allow the relationship and the requirements to change over time.

For example, if you anticipate technological change of some sort you can specify in the contract the need to renegotiate certain provisions, contingent on certain sorts of technological changes. Essentially it would open up some parts of the contract to reconsideration by you and the vendor,” Klepper says. “But when all bets are off and it’s really difficult to anticipate how technology is going to impact the business, then you want to move to something that is closer to a partnership.”

Klepper and his colleague Wendell Jones have written a book titled Outsourcing Information Technology, Systems and Services, which provides valuable information to managers considering outsourcing. Klepper also was a nominee for a 1999 Outsourcing World Achievement Award for academics who have advanced the theory of outsourcing. He has served as a consultant to Citicorp Mortgage in training and users. He has been published in numerous IT publications.

Lessons From the Outsourcing Primer

  • It is difficult to write a contract that encompasses all the possible changes that may occur over the life of an outsourcing relationship.
  • Businesses may prefer a partnership so that they can recoup their investment.
  • A partnership may be preferred if the nature of the work within the outsourcing relationship expands beyond the normal term of a contract.
  • It is easier to anticipate changes in a short-term contract.
  • Long-term contracts should have built in mechanisms that allow the relationship and the requirements to change over time.

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