What makes a great outsourcing contract? Part I

There's no way to avoid simply every obstacle thathand, plenty gets included in outsourcing agreements
might come your way, of course. However, a goodwhich simply doesn't need to be there. Excess
contract can definitely help you navigate around a hostbaggage on a contract isn't just inefficient in itself
of otherwise potentially pernicious problems. Getting(although those legal fees sure do add up); it leads to
things down in black and white at the start of themuch more troubling inefficiencies in the service
journey not only gives the parties some binding fabricprocess.
to their agreement; it also shapes the entire ethos ofFor example, a SLA-heavy contract might appear nice
the deal - as well as providing processes to turn to inand tight to a buyer - but by including a vast number of
the light of the unexpected or the downrightservice levels, and thus requiring significant reporting
unfortunate.and checking resources on both sides of the
So what makes a good - even a great - contract? Ofagreement, the buyer is effectively driving up costs
course, each has its own idiosyncrasies and quirks -both within their own organization and within that of the
but there are some aspects which every outsourcingprovider. These extra costs will eventually be borne by
deal should contain to ensure the best possiblethe buyer - who suddenly might not feel they're getting
framework within which these business-critical dealssuch an attractive deal after all. 
can develop and thrive. While no single contract canSLAs are of course crucial, but the buying organization
be hailed as the perfect example of its species, hereshould be wary of diminishing the advantages of
are a few elements which, combined, will help lift youroutsourcing by tying its provider to a surfeit of service
own agreement up out of the mire towardslevels. It may be, though, that SLAs can take on a
outsourcing heaven…rather political significance during contract negotiations,
Due diligencein that companies might feel it advantageous to
To begin at the beginning: the first step towards aappear to compromise on what are, in fact,
perfect contract happens a long, long time before anlower-priority SLAs in exchange for more attractive
agreement ever gets near paper. Finding the mostpricing. Going into the negotiations with 100 different
suitable partner, and the due diligence that goes alongservice levels and coming out with 10 absolutely crucial
with that quest, is of course an absolute prerequisiteones and a massive reduction in the cost of the
for any half-decent agreement, in that the buyer needsprovision might not be particularly bad business if those
to be completely confident in the ability of their10 are the only ones you really, really wanted
prospective provider to fulfill their side of the deal:anyway… 
residual mistrust or a lack of complete engagementPartnership
between the parties in question means that worriesIt may sound like a cliché but it's true anyway: a
about performance can (and almost certainly will) colorgood outsourcing deal is a real partnership and has to
contractual negotiations to the extent that thebe approached as such by both (or all) parties right
document may take on a very different aspect as thefrom the off. Speak to anyone involved at the upper
putative client's concerns manifest themselves in waysend of a major outsourcing deal and they'll stress the
- extra clauses, hyper-sensitive penalty triggervalues of collaboration and deep connection rather
mechanisms and the like - which can effectively ruinthan espouse the "hands-off" approach of days of
the relationship from the off.yore.
Incidents such as the high-profile Satyam affair have -In an article he wrote very recently for SSON,
understandably - created a good deal of trepidationInternational Association for Contract and Commercial
among would-be buyers of outsourced services. TheManagement (IACCM) CEO Tim Cummins looked at a
big problem with the Satyam scandal in particular wasdiscussion around the following hypothesis: "It has
that the fraud was so well concealed for so long thatbecome widely acknowledged that ‘smart
the company appeared from the outside to be bothcontracting' is the key to a successful BPO relationship.
healthy and reputable - and was moreover certified asHowever, traditional legally-driven negotiations often
being so by external auditors - so even prettycreate 'structured adversarial relationships', designed to
thorough due diligence missed the rather large blackpunish failure, rather than encourage the growth of a
hole at the center of the provider's accounts. Onestrategic relationship. This tendency is aggravated by
positive consequence of the whole sorry affair is thatthe efforts of procurement experts to view BPO as a
potential buyers have really been forced to up theircommoditized service rather than an incentivized
game in terms of due diligence; companies thinking ofbusiness partnership."
entering into an outsourcing agreement should now beUnder the traditional view of outsourcing as a
both more aware of the possible dangers and bettercost-saving tool it's relatively easy to come to view
prepared to seek them out, and stress-test theirthe provider as just that - a provider rather than a
putative partners.partner. However, as provider capabilities have
By the time discussions reach the contract stage, thematured, and software and resource provision have
buyer should feel entirely comfortable with thebecome of an increasingly high quality, the question of
vendor's financial health and capabilities; a well-informedwhat an outsourcer can add beyond cost savings has
buyer (while not of course allowing any laxity into thebecome ever more important. As such, constant
contract: regardless of the level of trust, the usualdialogue between parties in search of the next
protections must be observed) is less likely to spendvalue-add has become indispensable.
precious time agonizing over decisions which in the endA partnership of ideas rather than a simple
only obstruct the path to contract and partnershipbuyer-vendor dynamic is becoming the norm - and this
perfection.needs to manifest itself at contract as much as
Similarly, the buyer should be thoroughly confident thatanywhere else in the relationship. This doesn't just
they have found not only a secure and trustworthymean the buyer working closely with the provider on
partner, but a reasonably-priced one, too. It should gothe terms of the contract; it involves - where possible -
without saying, but possible buyers of services - evena collaborative approach to issues which formerly may
if they already have providers incumbent - should shophave stayed clearly on one side or the other of the
around for the best deal and tie down an awarenessprovider/customer divide.
of market value for the services in question beforeThis can be encouraged by hard action as well as by
negotiations begin, let alone contracts begin to bewell-meaning rhetoric, of course. For example, it's now
discussed. What this also means - and this tends to beincreasingly common for contracts to include
less robustly adhered-to - is that buyers need to knowcontractual clauses requiring service costs to
what services are going to be required, in as minute adecrease over the course of the agreement - to
detail as possible. This can be worked out infactor in falling tech costs, certainly, but also to
partnership with the vendor, certainly - but if that's theincentivize the provider to follow a course of
case it needs to be done before, rather than during,continuous improvement. Going along with such
the actual contract stage, since otherwise may resultclauses involves a degree of compromise on the part
not only a potentially damaging loss of focus, but a lackof the provider - but compromise is the secret to
of clarity around the financials which the contract looksmany a successful relationship, and at any rate if the
to set in stone.provider believes that the savings in question can be
Keeping focusedmade, presumably they'll be happy to accept those
Key to driving all parties along through the contractterms as part of what could regardless mean an
process is a firm focus upon the end goal - goingextremely satisfactory deal for them financially
beyond the formation of a mutually acceptablespeaking. Some might say, it's only fair.
agreement to the actual provision of a high-quality(This topic also bears relation to another, earlier SSON
service. For both (or all, in the case of multilateralarticle featuring the IACCM CEO: an interview with
agreements) parties the intention of the contract is notTim Cummins in which he glances at the changing
to be a work of art in itself, or to keep the lawyers inshape of business and commerce, with traditional
Armani for another month: it's to facilitate the provisionorganizational structures transforming towards a
of a service or services, the carrying-out of certaindisaggregated business model. While that is in itself
work at a required standard.another, vast, issue, it's worth noting that as
With that in mind it's important to involve the end usersorganizations disaggregate the need for collaborative
as much as is feasible. Something that might seemsourcing relationships will become increasingly
logical and unremarkable to a specialist in contract lawimperative - as will, thus, the partnership ethos
might appear utterly implausible or even potentiallyespoused above.)
disruptive from the perspective of an end user within(...to be continued...)
the buy-side organization; getting the input of those___________________________________
who will actually be dealing on the ground with theThis article was first published on the Shared Services
service being provided should help keep thoughts& Outsourcing Network (SSON) - Read it here:
focused well and truly on the task in hand.About The Shared Services & Outsourcing
Likewise, a firm focus on the scope of the agreementNetwork (SSON)
will have benefits throughout the drawing-up of theSSON is the largest and most established community
contract and, more importantly, throughout the lifecycleof shared services and outsourcing professionals, with
of the agreement. Understanding what a contractover 25,000 members.
should cover, and why, will not only make for a betterSSON provides the roof under which key industry
contract: it'll also increase awareness around what isn'texperts and organizations share their experience,
covered by the contract and thus help to directknowledge and tools, and practitioner peers connect
attention in the right direction in the case of troublewith other all over the world, both face to face and
down the line. A tight focus will also, of course, help limitonline.
"scope creep" among the more enthusiasticSSON focuses on developing its members through
participants in the negotiations - and help keep thingsproviding training, tools, and networking opportunities.
as lean as possible.SSON staff works from international offices in New
Lean and keenYork, London, Singapore, Sydney, Berlin and Dubai to
Who says contracts have to be long and complex? Ifresearch current trends and developments in shared
companies the world over are going Lean, surely theyservices.
should be doing so in their contracts too? ObviouslyMore information visit the Shared Services &
when it comes to something as critical as drawing upOutsourcing Network (SSON) website. Stay up to
a contract - possibly for hundreds of millions of dollarsdate with SSON's latest twitter posts at twitter.
- it doesn't pay to skimp on the details… On the other