“Assimilating into the new economy is the business challenge of the millenium,” says John Funk, a partner in the Dallas office of Jones Day Reavis & Pogue. The attorney, who has specialized in outsourcing legal issues for 20 years, believes outsourcing is the final answer to this million dollar question.
Funk believes “the case for outsourcing becomes more compelling as time goes on.” The traditional reasons to outsource remain viable in the new economy. Companies still must reduce expenditures, control their cost centers and gain efficiencies. But new economy issues turn up the heat. The CIO now must determine how to play the new economy game and support the selected solution. The attorney asserts outsourcing is the most efficient method to transforming bricks and mortar companies into clicks and mortar concerns.
Like two tributaries of a river flowing together, traditional IT outsourcing is merging into the new economy way of doing things, according to Funk. What’s causing this confluence is the reaction of traditional brick and mortar companies to the challenge of operating in a dotcom environment.
The new economy is putting pressure on the boundaries of a traditional IT outsourcing contract. For example, the old style contracts contain a series of service level agreements (SLA). And when a vendor doesn’t meet them, there are typically consequences, like performance credits. New economy contracts have SLAs, too, but very different ones.
Redefining What’s Important in an Outsourcing Relationship
The Internet is redefining what companies deem important in an outsourcing relationship.
For example, the percentage of availability is now a crucial SLA. Ecommerce sites can’t afford to be down; buyers don’t like seeing the 404 error message announcing the Web page won’t appear. If customers click away, they may be clicking away forever. Outsourcing providers have to ensure their customers’ sites are operational 24/7.†
An equally important new economy issue is bandwidth. Outsourcing providers have to deliver enough bandwidth to handle all traffic, even at peak times. A good example is an Internet stock brokerage site. If bad news hits the stock market and securities take a nose dive, many investors will want to trade at the same time. Traders who have to unload their positions and buyers eager for a bargain can’t afford to not be able to get into their on-line trading accounts.
Funk instructs buyers to ask potential vendors, “How much volume can you handle?” He admits hammering out clear, concise and appropriate service levels concerning these bandwidth issues “can be challenging.”
The traditional calls for flexibility can actually seize up an outsourcing contract. Funk says traditional outsourcing contracts always built in some wiggle room because none of the players could accurately predict the future. In the old economy, lawyers budgeted allowable changes in time units like quarters or even years.
Building Change Into an Outsourcing Contract
Now, however, things move at Web speed. A quarter can equal a lifetime in the new economy. Funk says flexibility clauses were not designed to handle monthly or even daily change. The new economy “is stretching” these mechanisms, he says.
Outsourcing contracts today must build in a change mechanism that mirrors today’s business tempo. Buyers and vendors have to work together to craft a solution that will accommodate speed.
Application Service Providers (ASP) are already having an impact on how traditional IT outsourcing contracts receive the right to utilize software. The old style contracts center around the software vendor licensing its software to the buyer. The wild success of the ASPs has created “a tension” between the two methods of software acquisition. “Both suppliers and buyers will have to grapple with a new solution,” says the attorney.
A related legal issue is the rise of Business Process Outsourcing (BPO) providers. They are becoming a popular solution because they take over the entire process and generally perform faster and better than the in-house departments. In today’s highly automated world, part of that process includes an IT component.
Companies who have already outsourced their IT functions and then decide to switch to a BPO provider suddenly have a conflict. The BPO must have control of all the pieces of the process to be successful. “When a BPO takes over a vertical function, it will impact the IT contract. Suddenly, the customer may be faced with competing IT providers,” says Funk.
Companies are just now forging a path to a solution to this thorny problem. “How do you disengage all the pieces and reintegrate them into a workable structure?” asks the attorney rhetorically.
Lessons from the Outsourcing Primer:
- The new economy has its own set of SLAs that are of prime importance.
- Turning to a BPO provider can cause a conflict if the IT portion of the process is already outsourced to another vendor.
- Outsourcing contracts today have to reflect the fast pace of change in the new economy.