Ten top tips to ensure outsourcing success - SJ Berwin

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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 >
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.
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Ten top tips to ensure outsourcing success - SJ Berwin

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