Nine Ways to Protect Your Interests
Outsourcing experts have seen the good, the bad and the ugly. Here are nine rules of the road to increase the odds of outsourcing success.
1. Have enough vendors in the bid process.
The worst outcome for a buyer is to negotiate with just one supplier. “There’s no competition for pricing and services,” observes Gary Venner, director, ARC Partners, a New York City management consulting firm focusing on financial services, banking, brokerage and insurance. That happens, however, if all the other suppliers fall out before the final negotiations.
The only way to ensure there are at least two suppliers in the final negotiations is to keep the upstream pipeline full. Venner says buyers typically only want to talk to two or three suppliers in depth before the downselection process because of the significant amount of time required to carefully review each proposal.
The question becomes: What’s the optimum number? Venner suggests starting out with four to six real players.
2. Know exactly why you are outsourcing. Then don’t lose sight of those goals during the negotiation process.
Buyers often hire consultants and outsourcing attorneys to help them to negotiate the deal and write the contract. Susan Maraghy, director of sales and business development, Enterprise Systems for Lockheed Martin Global Telecommunications in Bethesda, Maryland, says sometimes these experts try “to add key things they did in their last deal that do not reflect the business needs of this client.”
This often happens during the service level discussions. The experts may want to use industry standards as the benchmark when those standards have no bearing on the buyer’s true goals. “Use a realistic baseline for performance, not industry standards or the ideals of a third party,” she advises.
3. Complete deals expeditiously.
Dragging out a deal can be dangerous. Take too much time and the management or the business can change. “Reduce the opportunity for change to occur,” suggests Venner.
He describes one deal where a company wanted to outsource its desktop operations. This move would create a common corporate infrastructure around the globe, something that hadn’t developed because of the company’s decentralized structure. Because that was a corporate objective, the corporate office committed to subsidizing some of the outsourcing costs for its operating units.
However, the deal dragged on. Fifteen months later, the management changed. The new management said, “Why are we doing this?” It rescinded the offer to absorb some of the outsourcing cost. Once the divisions had to shoulder the full load, they reconsidered. The deal fell apart.
“This company spent $1 million on consulting fees and countless millions on its staff time. All went down the drain,” says Venner.
4. Have a change mechanism.
Management changes can cause problems. Maraghy says if a new CIO arrives on the scene, the new management might disagree with the old guard and try to change the contract.
Maraghy says a better way to deal with change is to have a yearly review. Buyers can restate their outsourcing goals to meet any new business realities. The supplier should also document the reasons certain decisions were made to protect against changing management and business objectives.
5. Make sure you have the right to renegotiate if the ownership of the supplier changes.
The consultant says most outsourcing contracts have a termination for convenience clause if the vendor changes hands. “In reality, buyers don’t want to terminate because that creates a tremendous headache and expense,” says Venner. A better safeguard includes the right to renegotiate the price and the services with the new management.
6. Negotiate the cost of insourcing up front to avoid haggling if it happens.
Maraghy says agreeing to these costs at the outset gives the supplier a clear idea of how to build its business model. Also, it outlines all the costs that are embedded in the supplier’s service fee. If the buyer has to insource, it needs to know the costs are higher than just the expense of purchasing the equipment.
This is especially true of personnel. Buyers who have to rehire their old employees should expect to pay more for them. That’s because they may have enjoyed better benefits, training and career advancement opportunities at the supplier and will expect the same if they have to move back, the Lockheed executive explains.
7. Include the supplier in all your major business decisions.
Buyers don’t include suppliers in their strategic processes enough, observes the consultant. “Buyers should take advantage of the supplier’s knowledge,” he explains. Continually updating the supplier makes it easier for the supplier to add or subtract services according to the buyer’s needs.
8. Allot 3 to 5 percent of the cost of the deal for governance.
Venner says there’s no such thing as a turnkey outsourcing deal. “You have to manage the deal and that will cost money,” Venner observes.
9. Be prepared to move swiftly when problems occur.
“Build a contingency plan in case things go south,” says Joe Wagovich, director of communications for Lockheed Martin’s Information Support Services. The Seabrook, Maryland provider specializes in outsourcing IT services to government. Lockheed formed a strategic alliance with an 8A company – the small and disadvantaged businesses the government makes a point of doing business with – and won a contract because of its partner’s 8A status, reports Wagovitch. In the midst of the contract, one of Lockheed’s major competitors acquired the strategic partner.
The change created two challenges. First, the outsourcing providers lost their 8A status. They had to find another appropriate company that qualified for that designation in order to keep the contract.
Second, Lockheed had to learn how to work with a competitor. This turned out to be a good thing because the two companies later joined hands and went after two other major outsourcing contracts together.
The ultimate nightmare is when an outsourcing vendor suddenly closes its doors. Venner tells the story of an Atlanta outsourcing firm that recently declared bankruptcy on a Friday afternoon. The supplier’s employees were working at customer sites. One customer didn’t want to lose the employees who knew its system well. So that same Friday afternoon it made provisional offers to everyone who had just received a pink slip.
On Monday the work continued as usual. The swift move gave the buyer time to evaluate the employees and make permanent offers later. And it had the knowledge base it needed to bring the work back home.
Lessons from the Outsourcing Primer:
- Have enough vendors in the bid process.
- Know exactly why you are outsourcing. Then don’t lose sight of those goals during the negotiation process.
- Complete deals expeditiously.
- Have a change mechanism.
- Make sure you have the right to renegotiate if the ownership of the supplier changes.
- Negotiate the cost of in sourcing up front to avoid haggling if it happens.
- Include the supplier in all your major business decisions.
- Allot 3 to 5 percent of the cost of the deal for governance.
- Be prepared to move swiftly when problems occur.