Guide to a Perfect Offshore Outsourcing Vendor Deal

CIO - Cost-cutting: Beleaguered companies see it as the only sure action in an uncertain world. They think that if they cut costs beyond the bone, surely profits will seep from the wound.

During times of economic turmoil, when the pressure to cut costs is most intense, many companies turn to offshore outsourcing. They see it is a quick way to reduce IT and other back-office expenses.

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Under financial strain, however, companies-even those that are experienced with offshore outsourcing-make knee-jerk decisions, and in their haste, they fail to consider provisions in outsourcing contracts that would protect their staff, give them more control over the staff the outsourcing company allocates to their projects, or safeguard their intellectual property. The outsourcing deals they ink end up doing much more harm to their bottom lines than good.

Richard Green, partner at law firm Robinson & Cole LLP, spent a good part of the previous recession as an in-house lawyer with a business process outsourcing (BPO) provider, where he witnessed first-hand the bad contract negotiation decisions clients made under cost and time pressure.

He says customers made concessions on operating level agreements (OLAs) and service level agreements (SLAs) after only a round or two of negotiations.

"If an issue [with an SLA or OLA] wasn't going to save the customer money in the short term or speed up deal closing, we on the supplier side needed only to dig in [our heels] for a bit to get our way," says Green.

Green cites the offshore outsourcing engagement Lehman Brothers entered into in 2002 with Spectramind (now owned by Wipro) to have the Indian company manage its internal help desk as an example of a deal that a customer didn't give due consideration.

"The function Lehman outsourced was universally viewed as too complex and immature within Lehman's own organization to be a good candidate for outsourcing," says Green. "Yet, driven by dollar signs, Lehman did it anyway with disastrous results. The performance and the feedback from internal company customers was so terrible they shut it down a few months later." Lehman had to bring help desk management back in house.

Conseco had a similar experience when it outsourced a contact center to India in 2001, says Green. Customers were so up in arms over the move that Conseco brought the contact center back to the U.S. in 2003, he says.

Lehman's and Conseco's experiences make it clear that the biggest offshoring mistake companies can make in this environment is moving too quickly. Besides proceeding too fast, companies should make sure they avoid the following eight pitfalls that thwart companies' best efforts to save money through offshore outsourcing.