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Outsourcing Gotchas

Hidden traps lurk in every outsourcing contract. Here are 12 big ones -- and how you can avoid them.

By Kathleen Melymuka
March 22, 2004 12:00 PM ET

Computerworld - To a CIO, outsourcing contracts may look like other procurement and service agreements, but they're much riskier. "You're writing a contract for a service that's impossible to describe, that will change over time and need to be renegotiated, that will make you dependent on the service provider and for which termination is not an option," says Paul Roy, a partner at Mayer, Brown, Rowe & Maw LLP in Chicago, who has put together some of the largest outsourcing deals in history. "That's not an ideal negotiating position," he adds.
Roy and other attorneys who specialize in outsourcing have seen the challenges CIOs face when they sit down to negotiate outsourcing deals. Here's some advice on gotchas that can undo the unwary:

Problem: Unresolved issues. Amid the pressure to get the deal done, the outsourcer may push you to sign before pricing or service levels are nailed down, promising only minor adjustments later. "The supplier may say, 'This is standard; we do this all the time,' " says Bob Zahler, a partner in the outsourcing practice at Shaw Pittman LLP in Washington. "But in our experience, in every case that has produced a bad result."
Solution: "It's much better to resolve those things beforehand, even if it means delaying the signing," Zahler says. It takes many months to put together an outsourcing deal, he adds, so if you know you don't have sufficient data to establish service levels or pricing, start measuring immediately.
Problem: Fixed service levels and incentives can become antiquated over time.
Solution: Design the agreement to be flexible so you can add and remove service levels and set incentives so you can move from one service level to another, says Roy. Include a mechanism that allows you to ratchet up service levels to keep pace with the market, focus on things that create business value and adapt over time.
Problem: Fuzzy scope. The standard contract has voluminous descriptions of scope of service - often in excess of 100 pages, Zahler says -- but they're written by technical people who aren't as precise and detailed as they should be. "And clients don't read them," he adds.
Solution: Zahler's firm breaks IT into 77 detailed processes based on industry standards and creates a matrix with processes down the left side and the client's description of his IT group across the top. Then they color-code supplier and customer responsibilities. "It's easier to do a contract that way and it gets clients to focus on scope of service," he says.
Problem: Tasks missing from scope. No matter how careful you

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