An Outsourcing Lawyer’s Perspective
For those who have negotiated multiple outsourcing deals over the years, there is no question that there are indeed common problems and challenges faced in almost all outsourcing deals. The IT outsourcing industry, in particular, has come a long way in the last several years in terms of ‘lessons learned’ from deals that have gone awry. Because outsourcing deals are heavily contract-intensive, lawyers who represent clients attempting to outsource are usually involved from very early in the outsourcing process through the request for proposals (RFP), vendor evaluation, and the terms and contract structuring and negotiation. That body of experience enables an outsourcing lawyer to reach beyond the legal and contractual issues to assist clients by pointing out some of the pitfalls in outsourcing deals. Here are just a few you may want to consider.
Outsourcing Readiness
Is your company ready to outsource? Many times, customers will start the outsourcing RFP and contract negotiation process before they have thoroughly evaluated the outsourcing decision. This premature action — often driven either by naivete or an executive level mandate that the outsourcing is to be completed by a named and fast approaching deadline — can cause a lot of problems.
First, clients need to realize that the RFP, proposal and negotiation process is very time consuming and expensive for all parties involved, including outsourcers. Before becoming involved in the RFP process, qualified outsourcers understandably want to confirm that the RFP is not merely issued by a ‘tire kicker,’ but that the client has evaluated the outsourcing decision against the other options available and is serious about proceeding in good faith with the RFP process.
Second, many clients do not consider that the intelligent negotiation of an outsourcing deal requires that they gather and provide to the vendor extensive, validated internal data. Validation is important. Time and again outsourcing negotiations run into trouble in the ‘eleventh hour’ when serious pricing and service level questions arise because the outsourcer has no confidence in the client-supplied data made available during negotiations and the due diligence process. Contracts are all about binding commitments. When internal data is not available or is of questionable validity, the outsourcer will not be willing to commit and the customer will end up with a non-binding ‘agree to agree,’ which buys the customer little.
This is not to say that the customer’s internal IT or business operations must be perfectly aligned with ‘best practices’ before it can start the outsourcing process. Few, if any, internal IT shops have achieved such vaunted status, and outsourcing deals are never done in a vacuum or a perfect world. To have any realistic chance of structuring an outsourcing deal that will last, however, the client must be prepared to build the foundation with reliable data on which contractual commitments can be built. The challenges to accomplishing the outsourcing deal will be substantial enough without undermining it with insufficient and questionable data.
Allowing Time for the Process
Along with determining outsourcing readiness, customers should guard against trying to compress the RFP, due diligence and contract negotiation period into an unrealistic time period. There is no way around it — outsourcing deals take time to do right. These deals are complex and require a great deal of iterative discussion among the negotiation team members for the outsourcers, customers and their professional representatives (i.e., consultants† and lawyers) to agree upon and document clear understandings. There is no cookie cutter approach to outsourcing that will work in every situation. The parties must take the time to get the fundamentals right, and that includes adequate time for due diligence, discussions and negotiations.
At the same time, a balance is required between rushing too quickly through the motions and allowing too much time to pass. There is no rule of thumb for how long completion of an outsourcing deal should take after the RFP proposals are received from outsourcers. Much will depend on how motivated and how well prepared the customer is for the process. One rule of thumb is clear, however, and that is that the process generally will take longer than the customer estimates in the beginning. So the customer should build some cushion into the time line for the deal. Invariably, issues that no one anticipated will come up in the process and will require additional time for resolution. If an arbitrary deadline is pressing, the temptation will be to postpone the issue to the post-contract period when business disputes can be difficult to resolve.
A Getting a Deal that is ‘Too Good’
Many novices in outsourcing treat the process as though it is just another commodity procurement. They look for the absolute lowest price among competing bidders and then drive the price from there to rock bottom regardless of service or maintenance levels. In outsourcing, this can be a big mistake.†
Quite often, certain outsourcers who are very hungry for a deal will let themselves be bid down to less than justifiable profit margins just to sign the deal. In these cases, the customer almost always ends up unhappy with service levels, and the outsourcer responds that it is doing the best it can, given the low margins it is earning. In some cases, the margins may be so low that the outsourcer approaches the customer with the suggestion that it wants out of the long-term contract unless the customer is willing to renegotiate. In other words, it is not unheard of that outsourcers will over-commit to high service level guarantees and bargain pricing, whether knowingly or not. Prospective outsourcing customers have to be able to determine when they have struck a properly balanced deal with the outsourcer.
Getting Your Outsourcer’s Attention
A common complaint among outsourced customers is “I can’t get my outsourcer to respond or pay attention to my problems.” Although we always hope for outsourcing relationships with outsourcers that work as close business partnerships, it doesn’t always work out that way. This is when a well-conceived outsourcing contract may have made a difference. There are many components that should go into the due diligence process and into an† outsourcing contract to ensure the customer gets the level of attention it deserves.
For example, during the negotiation process the customer should determine whether the outsourcer’s account manager assigned to the customer will have a proper level of authority within the outsourcer’s organization to deal effectively with the customer’s problems. Many outsourcers will agree to include contractual provisions mandating that the account manager will be responsive to the customer. But customers complain often that although they may have a good relationship with their account manager, that account manager doesn’t have the clout necessary to get an appropriate level of executive management attention within the outsourcer’s organization.
Good service levels with real bottom-line consequences attached can make a big difference. An outsourcer that is not otherwise motivated, often will† begin to listen when contractual service level failures start impacting the outsourcer’s profit margins. That is one important reason to take the time to prepare a proper and thorough service level agreement that includes remedies such as invoice credits and termination rights. Other provisions, such as strong problem escalation procedures (to the highest management levels of the outsourcer) can be equally effective.
Using Your Legal Counsel Effectively
Lawyers representing customers in negotiating outsourcing deals find very quickly that the process is one in which the legal and contractual issues blend with the business, technical and operational issues. Likewise, the customer’s negotiation team must grapple with many legal concepts in the context of negotiating their outsourcing deal. While it is not the role of your legal counsel to provide consulting services, remember that experienced outsourcing legal counsel have seen over the years what works and what doesn’t work in the structuring, selection and negotiation phases of outsourcing. Your lawyer will be most effective when viewed as part of the overall outsourcing team and involved in discussions and decisions in each phase. Don’t assume that all the lawyer should do is thumb through your contract at the end of the negotiations.
Experienced outsourcing lawyers can be used effectively to bring focus† and clarification to issues as they are being negotiated. A common problem for customers who call on counsel late in the process is that they may have agreed in principle to points without considering all the business and legal ramifications. Addressing these points in ‘last minute’ mode can be difficult for everyone involved.
Bill Deckelman is a shareholder with Munsch Hardt Kopf Harr & Dinan, P.C., a law firm specializing in outsourcing, with offices in Dallas and Austin, Texas.
Lessons from the Outsourcing Primer:
- Make sure your company is ready for outsourcing before the RFP is issued. To negotiate an effective outsourcing contract you will need a solid data base of information on the company’s current costs and service levels.
- Allow enough time for the outsourcing process to transpire. Both the company and the outsourcer will learn many facts in the course of due diligence, evaluation and negotiations that will lay the foundation for a successful contract and relationship.
- Don’t negotiate so hard that you end up with an over-committed outsourcer who agrees to high service levels with little or no profit margin to support the deal. You’ll be renegotiating before you know it.
- Do your homework in the evaluation phase and in the contract structuring to ensure that the outsourcer’s account manager is an individual who has the clout to cause the outsourcer to be responsive to your issues as the outsourcing relationship proceeds.
- Use your legal counsel effectively. An outsourcing lawyer can be most effective in guiding the client around common pitfalls if the lawyer is brought into the deal early as an integral part of the RFP development, evaluation and negotiation phases.