To be held accountable means one is subject to certain obligations. In the world of outsourcing, both buyers and suppliers must take preventive measures to ensure an equitable and successful relationship. For the buyer, this means structuring an effective contract that details a broad range of ways in which the supplier will be held accountable. These include audit and benchmarking rights, user surveys and disaster recovery plans. There are termination rights and the right to sue afterward as well as service levels and their related credits or penalties. And, of course, the contract describes various legal remedies in the event of failure.
When you outsource eBusiness or Internet initiatives, the focus on accountability shifts a little from traditional IT or BPO contracts. Although you’re still entrusting your organization’s important functions to a supplier, the business context changes. “Some changes are subtle, some are not so subtle; but the differences are important,” says George Kimball, a partner in the Los Angeles office of Arnold & Porter, an international law firm.
The Business Environment
Kimball, whose practice has concentrated heavily on outsourcing for the past ten years, outlines three characteristics of the eBusiness and Internet business context.
- Demand for Speed. Because of competitive forces, the marketplace creates enormous pressure to get a deal signed and get the initiative to market in weeks, rather than months. “The market simply may not allow people months to analyze present operations and go through the elaborate song and dance known as competitive procurement,” he points out.
- Something New. Typically, eBusiness and Internet initiatives are entirely brand new. It is not the same thing as taking a function you already have and moving it to a different environment. In some respects, the transactions may be simpler because they are new.
- It Involves Outsiders. Usually, eBusiness and Internet initiatives have a strategic impact. Unlike outsourcing a back-office function like payroll or inventory, these initiatives include interaction with suppliers or customers, payment intermediaries, telecommunications companies and other third parties. “It also means the Net is part of the infrastructure, and the initiative may be more dependent on outsiders than an internal network would be,” explains Kimball.
Staying Current
A range of legal issues – privacy, intellectual property, contracting electronically instead of with pen and ink – accompany eBusiness and Internet initiatives. Even though the demand for speed exists, a company needs to safeguard its position and make sure it is accountable on legal requirements. It’s important to have good legal counsel at the front of these arrangements to ensure the contracts deal with these different issues.
Kimball points out that it’s equally important to police the issues after the contract is in place. He suggests that a good way to keep current is to read industry and business press, as well as legislative proposals. If you are offering a service to the public over the Internet, you must also pay close attention to the activity at your Web sites and portals. “I think we could all learn a thing or two from the conventional brick-and-mortar retailers who hire people to go out and shop their stores,” he says. “There is no reason not to do the same thing in the Internet world.”
Above all, he warns, watch with whom you do business. To avoid trouble, insist on high standards of integrity.
Accountability to Allies
eBusiness and Internet initiatives often involve alliances among several parties. Kimball believes that a contract, above all, is a framework for a business relationship, not just an armory of weapons to use when things go wrong. Good contracts work because all parties have incentives to perform, risks are allocated fairly, and both parties deal fairly with one another. The Golden Rule, he says, “has not been improved upon”.
Nevertheless, Kimball suggests that both sides need effective tools for contract management. Regular reports, testing, steering or oversight committees that assure executive involvement and oversight are even more important in eCommerce than they are in conventional outsourcing contracts because of the time pressures, he advises. “Conventional legal remedies, such as termination and litigation, are cumbersome, slow, very expensive and uncertain. And failure is not an option where you are dealing with a major eCommerce initiative. The right to terminate the contract and sue the other guy later on ultimately is not useful when the project goes down in flames.”
He suggests another solution for pressure from need for speed and a high risk of failure: trying more than one initiative on an experimental basis to see what works best. “Decades ago, the Pentagon before buying an airplane used to hire two or three companies to build an airplane and test flew all of them before they made a choice,” he says. “When a major company is looking at an eBusiness or Internet initiative, that is sometimes a sound strategy.”
The Internet world often increases the number of participants in an initiative (in a B2B marketplace, for example), which adds complexity that can make an arrangement harder to manage. If speed is at a premium, make sure that someone really is in charge and has the authority to make a final decision. Where eCommerce initiatives involve multiple participants in an industry, there may also be serious legal issues such as antitrust and trade regulation issues, and companies should get good legal advice before proceeding.
“At the end of the day,” says Kimball, for these things to work, the customer has to get service it’s happy with, and the supplier needs to make a living.” Everybody’s long-run interests are best served if both sides are accountable to each other and to themselves. †
Lessons from the Outsourcing Primer
- When you outsource eBusiness or Internet initiatives, the focus on accountability shifts a little from traditional IT or BPO contracts. The business context changes because it’s something new, there is a demand for speed, and you are dealing with outsiders.
- If your initiative involves the Internet, the Net is part of the infrastructure and is more dependent on outsiders than an internal network would be.
- Allocation of risk is even more important than contractual remedies because it gives both sides incentives to do the right thing.
- Where eCommerce initiatives involve multiple participants in an industry, there may also be serious legal issues such as antitrust and trade regulation issues, and companies should get good legal advice before proceeding.