March 18, 2012, 7:30 AM — The hard work of putting together an effective IT outsourcing request for proposals (RFP) is behind you. You gathered requirements. You baselined your service costs. You set the rules for the process. You put in place your required contract terms. You outlined a detailed negotiation schedule. Now it's time to sit back and watch the RFP responses roll in.
But don't relax yet. Hidden within those vendor replies may be details that look great on paper but are actually ticking time bombs set to go off only once the deal is well underway. Watch out for these nine outsourcing proposal red flags:
1. Deep Discounts
Beware the provider the presents a price that's more than 10% lower than all the other bidders. "Competitors know roughly what each other charges," said Mark Ruckman, an outsourcing consultant with Sanda Partners. "Any vendor that low-balls their price is either trying to buy the business or doesn't understand the scope."
2. Gainsharing Offers
What's not to love about stipulating that client and provider reap shared financial rewards resulting from improvement or innovation? A lot, it turns out.
"These commitments too often are constructed as mechanistic price reductions intended to deliver assured savings to the customer and to force the provider to innovate in order to preserve its margin," said Randall Parks, co-chair for the global technology, outsourcing and privacy practice group at Hunton & Williams. "The customer, with savings in hand, has little economic incentive to participate in the hard work of process re-engineering. The provider may have the incentive, but without the customer's enthusiastic participation, is handicapped in meeting the goal."
Most gainsharing agreements are too vague, according to Esteban Herrera, COO of outsourcing analyst firm HfS Research. "Even when they are specific, they tend to take a toll on the relationship because getting on the same page about what the real investment and real return is can be debilitating."
And shouldn't the IT service provider seek such improvements as a matter of course? "Customers should take the perspective that capturing these savings should be contractual obligations of the vendorÂnot margin entitlements," said Steve Martin, partner in outsourcing consultancy Pace Harmon.
3. Penalty Earnback Provisions