For richer for poorer

Marry in haste, repent at leisure ? it?s as true of an IT services deal as it is of signing on the dotted line at a church or registry office. Just as marriages that seem made in heaven can end up in the divorce courts, so a partnership between outsourcing companies and their customers can often end in acrimony and expensive legal battles. All too often commercial pressures such as year 2000 work, restructuring, and new business ventures mean that outsourcing contracts are hastily drawn up. ?Organisations often have deadlines by which they need to have the contract signed, and the negotiation is the part that gets squashed between looking for a supplier and signing the deal,? says Ian Law, principal consultant at KPMG, which acts as an advisor to companies during outsourcing negotiations. ?But you need to take your time ? contract negotiation is one of those rare chances to really do something about something that will affect you for five to 10 years. You need to think hard about what you want to get out of it ? what?s vital to you and what?s just nice to have. The number one point is to know what you want,? adds Law. The trouble is, a typical outsourcing contract lasts five years or more, and it is not always realistic to make accurate predictions about what you might want that far in advance. Because of this, both outsourcing suppliers and customers are moving away from the idea of a rigidly-defined contract towards a more flexible deal with more room for give and take on both sides. Adam Afriyie, managing director of outsourcing firm Connect, says: ?In our experience, one of the major problems you can run into with outsourcing is that the contracts are too rigid, both in terms of the contract itself and the way people interpret it.? He adds: ?It all starts off with a nice friendly chat, and then the legal departments move in and make the deal very rigid, which is okay until a couple of years later, when a problem arises and the people who were involved in the original negotiations and understood the spirit of the agreement have moved on.? Both parties stand to lose from a lengthy contractual wrangle in situations where the client is trying to get something for nothing, and the supplier is trying to make as much as possible on the deal. But how do you build flexibility and goodwill into a contract while avoiding the trap of making it too vague to be of any practical use? It sounds like a paradox, but it can be done. However, it does mean organisations giving up the idea of just dumping all the project risk on their service supplier, and moving instead towards a partnership approach involving both shared risk and shared reward. It has worked so far for Brent Council, which over the years has reduced its in-house IT department from more than 120 employees to around 30 through a series of managed-service deals. ?It?s difficult in advance to specify exactly what you?re going to want in a three or five-year timeframe, so we say we?ll work in partnership with the supplier, with all the attendant risk,? says Brent?s corporate contracts manager Stefan Samek. One way Brent builds flexibility into its contracts is by specifying the results it wants to get, rather than the technology it wants the supplier to use. ?We were concerned about ossifying the technology over a contract that would run for five years or more,? explains Samek. Brent has also firmed up the partnership concept by incorporating quality improvement programmes into its service contracts, in some cases with undertakings to share any resulting cost savings. ?Suppliers have fixed costs they have to cover, and we have a council tax we need to keep down as low as possible ? we need to find imaginative ways of solving these problems,? says Samek. Suppliers, not surprisingly, stress the need for contracts that offer them carrots as well as sticks. Afriyie says: ?Traditional contracts would, for example, say that if we fail to achieve 98% uptime then we pay a penalty ? but there was no upside for exceeding that target.? He adds: ?We?ve negotiated contracts where, if we exceed service levels or add value to the service in some other way, we get a small bonus. We undertake that the charge we make to the customer will go down by a minimum of 1% per quarter, but if our profit margin goes beyond 27% then we split that difference. ?We are encouraged to deliver the best and most efficient service we can, and the customer is allowed to change factors such as the service level that?s being monitored.? Law recommends that buyers should lay their cards on the table before they start negotiating, by sending out a draft contract defining exactly what they?re looking for from the outsourcing partnership. ?Most suppliers will ignore it, but it?s a position to start from,? he says. Key to the contract, Law believes, is a well-defined service level agreement (SLA). ?A good SLA is a way to have a good partnership.? he says. Solicitor Sylvia White, of Edinburgh-based law firm Shepherd & Wedderburn, has worked on a number of outsourcing contracts and agrees on the importance of getting the service levels right. ?You need to be as detailed as you can get away with in the contract,? she says. ?Service companies want as much flexibility as possible, lawyers want as much detail as possible.? She warns, however, that there is a price to be paid for being demanding. ?The more specific the SLA, the higher the cost of the contract ? but the more likely you are to get what you want. You pay your money and you take your choice.? For the service level agreement to work to be successful, a lot of thought needs to go into how performance is going to be measured, and which indicators are most important to the business. Law suggests that the agreement also includes guidelines on the continuing consultation process between the two companies. ?In the past, we?ve set out details of the different meetings that both organisations would have over the year, and what they would both bring to meeting,? says Law. ?For example, the customer might bring knowhow about their particular market, and the supplier might bring an overview of new technology that might help them achieve their objectives,? he adds. Ongoing consultation is seen as a high priority at Brent, where regular management meetings keep the small in-house IT team in touch with the service providers. ?A lot of organisations get into partnerships with service companies and seem to rely on the relationship just working without any input from them,? says Samek. ?You can?t get rid of your responsibility that way. You have to put time into contract management ? talking to the supplier almost ad nauseam is an important thing to do.? Another problem for many organisations embarking on contract negotiations is deciding how much they should be paying the supplier in the first place. What do you use as a basis for comparison? Using your existing in-house IT operation is only a good idea if that operation is running efficiently. The tendency has been to regard outsourcing as a way of removing IT as a problem by dumping it onto the outsourcing supplier ? but that way buyers can end up paying through the nose. ?You can?t outsource a mistake and expect someone else to fix it at no cost ? you end up paying a premium for the service company to solve your problem for you,? says Peter Hardisty, of performance improvement consultancy Compass. Hardisty adds: ?We advise getting your house in order first, so that you?re comparing one well-run service with another. You can have several tenders come in, but it?s hard to evaluate them if you should be running things for #10,000 less than you are.? Neither is comparing one tender with another an easy task. Hardisty recommends making sure the contract and the pricing structure are defined to make comparison as easy as possible. Hardisty says: ?If the elements of the contract are defined in terms that are meaningless ? such as ?provide computer services? ? that makes the comparative process that much more difficult.? At the other extreme, according to Hardisty, are situations where the buyer has defined the process so carefully that there?s no room for manoeuvre, making it almost impossible for the supplier to even meet their criteria. ?It all comes down to the fundamental pitfall of not enough time put into planning,? he says. ?Organisations are under pressure to put a deal together, but you pay a price for lack of planning.? Just as no one wants to think about divorce when they get married, service buyers are often reluctant to think about what?s going to happen at the end of the outsourcing deal. But transition phases at the beginning and end of the contract are the trickiest times of all. Law advises building a fixed consultation period into the contract, which comes into effect at least six months before it?s due to end. ?If your supplier wants to get out and you?ve only got two months to plan, it can be a disaster,? he says. Issues to consider before the contract even begins is how you?re going to keep track of the assets and intellectual property involved in the service being provided, and how you decide which belong to you and which to the service provider. And then there is the staff, whose rights are protected under employment regulations known as Tupe (Transfer of Undertakings ? Protection of Employees). Fall foul of these regulations, and you and the service company could end up in breach of contract ? or you could find yourself without any staff when the outsourcing deal comes to an end.