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It is fairly difficult to get a solid business relationship established and defined in a contract, and also allow for the required need for change, says Dave Burkett, president of Compass America. By their very nature these arrangements tend to lean towards defining very specifically what is going to happen, and assign penalties and rewards if they don't. This in itself conflicts with flexibility. And flexibility is very important to developing a partnership.

"When there are two teams of lawyers negotiating a very thick contract, by the end of it a company ends up with a deal that is very difficult to change," Burkett says. "So it is important to devise a contract that focuses on how the contract will change over time, rather than defining what the business is doing today."

Burkett manages Compass North America, which includes both the Canadian and the American operations. The Compass outsourcing practice, which began in Canada, consists of two parts. First, Compass' collects data on outsourcing and insourcing and uses it as a proxy for valuing outsourcing contracts either initially or at renewal points. This value analysis determines whether a contract is priced appropriately compared to what it costs other companies that are doing similar information (IT) processes. But Compass even goes deeper than that.

"What we found is that there is a lot more to an outsourcing practice than just finding the right price," he says. "And so we evolved our pricing analysis into a ten step process that guides a company through the outsourcing process. The ten steps begin with the initial stakeholder analysis and then gives guidance on constructing a governance model to make sure that the outsourcing contract is administered appropriately and objectives are achieved."

The Importance of Being Consistent

What Burkett has found out through his years of outsourcing experience is that it pays to be consistent throughout the process. The most important thing is for the organization to understand exactly what they want to achieve by outsourcing. It is very common that the people that are in charge of constructing the deal do not understand the company's objectives. The senior management's mandate is not clearly understood because the negotiations are often handed off to the information technology (IT) group to negotiate the deal. Unfortunately, the IT group looks at business objectives differently than senior management and are not usually the best people to put in charge of negotiating an outsourcing deal.

"The IT group is not very objective because they have a vested interest in the outsourcing of their department," Burkett says. "They tend not to have the broad management skills that are needed in this type of situation. They tend to assume that it is the technology that needs to be managed, but it is a business relationship that needs to be managed."

Most often the IT group's main focus is cost and delivery. They usually stay away from partnership and synergy issues. So most deals are constructed to run fairly well from a static, delivery point of view, he says. But there is very little discussion about ways to incorporate changes in technology and new business directions. So, in essence, a partnership never develops because the customer and vendor become consumed over price, and never begin developing new ideas and incorporating ways in which the organization can get more value from the technology.

Having Different Goals

Partnerships often begin the relationship thinking that the two sides can write a contract and define a process easily because they assume that they have the same goals. That is never true, Burkett says. If the client is an insurance company, its goals are very different from an IT vendor's goals. The two companies need to come to terms with the fact that the goals are conflicting. The important thing is that the team that manages the function has the same goal, which is the delivery of effective services at an economical price. They are both working for that purpose even though they are reporting to separate bosses. That is how a partnership is formed. The insurance company continues to market and sell insurance and the IT vendor continues to look for new clients, but the IT team is the group that is there every day and must work at the partnership.

Once the contract is negotiated and agreed upon, and the governance model is in place, the contract needs to be put in a drawer. What should be put in place is a well-defined process for ongoing management issues. "The management process is what should be brought out and referenced, and if the client and vendor aren't following the prescribed measurements or they aren't working satisfactorily, then the measurements need to be flexible enough that they can be changed," he says.

The customer is going to get out of it what they put into it, and a contract isn't going to save them. Typically when the deal goes bad the client is usually as responsible or more responsible than the vendor, though the supplier is usually the one that is blamed for unsatisfactory service. Deals should define a set of responsibilities for the client and they need to resource those appropriately and often they don't.

Lessons From the Outsourcing Primer:

• Contracts tend to be very specific about details, which conflicts with having a flexible relationship.
• The contract needs to focus on how the relationship will change over time, rather than defining what the business is going to do today.
• Having the IT group negotiate the arrangement isn't always the best option because they have a vested interest in the process.
• A vendor and its client have to come to terms with the fact that the goals of the two organizations are conflicting.

Publish Date: November 1999

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Copyright © 1999 - Everest Partners, L.P.

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