If you want an outsourcing agreement to be beneficial for both sides, you have to start with a good contract. Great outsourcing contracts happen when “you know exactly what you are trying to accomplish,” says Bob Chaffin, director of contract management and finance for General Motors’ Information Systems and Services Division in Detroit, Michigan.
GM, which has on-going outsourcing contracts with suppliers around the globe, only retains IT architecture, strategy and design in-house. The automaker outsources everything else. Given his experience, Chaffin says outsourcing is “not for the faint of heart,” says Chaffin.
Chaffin says transferring risk from GM to the supplier is at the top of his list of things to accomplish when negotiating an outsourcing contract. Software development projects sometimes come in past the deadline and over budget — and even then the program may not perform as planned. “When I transfer the profit to another company, I want them to shoulder the risk, too,” says Chaffin.
Chaffin’s second consideration revolves around management expertise. He expects the outsourcer to acquire specific skills that his GM staffers do not have or will never need. Outsourcing management expertise lowers the project’s sticker price for GM because the automaker doesn’t have to hire employees with that expertise itself. “I can have my management focused on our core business,” he explains.
GM starts its bid process by determining exactly what GM wants to accomplish with each contract. Chaffin says he spends twice as much time on the preparation than during the actual contract negotiations.
Benchmarks are not negotiable
Chaffin says his staff allots equal time for discussion about benchmarks as they do about cost. He interviews his users to understand exactly what they want. Companies new to the outsourcing process should never underestimate the amount of homework required to come up with “crisp and clear” requirements.
His RFQ is extremely specific about these requirements. And he never allows the supplier to steer him away from his benchmarks in the middle of the negotiation. “Service levels and quality requirements are never negotiable,” he says.
He also does his homework on the scope of the contract. That prevents surprises when the invoices begin to arrive. “We define service levels, quality levels and scope at the outset of the negotiation. Then the only thing that is negotiable is price,” says Chaffin.
GM informs the suppliers of its target price very early in the negotiation process. If possible, Chaffin doesn’t mind if the price of the new contract remains the same as the price of the expiring one if he can receive improved technology and management skills.
How the contract will be managed is another key component in an outsourcing contract. Chaffin says 90 percent of the management issues should be addressed in the agreement. Key clause should outline how both sides handle a disagreement. “Because there will be disagreements,” says Chaffin knowingly. A good contract reduces the number of these problems.
Steering Clear of Contract Disputes
The contract must be clear about the chain of command when there is a dispute. For example, if a dispute is not solved in five Mondays it goes to the next executive level. The last resort is Chaffin’s desk. “I never let a dispute linger. I resolve them quickly myself to protect the larger relationship,” he says.
The contract must also insist that the work continue regardless of the dispute. This clause is especially important when the dispute involves money. “What you don’t want is two guys in Australia stopping the work because they are arguing over the meaning of a clause in the contract. We have to protect the work of the men and women making our trucks, because they are the ones delivering value to GM,” says Chaffin.
GM assigns its top players to the outsourcing contract process. “Don’t throw this job to your C minus players,” warns Chaffin. Instead, select top staffers who are dedicated to this task until the contract is signed.
Ramping Up the Contract Managers
GM requests bids from a wide list. But it also develops a target list of outsourcers GM would like to work with.
While GM is negotiating its outsourcing agreement, another team is training the employees who will be managing the contract for the automaker. Newcomers sometimes assume that once they sign an outsourcing IT contract their work is done. Instead, the work of managing the contract is ongoing.
Chaffin suggests completing the training as close to the execution date of the contract as possible. He wants his staff up to speed because the first six months of the contract set the tone for the remainder.
His favorite management tool is to summarize the key clauses of the contract and print them out in big block letters in PowerPoint slides. The slides become the surrogate contract. He finds his staff consulting the slides to determine what they are supposed to do. “The slides tend to keep disputes from happening,” he observes.
The slides are important because most employees can’t understand the legal mumbo-jumbo of the contract. Chaffin, who hails from the hills of Tennessee, says he translates the contract into “Tennessee farm boy language;” the slides are a comprehensible user’s guide. Of course, at the bottom of every slide there is a disclaimer that these slides in no way change the contract.
Chaffin also shares the summary slides with his supplier. “I want to do a roll out with a consensus,” he says.
The executive has one more word of advice to any company who is new to outsourcing: hire experts who are not new to outsourcing. Attorneys and outsourcing consultants are adept at protecting the interests of the buyers. “Their advice will pay for itself ten fold,” says Chaffin.
Lessons from the Outsourcing Primer:
- Service levels and quality requirements are never negotiable in an outsourcing contract.
- Do your homework long before you put out a request for a bid.
- Write clear and crisp requirements so there is no misunderstanding about what is expected.
- Put the contract into layman’s language so your staff can understand what’s expected of them.
- Train your staff so they will be ready by execution date.
- Never let disputes linger. Put dispute settlement processes into the contract itself.
- Make sure the work continues if there is a dispute.