Mastering contracts

Almost every IT project today includes some element of outsourcing for application development, data center operations, Web hosting, end-user training or myriad other details. Sometimes it's a tactical decision ("Quick! Call ABC Rent-A-Programmer! We don't have time to recruit our own Java programmers!"), and sometimes it's part of a larger strategic initiative to divest the enterprise of noncore competencies. But whatever form it takes, outsourcing is one more element today's project managers must master.

We've learned a lot about outsourcing in the past decade, ever since we started negotiating outsourcing megadeals for billions of dollars over a 10-year period. Some of those lessons should be remembered in today's post-dot-com, recession-wary corporate environment; otherwise, we may repeat the mistakes we made with the unrealistic outsourcing deals negotiated during the gloomy economic climate of 1991-92.

First, it's crucial to know whether you want the outsourcing arrangement to be tactical or strategic in nature. If you're building a quick-and-dirty e-business application for some short-term need, you'll want to negotiate a deal that allows either party to walk away from the relationship after the system has been in production for a few months.

But if you're building a complex global system that will require ongoing hardware, software and technical support in 25 countries, chances are, you'll want a relationship stable enough to last three to five years before you have to start shopping for another outsourcing vendor.

In tough economic times, IT managers tend to negotiate outsourcing deals as aggressively as possible, partly because they feel they will motivate vendors to be more diligent about efficiency and productivity, but mostly because senior management will be scrutinizing every cost item to see whether a few more pennies can be saved.

This is understandable, but one of the lessons from the '90s is that a long-term outsourcing relationship won't be stable and healthy unless it's based on a win-win approach. If you're negotiating an outsourcing deal that will last only for the duration of a one-year development effort, maybe you can bully the vendor into accepting terms that will actually cause it to lose money. But if you try to apply this strategy to a 10-year relationship, it will eventually backfire. You can tolerate an obnoxious date for one evening, but an obnoxious spouse is likely to cause a divorce.

Throughout the '90s, we also believed that metrics were the basis for a rational, objective relationship with an outsourcing vendor. Whether you call it quality metrics, productivity metrics or service-level agreements, the basic idea was to quantify every relevant aspect of the relationship to ensure that there would be an objective basis for determining whether the vendor was doing what it promised to do.

Get Some Advice

Today, we realize that while metrics and service-level agreements are the foundation of a healthy relationship, they don't guarantee that conflicts can be avoided. Indeed, the most important part of your outsourcing contract is likely to be the section covering conflict identification, escalation, resolution and de-escalation.

Perhaps the most important development in the outsourcing field during the past decade has been the growth of a mini-industry of advisers, facilitators, lawyers and consultants including former CIOs who can help IT firms and outsourcing vendors structure and negotiate complex outsourcing deals that have the best chance of surviving through good times and bad times in the years ahead.

If you're about to embark upon a large, tough outsourcing negotiation, you should track down some of these folks. It may add a few dollars to the outsourcing budget, but it's probably the best insurance you can buy.

» posted by ITworld staff

Computerworld

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