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Anyone who has gone through the process of securing an IT outsourcing deal for their application development management, help desk, data center or network services-deals that can often be worth in excess of $20 to $100 million dollars and take years to implement-knows that transactional costs alone can be both enormous and onerous. But when managed correctly, the legal part of the outsourcing process, including the negotiations of a final contract, do not have to be deal breakers. Designing outsourcing deals for efficiency, and with a focus on a win-win approach from the get-go, goes a long way in helping to ease the time and stress of outsourcing contract negotiations.
Some of the prevalent negotiation time killers that delay an outsourcing deal include focusing on issues that may not be the most relevant to the organization. For example, too much time spent on limitation of liability (where you could have fairly predetermined positions with your vendor in pricing the deal), or not spending enough time on performance indicators or practical remedies for problems that may develop. The goal is to use the contract as a road map for problem solving once you are working with the vendor.
Also, many times, key stakeholders don’t understand industry standards and points of relevant negotiation, or these stakeholders are not brought into the discussions soon enough. This can result in bureaucratic time wasted later in the game and lack of buy-in by major decision makers. To help avoid unrealistic expectations, late-game changes and derailments from a win-at-all-costs approach, follow these seven guiding principles to keep your team on track:
Principle No. 1: Gather all key stakeholders in the beginning
Gather all key stakeholders in the beginning. This includes the tech execs, in-house counsel, audit team, risk management outside consultants, outside counsel, finance, and other subject matter experts. Uniting these key stakeholders at the outset will save time and money in the contracting process, without a doubt.
Facilitate a Strategy Session
Principle No. 2: Facilitate a strategy session
Facilitate a strategy session to review outsourcing goals, anticipated ROI, alternatives available, reasons why provider was selected, key expectations and concerns, greatest wants, needs and risks not willing to take. This important step will ensure that time is best utilized and the right stakeholders are involved in critical discussions during the contracting process. Again, doing this after the fact, or not at all, will cost more money in the long run and take more time.
Principle No. 3: Put a strategic plan on paper
Putting a strategic plan on paper, and consulting it on every redline change to stay on focus, is a critical part of the process. With a written plan, the negotiation team can benchmark critical decisions against the plan created by the stakeholders and focus on the really important issues. This is a fundamental to identifying priorities and sticking to them throughout the process. If you don’t write it down and measure how you follow it, it will cost you more in time and money, and the results may not be as strong.
Principle No. 4: Negotiate for value with a win-win approach
Negotiate for value with a win-win approach. It’s not going to help your cause if your vendor can’t make money on the deal, and you’ll feel the impacts when the vendor starts to cut corners. Remember, that at the end of the contracting process, you are outsourcing a critical function in your business to the vendor. If you have negotiated too aggressively and forced them to take positions they do not want to take, you have not set a strong foundation for a good working relationship.
Its All About Allocating Risk
Principle No. 5: Recognize that outsourcing contract negotiation is all about allocating risk
Recognize that outsourcing contract negotiation is all about allocating risk while building a foundation to work as strategic partners going forward. By understanding the anticipated risk allocation prior to the contracting process, you can more effectively maintain the relationship while finalizing the contract terms that allocate risk.
Principle No. 6: Understand that vendors have fairly standard parameters
Understand that vendors have fairly standard parameters in their contracts within which they will work; the key is to acknowledge those parameters and communicate what is most important to you. They want the relationship to be successful and to get the deal.
Principle No. 7: The more alternatives you have, the greater your ability
The more alternatives you have, the greater ability you have to push for the terms you want. This is the golden rule of all negotiation. If you do not have viable alternatives to the vendor with whom you are negotiating, you do not have a strong negotiation position. If this is so, you should not waste valuable time or money arguing over points that may not significantly change. There is a constant balance of risk in pushing too hard versus the ultimate reward-is it worth it?
The time, money and resources required in the outsourcing contracting process can be significantly reduced if the stakeholders are willing to invest a little time upfront for careful planning and preparation. If the team is willing to do the pre-work necessary to determine acceptable risk allocation positions, key goals in building relationships with the vendor and determining what matters most, then the contracting process can be significantly less painful and less costly. While so often overlooked, this critical step can have a dramatic impact on the transaction costs.
Jennifer C. Wolfe, Esq., APR, is founder and CEO of Wolfe, LPA. Jennifer is an award-winning attorney and executive leader whose published articles cover topics ranging from strategic planning, negotiation and communication to women in business and the law. Jennifer is a regular legal columnist in Pink, a national magazine targeted to women business owners and executives. Jennifer provides continuing education to organizations throughout the country on a variety of topics, most notably, negotiation, best practices in contract management, branding and innovation.
Prior to attending law school, Jennifer worked as the Marketing and Communication Director for Reach Publishing, where she managed marketing, public relations, advertising and franchise relations for the national company. She received her Juris Doctorate and Masters Degree in Organizational Communication from the University of Cincinnati, graduated magna cume laude in Journalism from Ball State University, and has been trained at Harvard Law School in negotiation and mediation. She can be reached at jwolfe@consultwolfe.com.