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TalkingPoint: Current Trends In Outsourcing « Back
July 2012
Page 4 of 5
FW: What kinds of risks might companies expose themselves to when entering outsourcing arrangements? How can these be managed and mitigated?

Calabro: An outsourcing arrangement entails many risks – short-term as well as long-term. There are risks related to the engagement itself, for example, risk of a failed transition due to poor planning/management or financial risk due to aggressive pricing/missed requirements. Then there are longer-term risks like the risk of sun-setting a new implementation because it moves to low cost operation mode and then it can’t continue to align with business needs or lack of innovation resulting in the need to undertake expensive transformation projects in the future. These risks can be mitigated to a large extent by establishing a strong relationship between the supplier and the buyer, managing the engagement through solid governance and establishing SLAs that are closely aligned with strategic business outcomes.

Maughan: It is really not possible to predict in all circumstances the risks that companies expose themselves to in outsourcing. This needs to be carefully considered in each case. Obviously, the company loses direct control over its own systems and processes but, hopefully, the trade-off is extra quality at a better price point. This needs to be managed by an appropriately sized retained team and governance structure to make certain that the externalisation process does not introduce unacceptable risks.

Konvisser: A fundamental characteristic of outsourcing is the transfer of control from the client to the provider. This means that the risk of service failure to the client’s business is now controlled by the provider. The best way to manage this risk is to properly incentivise the provider’s performance through the one remaining motivational tool retained by the client – money. This can be done both by designing a payment structure that incentivises quality performance, and through the use of service levels tailored toward key business results – rather than the inputs that alone do not drive business results – with appropriate financial credits for failure.

FW: Can you outline the key considerations that need to be made when structuring an outsourcing agreement and drawing up the relevant documentation?

Maughan: An outsourcing agreement is like a jigsaw. It needs to draw together the legal, technical, financial, HR, security and commercial considerations that have been discussed as part of the outsourcing project. It’s important to make certain that the elements of the jigsaw fit together in an appropriate fashion and also that you create something that is going to allow the parties to work together over the course of the forthcoming years. It’s important to create something that is sustainable and not so unwieldy that it becomes inoperable. An outsourcing contract should be a living document. All of the elements ought to work together as an integrated whole. It ought to cover the initial scope but it also needs to be flexible enough to cope with the key changes over the life of the contract, such as acquisitions and divestitures. It also needs to cope with pricing change in a way that convinces the customer that it is likely to continue to receive good value for money and is not going to leave the customer with an expensive white elephant in a few years’ time.

Calabro: While drafting an outsourcing agreement there are some obvious considerations like pricing mechanism, legal areas including IP, indemnifications, risk mitigation strategy in case of poor performance (by the vendor) and operational SLAs. However, there are some other areas that a buyer needs to focus on like – how will the relationship be governed and evolve over time? How does the company maintain some leverage over the supplier during a 3, 5, or 10 plus year relationship? And most importantly, how does the company determine that there will be continuous business alignment, innovation and effective management of their outsourced business processes/applications in order to realise true value out of the arrangement.

Konvisser: The outsourcing relationship is defined by four key components: scope of service (what will be done), service levels (how well it will be done), pricing, and governance/relationship management. These components need to operate in an integrated and holistic fashion to incentivise proper performance by the provider and to ensure that the provider is adequately compensated for the services. The outsourcing agreement needs to adequately address each of these components, as well as provide legal terms and conditions around the relationship. In addition, both providers and clients should focus on three key time periods: transition into the relationship; ongoing run during the relationship (which may include transformation); and disengagement assistance/knowledge transfer at the end of the relationship.
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