Article

Outsourcing contract

Company A has decided to outsource one of its tasks (IT, marketing, legal, facilities, human resources, accounting, etc.). They selected supplier B as their best choice.

After an often demanding ramp-up period, things are going well so far. According to several studies, at this stage already 25% of transactions are discarded before they are even signed. And only 50% of all outsourcings deliver the expected value during their initial period.

In our story, Company A and Supplier B continue their journey, with its inevitable ups and downs, for around 3 years or more.

Then comes the third decisive stage, the one we wish to address here: almost all outsourcing transactions come to a more or less abrupt halt, either due to external events (such as changes in organization, technology, etc.), or to the erosion of time.

As a result, almost all outsourcing contracts are severely impacted.

What really happened?

Obviously, at the outset, the customer took into account a number of strategic considerations. But later, both customer and supplier focus on operational issues, both striving to keep their respective profitability in the transaction.

In effect, the customer is concerned with reducing costs, while the supplier is concerned with profit margins. These contradictory objectives open the door to a variety of conflicts. From then on, discussions focus on price and scope of services, and the relationship becomes increasingly contentious.

What can be done about erosion and conflict?

The good news is that there is a way to avoid such erosion and conflict.

We build on this excellent research, while adding a few practical tips drawn from our own experience.

It all starts with the realization that, in an outsourcing relationship, customer and supplier are in the same boat. In other words, the first point is that genuine mutual trust is essential.

The second element is the most difficult to resolve: both parties must imperatively put their concerns about improving costs or profit margins in second place.

Of course, costs and profits must be closely monitored, but the primary objective must be a fair, long-term relationship for each of the contractual partners.

Unfortunately, many disqualify themselves at this stage. And only those who excel know how to reach this level of maturity.

Thirdly, we need specific governance.

Governance model

The new governance model you’ll need should have the following considerations:

• Real needs, present and future
• Market developments (regulations, competition, national and international trends, research material, technology evolution, etc.)
• Problems encountered by customer, supplier and end-users
• Out-of-the-box” considerations are desirable
• At the outset, discussions should be totally agnostic of personal and corporate interests.

The innovation and continuous improvement clause

Some contracts contain clauses often referred to as “technology watch”, “innovation” or “continuous improvement”. But a clause is far from enough. And making it a supplier obligation doesn’t work.

Here’s how to do it right.

Sharing success

• The customer must agree not to terminate the contract for a certain period of time
• The customer remains in charge, but shares his strategic plans and wishes to collaborate with the supplier, at least on a strategic level.
• The customer must agree to pay for these services in addition to the outsourcing contract, as with all strategic consulting.
• For its part, the supplier must contribute with added value, as a true strategic contributor, and not as a vendor or operational person.
• The supplier must offer its services at market value
• It’s a good idea to involve other players, in addition to the moderator, after discussion.
• The supplier will have a right of first refusal to implement innovations, which he will exercise responsibly and reliably (in practice, he will do the work, subcontract or coordinate, unless it doesn’t make sense).

Our experience

We have been involved in four cases recently where erosion had crept into outsourcing contracts, one on the customer side, three on the supplier side.

These situations are very common and can be “cured” easily, provided there’s a little goodwill on both sides.

In conclusion, here are two questions for you: what stage has the agreement you’re working on reached? And how will you go about it?