Six Signs You Have A Bad Outsourcing Contract
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| (CIOZone - June 09, 2010)
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When was the last time you reviewed your existing outsourcing contracts? Ben Trowbridge, CEO of Alsbridge, a global outsourcing consultancy, says that CIOs need to look at contracts at the end of every year. "You should also do an in-depth review midway through the contract, which is usually after two or two and a half years," recommends Trowbridge. "At that point, the client may have specific requests that weren't covered in the initial agreement."
Typically, during these reviews, outsourcing clients should be on the lookout for red flags and market and economic conditions that can have an adverse impact. "For example, there's the question of currency fluctuations," Trowbridge notes. "There needs to be some discussion of who assumes the risk in case of a currency swing."
Another potential problem on the horizon, Trowbridge tells CIOZone, is the possibility that India may slap taxes on its outsourcing companies. "This has been widely talked about," he says. The added cost of doing business because of new taxes would likely be passed along to customers, he cautions.
Here are six warning signs that CIOs should be on the lookout for, according to Trowbridge.
Age of the Agreement
Outsourcing agreements typically range from three to five years in length, with some of the older ones going to ten years. Good outsourcing contracts are designed with flexible terms and governance processes to handle changing conditions, yet even flexible agreement terms can become outdated before the expiration date. In the last few years, legal provisions have changed in the areas of data privacy, data security and service provider financial covenants. So there may be obvious modifications that should be made to improve the contract for both of you long before the contract terminates.
Changing Business Conditions
Business conditions may have changed considerably since the agreement was signed. The firm might be smaller and need fewer services. The company's business model may have changed, so lower levels of service (e.g., lower priority service) at lower costs might be acceptable, or maybe the company can pay more for a higher level of service. Review the contract for these types of adjustments.
Higher Costs
Costs may be higher than anticipated due to unforeseen consumption, incomplete transformation or a misunderstanding of contract scope. Perhaps the company can control some of these issues through streamlined technology, improved training or other methods. If high costs are due to misunderstanding of contract scope, a discussion with the outsourcer may resolve the situation. Regardless, market conditions and pricing have changed for many firms. So consider today's "market price" for each outsourced service.
Lack of Innovation and Thought Leadership
While "innovation" and "thought leadership" may have been discussed during initial negotiations, often these expectations and commitments are not effectively described in the outsourcing agreement. Companies should review outsourcing contracts for these types of commitments, and then insist the outsourcer meet these requirements.
Relationship Disconnects
The relationship with the outsourcing provider will change over time. The account manager for the agreement, the person who best understands the background and intent of the contract, may take another position. The new account manager may interpret the contract differently. Additionally, reorganizations, mergers and acquisitions can cause realignment of outsourcing firm executives, meaning lost synergies that may be difficult or impossible to reestablish.
"There's also a growing gap on the client side of people who can work under the CIO managing outsourcing contracts," says Trowbridge. "The growth in the outsourcing market has outpaced the client personnel needed to manager relations with outsourcers."
Provider Personnel Changes
The provider's personnel, especially those who sit onsite and regularly interact with a firm, are essential to ensuring the success of the outsourcing agreement. Some may have previously been with the firm's IT organization. Others may be covered under a key personnel section of the contract, which gives you some say in if, when and how these folks move on to other opportunities. However, others may be moved to different positions, removing them from the relationship with the contracting company.
"This turnover can be very painful," Trowbridge says, "because the new people have to be retrained and must learn the client's needs from scratch. CIOs need to treat the outsourcing account team as though they're part of the client's staff to retain the relationship with personnel. The goal is to be viewed as the vendor's best customer." And the client the provider's people most like to work for. |
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