Five Things to Remember When Negotiating an Outsourcing Agreement

How can an organization meet the objectives of an outsourcing contract negotiation? I’ve identified five things to consider that can potentially keep you from conducting a successful outsourcing contract negotiation:
  •  Statement of Work – A Statement of Work (SOW) describes in great detail the services to be performed by the provider and also clarifies certain client responsibilities.
  • Service Levels – Service levels work in conjunction with the SOW to scope the services that the provider will deliver.  They describe how much and to what extent the services described in the SOW are delivered.
  • Termination Language – Termination language is analogous to a prenuptial agreement; just in case things do not work out as originally intended and can be manipulated towards the end of an outsourcing contract negotiation in order to get preferred price.
  • Future Pricing – IT costs should go down over time due to improvements in hardware and software functionality and pricing, labor arbitrage, automation, and so forth.  Because each situation is different, there are no easy “rules of thumb” to apply, but pay close attention to these specific areas:
    •   Year-over-Year Pricing
    •   Cost of Living Allowance (COLA)
    •   Variance Pricing
  • Delivery Locations – A provider may want to include the freedom to deliver whatever location they see fit in an outsourcing contract negotiation. Due to the risk of potential business impact, buyers should have approval prior to the movement of support functions.

“These areas of the agreement, if not carefully structured, can drain value from your business case and decrease the probability of having a successful and sustainable outsourcing negotiation. Due to the variations and complexity inherent in each deal you should strongly consider the use of an outside outsourcing advisor to help. Because they understand your perspective as well as the providers’ point of view, they are ideally positioned to help manage through these items and develop an outsourcing agreement that works well for both you and the provider.”

Advertisements

One thought on “Five Things to Remember When Negotiating an Outsourcing Agreement

  1. Pingback: Bug-Eyed Updates

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s