Business Intelligence

(10707) Michael Corbett says:

A good outsourcing relationship is never set in stone but instead is a fraemwork for a work in progress. Pricing, contracting and negotiating isn’t about getting the best deal possible because in a long-term relationship, both parties have to benefit if the arrangement is to endure. Instead, the outsourcing contract should establish a framework around which the relationship can grow over time.

Most effective outsourcing contractual arragements are modular in that they capture the intent of both parties and then can be added to and refined in the future. An effective outsourcing contract will have these sections:

Terms Section This is where the specific intent of the relationship is defined and how it will be managed. This will include information about the transition, the use of the customer’s assets, any transfer of personnel and each party’s responsibilities and cost allocations. How the relationship will be managed during the lifetime of the agreement also needs to be specified here.

Scope of services section Describes the type, scope and nature of all services to be provided by the outsourcer. This section must also set out the scorecard or metrics by which the agreement will be evaluated so there is agreement on this.

Pricing section Specifies what fees are to be paid to the service provider and how these fees are to be calculated:

Since outsourcing agreements evolve over an extended period of time, it’s important that both parties feel comfortable discussing their needs and requirements. In an enduring contractual relationship, both the customer and the provider must succeed in terms of their own chosen criteria. The responsibilities and risks must be shared in an even-handed manner and there mjust be some alignment of interests.
Outsourcing can fall anywhere along a continuum of risk and ownership. The parties need to agree where on this continuum they want the outsourcing relationship to operate. It’s only after this deliberate decision has been made that pricing and terms can be discussed. If the customer wants the provider to assume the high level of risk commonly found with joint ventures, then the agreed upon pricing structure must reflect that positioning.
Conversely, if the outsourcer assumes the minimal risks of a traditional supply arrangement, it stands to reason lower prices will be chargeed. Decide where along the continuum the agreement will be first and you can then move on to negotiating the finer points of an agreement.

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