Ten top tips to ensure outsourcing success - SJ Berwin

IT & Telecommunications
Ten top tips to ensure
outsourcing success
Andrew Sutherland and James Gill examine the market for outsourcing in
the context of the current economic downturn and outline the areas you should
be looking at to safeguard the future of your project
In 2008 we SAw A SpATe of ArTIcLeS
telling us that outsourcing was
entering an unprecedented boom
phase. research by global sourcing
advisory firm TpI showed that during
the first half of 2008 the industry saw
the highest number of outsourcing
contracts during any first half in more
than a decade.
More recent analysis reveals a
marked slowdown in activity during
the third quarter of 2008, particularly
in the financial services sector, with
global uncertainty resulting in delayed
decisions or cancelled projects. Despite
this, the prognosis for the fourth quarter
of 2008 was more positive, and overall
performance for the year in terms of
value of outsourcing contracts let is up
on 2007.
We are all waiting to see what
2009 holds in store. Unquestionably,
the challenges witnessed in 2008 will
persist. But our sense is that once the
fallout from the global financial crisis
starts to settle, strategic decisionmaking
will recommence and projects
will be taken out of mothballs. Perhaps
more than ever, companies will seek to
use outsourcing as a means of cutting
costs and increasing profitability. Many
customers will be in a hurry to get deals
done and to realise cost savings.
However, while outsourcing can
improve the bottom line, experience
shows that deals that focus solely
on cost-cutting to the detriment of
48 The In-House Lawyer February 2009
By James Gill
(top), partner,
and Andrew
Sutherland,
associate, in the
commerce and
technology group
at SJ Berwin LLp
everything else often do not meet
expectations. All too soon, the parties
find themselves having to renegotiate
or even unwind the deal altogether.
However, doing things quickly does not
necessarily have to be to the detriment
of doing things properly. This article
sets out our top ten tips for avoiding
the pitfalls common to many ‘quick and
dirty’ outsourcing deals.
1) do noT wALk In BLInd
Frequently, companies looking to
outsource don’t identify a clear and
achievable strategy in advance. Ask
yourself why you are outsourcing and
what your key objectives are. Think
carefully before deciding to outsource
solely to make cost savings. Done
properly, outsourcing can deliver other
business benefits, such as increased
competitiveness, efficiencies and
continuous improvement.
Consider the pros and cons: do
the benefits outweigh the costs
and potential delivery risks? Are the
functions in question suitable for
outsourcing? Typically, businesses
outsource non-core activities (eg
finance and accounting, human
resources, IT), allowing them to focus
on core strengths and skills. Above all,
consider the criticality of a function
to the business; outsourcing may
not be the best option where service
failure would have a serious impact
on your business, particularly where
the benefits that may be delivered are
marginal.
2) BuILd THe rIGHT TeAm
Fully resource your deal team with
the right skills sets. The deal phase is
often under-resourced (typically due to
budgetary constraints), with the result
that the deal takes longer, and costs
more, to complete.
If you are a first-time outsourcer,
consider whether you have the
appropriate in-house expertise to
determine your requirements and run
the selection process. If not, there
are some very good outsourcing
consultancies that can help supplement
your internal team. A modest investment
at the outset can be very valuable and
could help avoid cost overruns or other
disappointments in the future.
Ruthlessly project manage the
deal phase. Work streams need to be
defined, leaders and teams assigned,
and deadlines set and achieved. Do not
ignore or ‘park’ issues because they
are too complex or politically sensitive;
these issues will inevitably resurface
just as you are trying to close the deal.
3) defIne And documenT
your requIremenTS
It is against your requirements
document that suppliers will evaluate
whether your project is one they can
deliver and, subsequently, against which
they will scope and price their solutions

and delivery schedule. Encourage
dialogue and Q&A opportunities with
your prospective suppliers: this may
help you to refine your requirements.
Share the output from that dialogue
and Q&A with the other bidders (which
can be achieved through the use of
appropriate terms in the confidentiality
agreements that are typically entered
into to cover discussions during the
bid phase). The more detailed and
comprehensive your requirements are,
the less likely it is that there will be
misunderstanding or ambiguity between
you and the supplier. In turn, this will
help to mitigate the risk of scope creep
and associated management headaches
further down the track.
4) cHooSInG your SuppLIer
Whichever procurement process you
adopt (and you should strive to run
a credible competition), you need
to determine up front your detailed
evaluation criteria. Price should
not be the only (or even the most
important) factor in your evaluation.
Our experience shows that selecting
the cheapest supplier often ends up
costing more in the long run. Equally
valid considerations are:
n The proposed solution and time
frames: does it meet your stated
requirements?
n Approach to transition and start-up.
n Experience and references.
n Cultural fit.
n Innovation.
n Scalability.
n Geographic footprint.
n Flexibility and agility: how will your
supplier adapt to change?
n Response to key commercial
principles and contract terms
and conditions.
5) neGoTIATe A ‘wIn-wIn’ deAL
Avoid adversarial negotiations in
the contracting phase. Your first
engagements with the supplier will set
the standard for things to come. You
are not buying widgets, but complex
services, on complicated commercial
terms from sophisticated suppliers, so
the traditional procurement approach
of beating up your suppliers is unlikely
to achieve the right results.
Aim to achieve a win-win deal:
namely, sensible commercial terms,
with a fair apportionment of risk
between you and your supplier. Do not
expect to offload 100% of the risk; even
if you manage to do so contractually,
your supplier may still not really
understand the delivery risks and hence
how to manage them, which will mean
both parties end up being out of pocket
in the long run.
Allow your supplier to make a
reasonable profit. Forcing your supplier
to accept bargain-basement pricing
may look great on paper, but could
also mean that you are storing up real
problems for the future. A supplier
cannot live with an unprofitable deal
forever, and, to improve their margins,
they may be forced to slash costs
on the project in a way that impacts
quality and delivery. Other tactics may
include aggressively managing change
to the project to improve margins, or
even wholesale renegotiation. Recent
high-profile examples, such as the
departure of Accenture and Fujitsu
from the UK NHS Connecting for Health
National Programme for IT, show that
suppliers are not shy about walking
away from unprofitable deals mid-term.
Tough, customer-friendly contracts and
threats to take legal action might bring
monetary redress, but in the meantime
irreparable damage might have been
done to your business.
6) muLTI-SourcInG
Consider multi-sourcing (contracting
with two or more suppliers, as opposed
to a single supplier). This can achieve a
number of benefits, including securing
‘best fit’ for your services and reducing
delivery risk by not being over-dependent
on one supplier.
However, you should recognise,
and address, the new risks that multisourcing
creates. First amongst these
is integration risk arising from the fact
that no single supplier has end-to-end
delivery responsibility, meaning that
it may become difficult to attribute
responsibility for any failure, with the
net effect being that the customer
retains that risk. This can be addressed
by requiring one of your suppliers to
take the operational integrator role
and requiring all suppliers to sign up
to interface agreements designed to
ensure co-operation between them.
Inevitably, in addition to the integration
risk premiums that suppliers will factor
into their pricing, multi-sourcing will
result in additional management and
governance burdens on you. This
may mean that multi-sourcing is only
viable for the larger deals where the
costs savings are significant enough
to offset the risks.
7) offSHorInG
Offshoring the provision of business
functions to low-cost, overseas
locations is often seen as synonymous
with outsourcing and will very likely be
integral to the delivery model of some
of your prospective suppliers. However,
the decision to offshore should not be
taken lightly.
Ask yourself whether it is
appropriate to offshore the function
in question, particularly where it is
customer-facing; for example, with call
centres. Businesses that don’t ask
this question often end up bringing
IT & Telecommunications
‘Recent high-profile examples, such as
the departure of Accenture and Fujitsu
from the UK NHS Connecting for Health
National Programme for IT, show that
suppliers are not shy about walking
away from unprofitable deals mid-term.’
February 2009 The In-House Lawyer 49
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IT & Telecommunications
the work back in-house, by which time
customer goodwill may have been
irreparably damaged and business lost.
Identify the most commercially viable
location. Whereas a few years ago India
was the location of choice, nowadays,
with challenges arising from costs
pressures, poor infrastructure and lack
of available quality talent, customers
are increasingly looking to offshore to
countries such as China, the Philippines,
Brazil, Vietnam, South Africa and Eastern
Europe. The need for physical proximity
may mean that offshoring to the other
side of the world is not an option. Equally,
you should consider the implications of
any time differences.
Take advice, particularly on local
legal, regulatory and accounting
issues. It is vital to understand local
tax regimes, intellectual property laws,
the local corporate and regulatory
requirements, the impact of EU data
protection rules and local mandatory
laws (eg around employment terms and
protections and commercial contracts
laws). For regulated businesses, such
as banks and insurers, any particular
regulatory requirements imposed by
home state regulators (eg The Markets
in Financial Instruments Directive
(2004/39/EC) and the Financial Services
Authority’s general requirements for
outsourcing set out in Chapter 8 of its
Senior Management Arrangements,
Systems and Controls sourcebook (SYSC
8)) must be considered. Any of these can
impact the commercial viability of an
offshoring strategy. Similarly, delivery
risks arising from the choice of location
should be considered and measures
taken. The risk of environmental
disasters, military action and political
unrest can be greater in potential
offshoring locations, so you must ensure
that adequate business continuity
arrangements are put in place, including
having back-up sites to which service
delivery can shift in an emergency.
8) AcTIve GovernAnce
Effective governance and strong
relationships are key to any outsourcing
relationship. To achieve this, you need
to ensure that you actively manage
the relationship. This calls for constant
communication. You may choose to
establish a hierarchy of management
50 The In-House Lawyer February 2009
forums, which would address issues
ranging from the achievement of
strategic business objectives down to
day-to-day contract and operational
management issues.
9) STAndArdS, ServIce LeveLS
And vALue for money
Your outsourcing contract should detail
appropriate performance measures.
Consider what you need to measure and
the standards that need to be achieved,
but recognise that supplier performance
will not (nor is it intended to) be perfect.
It would be disproportionately expensive
to seek to buy a bullet-proof solution.
Consider the services that you are
outsourcing and tailor your performance
requirements accordingly. For example,
service levels work well for input-driven
IT outsourcing, but for business process
outsourcing (BPO) success is about
the improvements in the performance
of your business achieved through
supplier performance, not good supplier
performance of itself. Therefore, for
BPO, identify the strategic business
objectives for the project and how best
to measure their achievement. Also,
consider how your supplier may be
‘incentivised’ to ensure that standards
are met. Poor performance may result
in service charges deductions, but also
implementing a bonus payment structure
can help achieve over-performance.
Various contractual mechanisms
exist to ensure ongoing value for
money. Some are more useful than
others. Benchmarking is perhaps the
most common example and involves
the comparison of your supplier’s prices
and service levels with those offered
by other suppliers for the provision of
comparable services. This process has
its challenges, not least the struggle to
find meaningful comparison data, but
a wealth of benchmarking expertise
exists, and, if carried out constructively,
in a positive manner and with the right
assistance, it can be beneficial for both
parties. For the supplier, it can be a
ringing endorsement that it remains
competitive, which is good for the
relationship and for the customer.
When coupled with appropriate
contractual mechanisms, it can be the
route to lower prices and improved
performance standards.
10) fLexIBILITy And exIT
Inevitably, your business strategies
and service requirements will evolve
over the life of the contract. Equally, in
highly acquisitive industries, you may
need to move companies or businesses
in and out of scope relatively frequently.
Either of these may trigger the need
to restructure projects and, in order to
avoid the pain of deal restructuring, the
contract should provide for flexibility,
particularly for longer term deals,
including the ability to de-scope and add
to the services quickly and smoothly.
Suppliers will naturally be reluctant to
provide undue flexibility, particularly
where this might lead to less revenue,
without securing appropriate
protections, such as termination
compensation for stranded costs.
In addition, the contract should
include a robust exit management
regime, which secures the co-operation
and assistance of your supplier on the
hand-back of services or the transfer of
services to a new supplier. Be alert to the
fact that your supplier may be nervous
about allowing you or any new provider
the right to access or use trade secrets,
software or other proprietary rights,
even as part of a migration process.
Taking the time to agree the supplier’s
exit obligations up front is a worthwhile
investment and doing so at the outset,
when you have most leverage, is likely to
be substantially less difficult than doing
so at the point when you actually need
to deploy such mechanisms.
concLuSIon
The state of the global economy will
continue to sharpen the focus on
cost-cutting strategies, driving
growth in new outsourcing deals and
increased pressure on existing deals as
customers seek to extract further value.
Although customers and their advisers
will undoubtedly need to finesse
contractual models to accommodate
new demands, fundamentally, the
considerations addressed in this article
hold true whatever your motivation
for outsourcing, and observing these
top ten tips should help you ensure the
successful delivery of your project.
E-mail: james.gill@sjberwin.com;
andrew.sutherland@sjberwin.com.