Marriage is on the cards???
Someone rightly said, outsourcing contract is like a marriage contract. It doesn’t necessarily define the success of the relationship, but it does go a long way in facilitating it. And like a marriage the relationship should be allowed to grow and evolve over time.
Outsourcing deals are becoming more and more complex and dynamic, requiring effective governance structures that incorporate robust change management provisions. The contract may be written at a particular moment in time, it should be sufficiently flexible to cater for change in a predictable way.
Mergers, acquisitions, divestitures, and major shifts in strategy can have a tremendous impact on the size and scope of an outsourcing relationship. Although it isn’t feasible to plan for every possible change, an effective contract will include a concrete framework for addressing and managing big shifts with no dilution of service.
The framework should include provisions for amending the service to fit the new requirements. It should also address the commercial implications of such changes and provide clarity on who will bear the costs.
A contract also needs to demonstrate an agreed and clearly worded legal agreement. It has to cover the financial aspects of that agreement. There may well be elements of the agreement whose content should only be accessed by a restricted readership.
It is also in both the customer and supplier’s interests to have provision in the contract for regular governance meetings between the customer and supplier representatives, to discuss operational and performance issues.
Service Level Agreement should focus on the areas that are critical to the customer and are capable of being reliably and objectively measured. If the current statistics are to be believed, even in a developing country like ours where cost was always considered the first & foremost reason for outsourcing, Customer Service standards now carry more weightage than Financial attributes in Outsourcing Contracts. Well now we can say that better wisdom is prevailing over the traditional ways of doing business in our country.
Coming back to the topic, any large outsourcing contract will articulate particular service levels at which certain services are to be provided, highlighting the parties’ rights and obligations where those service levels are not met.
If performance falls below pre-agreed thresholds, a customer would typically want service credits to accrue (by way of abatement of the charges). Service levels seek to objectively define what level of quality the customer has paid for, and how well the services are being performed.
Pricing drives behavior on both sides of the outsourcing relationship, so it’s important to get it right. The most common mistake is to focus only on unit price (e.g. FTE rates) and not pay enough attention to total cost of ownership (TCO).
The pricing model has a big impact on TCO, and on how services are delivered. In its most basic form, a pricing model allocates commercial risk between the service provider and client, and specifies the volume of work the provider can expect. To develop an effective model, you must understand your needs and be able to articulate them clearly – which is one reason high quality preparation is important.
ABC – Activity Based Costing
Another excellent tool to balance your TCO is ABC (Activity Based Costing). It is always suggested to monetize the partner resources in a way your business demands & not by the traditionally prescribed rules of incurring the total manpower cost of partner. If your SLAs are well defined & payouts are linked to performance, the partner would certainly be forced to deliver better service standards in much lower cost. A well drafted contract with ABC payout model coupled with immaculately defined SLAs certainly takes care of your obvious fear that the partner would use underhand tactics like deploying lesser manpower than required & delivering substandard output to save on his costs.
The crux of the matter is, sign the pre-nuptials carefully or else alimony to the divorce would only add further agony to the broken marriage & a dented goodwill.