Managing Risks in Outsourcing: Part 2 – Contract Negotiations

In Part 1 of Managing Risks in Outsourcing, I focused on managing and mitigating risks during the supplier selection process. I will now look at the risks associated with contract negotiations.

If poorly planned and executed, the negotiation of an outsourcing contract can be a long, tiring and frustrating affair. Over-populated meetings which continue for days with little progress being made on commercial points, over zealous legal advisers who focus on points which have no real impact on the deal fundamentals, costly delays and significant frustration are sadly a common experience. Negotiation of an outsourcing contract can also expose a customer to a variety of different types of risks which are all too often overlooked.

Common risks which you face during negotiations include an outsourcing contract which does not support your business needs and objectives, costly delays in the timetable and the realization of benefits from the outsourcing, and long term damage to the relationship with your supplier due to an adversarial approach being taken to negotiations.

However, adequate preparation and planning will enable you to conduct more effective and timely negotiations thereby minimising the key risks. A well managed negotiation offers you an opportunity to build a strong relationship with your supplier and can improve the overall chances of a successful outsourcing deal which supports your business needs and objectives.

The key elements of the commercial deal should be agreed before focusing on the outsourcing contract. All too often customers are placed under considerable pressure to issue an outsourcing contract or exchange a marked up version, when the deal fundamentals have not been agreed upon with the supplier. This leads to significant delays, frustrations, miscommunications and wasted internal and advisory costs. It is important that both you and your supplier understand and agree, prior to detailed negotiations, both your, and the supplier’s, key business objectives, the scope of required services and associated performance responsibilities, and the related pricing model.

Negotiation of the outsourcing contract is an important step in a relationship building exercise, the success of which will be critical to the success of the deal as a whole. With that in mind, the negotiating team should ideally be led by a commercial representative who is experienced in outsourcing negotiations and who understands all areas of the deal. The team should include, in addition to any sales representatives, a senior operations staff member and at least one person that will be involved in service delivery on an ongoing basis. It is important to ensure that commercial proposals are deliverable in practice.

An outsourcing arrangement is a long term relationship, and the parties’ experience at the negotiating table will color the nature of their ongoing relationship. Therefore, a co-operative, non-adversarial, approach is more likely to succeed in the long term.
The desired negotiation timetable should be agreed, be realistic and ensure ‘buy-in’ from all members of the negotiating team. In addition, both parties should expressly recognise the importance of preparation for meetings. Preparation includes an adequate opportunity to consider, and discuss internally, any drafting or comments on drafting.

In most cases, key commercial decisions should precede legal drafting. Although the ultimate output of a negotiation is a legally binding agreement, the draft outsourcing contract should record agreement rather than present positions.

Key commercial negotiators must be able to make decisions and ensure that the process remains focused. It is a mistake to “leave it to the lawyers to sort out” as there is no such thing as a purely legal issue because every issue has a commercial consequence. Finally, the parties should make sure that the outsourcing contract is not more complex than it is required to be – clarity is critical to success.