Guide to a Perfect Offshore Outsourcing Vendor Deal

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.

1. Don't let offshore outsourcing vendors pad contracts with initial set-up fees.

Vendors realize that most outsourcing deals are price-driven. Therefore, some take dubious measures to ensure that they are the lowest bidder. Their low bids are often an illusion because they add costs elsewhere to make the deal more profitable for themselves in the end.

"This practice has been perfected to an art by some offshore vendors," says Anupam Govil, chairman of the Global Sourcing Forum + Expo, a trade show focused exclusively on outsourcing. Consequently, he adds, customers are often struck with a "nasty surprise" when unreasonably high set-up fees suddenly appear in the final contract.

To avoid such surprises, Govil recommends that customers ask prospective offshoring partners for fully loaded cost estimates. This way, when prospective buyers match quotes from different outsourcing companies, they can make apples to apples comparisons, he says.

2. Don't give more work to your outsourcing provider just because of a pre-existing contract.

Robinson & Cole's Green sees many companies pile work on an existing offshore outsourcing partner for convenience's sake.

"The thinking has been, 'Well, we already successfully outsource function X to supplier A, why not just throw another statement of work on supplier A's master agreement and outsource functions Y and Z too,' " he says.

That's a mistake because your existing outsourcing partner may not be the best vendor for those new functions, says Green. Your vendor might not offer the best price for those functions, or they might not have the expertise or experience managing those functions. What's more, the new functions you're thinking of outsourcing might not even lend themselves to offshore outsourcing.

Before you fork over new work to your outsourcing provider, consider if the work is best suited to your vendor.

3. Don't lose control of change management.

Diana J.P. McKenzie, partner and chair of information technology law at Neal, Gerber & Eisenberg LLP, sees too many companies treat outsourcing deals as static.

"All of these deals will change over the time," she says. "This is the nature of IT."

McKenzie advises offshore outsourcing customers to make sure their contracts include a process for handling changes to the contract as business conditions necessitate. (See also How to Renegotiate an Outsourcing Contract.

4. Don't depend on a foreign judicial system for relief.

When disputes between a customer and offshore outsourcing partner arise (as they often do when deals are rushed), customers can't depend on a foreign judicial system, particularly in India, to help settle the dispute.

"In India, it can take longer to get something through the court system than it does to raise a child," says McKenzie. "A contract must have an arbitration provision to have any hope of getting a timely resolution. Better yet, insist contract disputes be resolved in the USA."

5. Don't fail to validate the credentials of the outsourcing staff.

Unfortunately, it's not uncommon for staff at offshore outsourcing firms to fake their professional and educational credentials-and for their employers to let them get away with it.

"In India, one can easily obtain credentials through a variety of means, such as fake mailing addresses and fake phone numbers," says Mike Drips, a Microsoft SharePoint consultant who has worked on multi-million dollar projects for a variety of Fortune 500 companies including American Express, Verizon, Microsoft and GE.

If your offshore provider's staff isn't above board, you can't expect to get quality service, so make sure to perform background checks on staff.

6. Don't let your staff burn out.

In the heat of contract negotiations, it can be easy to forget certain provisions that will keep your staff sane, such as having your offshore vendor tailor its work hours to yours so that your staff doesn't have to work through multiple time zones.

"You are paying them money, so you should not be getting up at 3 AM for a conference call," says Drips. "The vendor's staff should be getting up [early or staying up late] to talk to you."

Another way to lower your and your staff's frustration is by adding a clause that demands English speakers, recommends Drips. English-speaking contacts may not automatically be provided to you if you have not added this provision to the contract, even if the overall outsourced function requires English-speaking roles.

7. Don't accept your domestic project manager's recommendations without evaluating the details of the deal yourself.

Offshore outsourcing providers will sometimes try to influence deals by wooing project managers with exotic trips and gifts, says Drips.

"Be wary if your domestic project manager suddenly has the funds to go on a three week visit to the country that your offshore vendor is located in," warns Drips.

Because enticement is not uncommon, scrutinizing deals yourself is critical. Also essential: Double checking all staff recommendations to ensure their opinions haven't been unduly swayed. If you don't vet your staff's recommendations or review outsourcing deals on your own, you risk entering into a disadvantageous contract.

8. Don't get caught in a data security trap.

Many outsourcing deals stipulate that the client is responsible for data security and require the client to secure its data before delivering it to an outsourcing partner.

"This makes sense until you realize that the entire goal of the outsourcing arrangement is to move as much work as possible to lower cost resources," says Mike Logan, president of Axis Technology, an IT consulting firm.

He adds that outsourcing customers can find themselves in a Catch-22 situation where they can't realize the cost savings from offshoring because they have to invest extra money in data security. And unfortunately, he says, there's no easy solution to the conundrum.

Exercise Discipline

The best safeguard against all these pitfalls is to take your time. "Companies that are successful at outsourcing will often dedicate years before a contract is even signed," says Robinson & Cole's Green. "They do financial modeling, risk identification and mitigation planning, technical, financial and reputational due diligence on potential suppliers, and head-to-head contract negotiation to force suppliers to cough up the best terms."

This story was edited by Meridith Levinson. Follow me on Twitter: @meridith.

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This story, "Guide to a Perfect Offshore Outsourcing Vendor Deal" was originally published by CIO.

Copyright © 2009 IDG Communications, Inc.

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