Top 5 catches when negotiating an outsourcing contract

While reducing cost is typically the primary benefit and objective of outsourcing, but an ideal outsourcing contract should also allow to realize the immediate and long-term delivery need, provide contract flexibility and ensure that the outsourcer receives maximum value for money that it will be spending.

Negotiating a good outsourcing contract involves much more than just achieving the pricing one desire. However, it is more important not to solely focus on the pricing. To meet these objectives one need to pay careful attention to following 5 catches while negotiating an outsourcing contract.

1. Statement of Work

A Statement of Work (SOW), when created correctly, describes in great detail, the services to be performed by the provider and also clarifies certain client responsibilities. The SOW describes WHAT will be done for the price.

2. Service Levels

Service levels work in conjunction with the SOW to scope the services that the provider will deliver. They describe HOW MUCH and TO WHAT EXTENT the services described in the SOW are delivered. Service levels and assumed labor costs are two primary drivers in a provider’s cost model. It is important that the service levels reflect what one needs even during the price negotiation.

3. Termination Language

It can be hard to focus on termination language and termination charges at the beginning of an outsourcing contract. Termination language is equivalent to a prenuptial agreement – it is there just in case things do not work out as originally intended. As the final negotiations occur, one may be tempted to give a bit on the termination language in order to get to the price point one wants.

4. Future Pricing

There are a number of factors to consider regarding future pricing. On the whole, one should expect their IT cost to go down over time due to improvements in hardware and software functionality and pricing, labor arbitrage, automation, and so on. Some areas to focus on are Year-Over-Year Pricing, Cost of Living Allowance (COLA) and Variance pricing.

5. Delivery Locations

In return for hitting the price point, a provider may want to include the freedom to deliver from whatever location they may find fit to deliver.
In summary, these five potential catches need to be managed closely through the negotiation process of an outsourcing contract. Due to the variations and complexity inherent in each deal one should strongly consider the use of an outside outsourcing advisor to help.

About Author:
Prabhakar Ranjan works with Systems Plus Pvt. Ltd.  He is part of the consulting team that delivers Vendor Management Office projects. He can be contacted at prabhakar.r@spluspl.com