Legal Pitfalls in IT Outsourcing: How to Minimize Transactional Costs

The transactional costs in IT outsourcing can be deal breakers. So it's vital from a financial and legal standpoint to create a strategic, win-win outsourcing deal from the start. Here, Knowledge Center contributor Jennifer C. Wolfe shares seven specific principles about how to create that win-win outsourcing deal, as well as avoid the legal pitfalls and time killers in the outsourcing negotiation process.


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.