Saving Money at the Contract Stage | Article

outsourcing Figures and PencilCost pressures continue to intensify as the Internet sets off a seismic shift in the global marketplace. Reducing the costs of an outsourcing transaction becomes an increasingly important component of the contract process. How can clients save money?

Bob Zahler, a partner in the Washington, D.C. law firm of Shaw Pittman, believes there are five ways companies can slash their outsourcing costs. The attorney, who typically represents the customer companies in outsourcing negotiations, says the beginning of the process is where most of the savings lie.

His first suggestion requires industry-wide agreement. The major players need to form an agreement on core outsourcing issues and make these decisions industry standards. This eliminates the need to hash out the same matters every time two parties get together to write an outsourcing contract.

The concept mirrors a similar solution in the real estate industry. Realtors aren’t attorneys, but writing contracts is a core task for them. So states appoint a joint committee of attorneys and Realtors to develop promulgated contracts that address key issues. Once the committee agrees, every Realtor must use the forms they created. This frees real estate agents to only negotiate the particulars of each transaction. Touchy topics like financing or title have been settled beforehand.

Settle Core Issues First

Zahler sees three topics that industry participants could agree upon in advance. They include:

  • The scope of service.
  • Service level specification.
  • Risk allocation.

Zahler doesn’t think it will be difficult to agree upon basic parameters since the major players have been inking outsourcing contracts for 10 years. “Back then, we had to flesh everything out. That’s not necessary now. Starting from scratch is very expensive,” he says.

In the early 1990’s, Zahler says experienced vendors had adopted this attitude; both sides respected the unspoken expectations. But lately he’s noticed outsourcing negotiations are starting at square one again. He attributes this change to employee turnover at the vendor. The tyros are visiting these questions for the first time. Another reason is some major vendors are becoming more entrenched and want to change the scope of their participation. They are starting over so they can bargain harder.

Until there is an industry standard, Zahler suggests addressing the core issues first. He believes it’s most cost effective to reach an agreement on these topics at the outset, instead of later on.

Send in the Decision Makers

A second way to save money is to encourage the actual decision-makers to attend the negotiation sessions. Zahler says his clients, who typically are facing their first outsourcing contract, form a team and empower them to do the deal. But, more often than not, the vendor sends out the sales staff. These people do not have the ultimate authority to sign off on an outsourcing contract. They generally have to return to the office to check on issues before they can commit. Zahler notes these delays really drag out the proceedings, thereby adding unnecessary costs.

Due diligence issues can also gobble up funds. Suppliers want intimate information about the client and want to visit the client’s site in search for cost savings. Zahler says vendors often ask for reams of information. It is not unusual for them to ask for figures the customer never tracked, forcing the managers to spend a lot of time gathering the data and crunching the numbers to develop the requested figures. Zahler says this kind of research makes the transaction more expensive.

His solution: Vendors should give the customer a complete list of what they need to know early in the game, so the customer can start gathering the required information. An earlier start should prevent costly delays later in the process.

Price the Contract Once

The fourth way to cut the cost of an outsourcing transaction is to only price the contract once. Too often, companies price the transaction many times in multiple forms.

Failure to communicate usually triggers a repricing. Zahler says the chief decision-makers will agree that the outsourcing contract will save the client 20 percent. Unfortunately, the staff who has to implement the contract has different views on how to save that 20 percent. Their first question: 20 percent of what?

Then the vendor will do its due diligence, find something its staff doesn’t like and start the pricing negotiations all over again.

Zahler says the best way to eliminate this problem is to have more detailed discussions at the outset. Specifically determine how the contract will calculate cost savings. And, perform the due diligence early. Then the discussions about price will be more factual.

Finally, the last solution concerns personnel. Zahler suggests that participants identify their entire team early in the process. Then, make no staffing changes, if possible. Committing employees to the project makes them readily available, thus avoiding expensive delays.

The attorney adds that vendors should include experienced managers who have survived a few outsourcing assignments on their teams. One of their additional tasks is to provide guidance to the newbies. Zahler says it can be a costly mistake to assign a leadership role to a manager who has to learn what to do on the job.

With a little planning, it is possible to save money on outsourcing contracts.

Lessons from the Outsourcing Primer:

  • Settle core issues first.
  • Vendors need to give client companies their due diligent list at the outset to prevent delays.
  • Price the contract once, not over and over again.
  • Form teams early and empower them to negotiate the contract.
  • Vendors should include experienced managers on their teams.

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