The Outsourcing Life-cycle – 9 Stages

The Outsourcing Life-cycle – 9 Stages

1.            Strategy – Outsourcing is strategic decision that is typically developed at senior levels within a business. It may be part of a larger strategy to move the company to a leveraged business model and to focus on core competencies. Or it may be to save net costs or due to a lack of internal resources. Outsourcing may act as a key differentiator which will give your business a competitive advantage over your competitors. It may equally be strictly a decision to outsource a particular function, operation, programme or project. Too few businesses consider taking legal counsel at this stage. However, it can be an invaluable albeit relatively small input; so many projects encounter real difficulties which are often difficult to work around at a later stage. For example, difficulties about licensing, intellectual property rights or a pre-existing contractual or leasing arrangement. Remember too that an outsourcing lawyer spends his life dealing with such transactions. They will be able to give you objective input as to the commercial viability of the transaction your putative strategy contemplates and the response of the market to it.

2.            Reassessment – this is not always considered enough, but often organisations look at their internal supply or alternative methods of supply to see if it could be re-engineered to meet the requirements that lead to outsourcing. Again the lawyer's input is small but important; helping you understand the options available.

3.            Selection – Perhaps the most important phase. This covers the definition of the work to be outsourced, as well as the selection of the vendors using RFI or RFP processes, and finally making the selection of the "best-value" vendor or vendors. Your outsourcing lawyer will be a key advisor here helping you with definition, the RFI process, identifying constraints and assisting in evaluation.

4.            Negotiation – This phase includes the negotiating of the contracts, schedules and associated agreements, and the final contract signing which is usually proceeded by extensive reviews on both sides. Two key decisions are necessary before this goes ahead – one is whether to negotiate with more than one supplier and whether or not to reach agreement on "heads of terms" or a "term sheet" before entering into detailed negotiation. Your lawyer will be able to advise you on this, but experience shows that clients tend to ignore the factor of competitive pressure, and to maintain competitive pressure for as long as possible. The momentum of competitive pressure usually delivers a far quicker and a better deal, though it may need to be balanced with other factors such as management time and cost. Term sheets are in my experience useful for ensuring that both sides are engaged in a deal-making process that makes sense to them and to focus on key issues. Do not, however, regard them as a substitute for proper negotiation –the devil is always in the detail. This negotiation process must involve adequate resources and senior executives from both sides - the key issues in a long-term relationship, such as outsourcing, are too important not to justify executive engagement from supplier and customer.

5.            Implementation – This phase involves the start-up activities of planning the transition and the implementation of the outsourced agreement, as well as establishing the detailed budget and administrative functions needed for its management, and formal launching of the programme. Both sides will probably find it something of a honeymoon and generally even the worst of marriages do not need their lawyer in those circumstances! However, remember that there are going to be a host of issues that you might need guidance upon such as staff transfer, mutual responsibilities and the like. Do not allow these issues to fester and start the relationship on a bad footing; it is much better to get them on the table.

6.            Oversight Management – This phase encompasses all ongoing activities required to manage the programme, and achieve the contracted results. Specifically, this includes liaison between the customers and the supplier; performance monitoring; contract administration, vendor/ partnership management; delivery integration and vendor transition. Inevitably stresses will develop in a contract and it is important for both sides to take an adult approach to contract interpretation. Remember that these are long-term relationships that need to flex with time. The competent professional advisor will have put in sophisticated devices in the contract to allow this to happen in a controlled and balanced manner. On-going change and re-negotiation and dispute resolution will be important – all of which are areas in which your lawyer should be able to help you. Being flexible in this context is not usually an admission of defeat; rather it is a sign of dedication to making things work and creating a "win:win" situation which delivers both sides' strategic objectives.

7.         Build Completion – This phase covers all completion activities of the build phase including any development programme and then acceptance and the introduction of new services. Hopefully all will go well. However, your lawyer can assist in issues connected with late delivery or implementation; service levels and service credits; acceptance testing; retentions for incomplete delivery and the like.

8.            Change – All complex-outsourcing contracts will be subject to change and alteration. These are either run as minor changes to the outsourcing contract or major changes, which might involve a re-tendering process. Your contract will – or should – have built into it a contract change procedure to deal with changes that are in the broad scope of the original procurement. The idea of change control is to provide visibility for both sides and to allow the relationship to proceed in a sense of mutual trust – perhaps the critical success factor in an outsourcing relationship. Do not however be tempted to push change control too far. Stretching these too far and into territories for which they were not designed is bound to lead to tensions and perhaps breakdown. This is particularly so in the public sector or in regulated industries where the law does not allow departure from the original advertised procurement.

9.         Exit - Inevitably all outsourcing relationships come to an end – either by flux of time, mutual agreement or sometimes in acrimony. Occasionally, they end through take-over of either supplier or customer triggering change of control provisions and from time-to-time breakdown through insolvency or for other financial reasons. The properly developed contract will have dealt with these at the outset and there will be provisions allowing for orderly transfer; post-exit assistance; staff transfer and ownership of data and intellectual property, and possibly access to escrow. Often provisions are included to deal with re-tendering and poaching or rotation of key staff or other less salubrious practices. This is a sensitive time for everyone and your lawyer can smooth it for you.

Remember that IT and BPO outsourcing is a highly specialised area and, in consequence, it is a highly specialised area of legal practice and one with a strong international dimension. Some of the contractual and legal approaches and the customs that have developed in the trade seem counter-intuitive even to lawyers of great experience in other areas of commercial law. Without wishing to seem self-serving, I can offer no better counsel to outsourcing companies and to their customers than to get proper experienced legal advice; to be prepared to pay for it and to involve the lawyers early so that they can be a force for good and for a positive business solution rather than helping you pick up the pieces afterwards. You will find that this pays off time and time again!

courtesy http://www.outsourcingprofessional.org/