To old romantics, getting married is a commitment for life. You’re both ideally suited and you’re obviously going to live happily ever after for ever and ever and ever, aren’t you? In truth, probably not. The harsh reality is that for many couples, that forever and a day relationship has a finite time limit on it.
Hollywood stars and assorted multi-millionaires have taken this message on board – hence the rise of the pre-nuptial agreement. The Hollywood wedding consists typically of hearts, flowers and a legally binding contract that spells out the consequences of a marital split. It’s hardly romantic, but is enormously pragmatic – and it’s something that companies negotiating outsourcing contracts would do well to take on board.
There are a lot of similarities between entering into an outsourcing agreement and a marriage. You’ve looked for the ideal partner, that partner has wooed you with their charms and now you’ve made a commitment to one another in the fond expectation that you’re going to be good for one another. But while some marriages will be lucky enough to last a lifetime, all outsourcing contracts will come to an end.
Sometimes this will result in an extension to the existing contract, but all too often a change of outsourcing provider is on the agenda after expectations were not met with the original partner.
Research firm Gartner Group reckons that 85 per cent of all outsourcing contracts signed since 2001 through year-end 2004 will be renegotiated within three years of signing, because the original contracts did not serve the enterprise’s long-term objectives.
In such circumstances it’s important to have your ‘pre-nup’ in place. Contracts that don’t come with a pre-determined exit strategy are likely to become problematic. “The outsourcing deal must be flexible so that as business goals change, the deal will also change,” said Linda Cohen, managing vice president for Gartner. “Successful outsourcing depends on a perfect balance of trust and control between both parties. Long-term outsourcing deals are usually constructed to rely on control rather than trust. However, organisational agility and the ability to create value requires flexible thinking and creativity that goes beyond process excellence.”
In other words, things change. Like in a marriage, the people you were on your wedding may not be the people you are on your 10th anniversary – your needs and expectations have changed. It just isn’t working any more. To cope with this, contracts need to be able to reflect changing circumstances. They need to be live documents with built-in mechanisms to allow for change to happen.
“It’s not quite a pre-nuptial, but you need to look at exit management and make sure that there are implementable plans in place,” argues Tim Wright of legal firm Shaw Pitman. “Some of the key resources that you need to think about are what are you going to do with the people and the data you transferred to the outsourcing provider. You need to do this at the beginning of the contract. If you get six months into the deal and it’s not working, then as a customer you will have less leverage than you have at the negotiating stage.
There are three things that can happen when a contract ends. The service is taken back in-house, the existing contract is extended or the existing contact is terminated and a new provider put in place. “The response from you is essentially the same in all cases,” says Wright. “Someone will have to take on the service. Coming back in house is the rarest option, while handing on to a new supplier is common. It becomes interesting when you’ve outsourced and that contract is coming to an end. The first time you outsourced, you were dealing with your own people. Now they’re not your people because you transferred them to the outsourcing provider. You need to manage and influence those people differently.
“You also need to understand the gaps between the objectives of different parties. The service provider will have put a lot of good people on to your account during the life of the contract, but that’s coming to an end so it will be reluctant to lose those good people if the outgoing service provider knows there is no chance of renewing the contract. Its attention will be elsewhere. You need to police service level agreements.”
While each ‘divorce’ will require its own particular settlement, there are some common questions that clearly need to be answered. The contract’s exit clause must state clearly what happens when the contract ends, particularly in relation to allocation of responsibilities. Costs must be taken into account: it’s going to cost money to transition the service, who’s going to pay for what? It’s important for customers to have a ‘get out’ option if the contract is not delivering what was expected as well as an exit strategy for the planned end of contact.
It’s important not to underestimate the problems that can occur with break-ups. The ‘amicable divorce’ is as tricky to pull off in business as it is in life. A case in point is EDS law suit against Xerox in 1999 relating to non-payment of fees after a 10 year, $3.2 billion outsourcing deal broke down. Xerox had entered into an outsourcing agreement with EDS in 1994, transferring 2000 people over to the provider in the process. It also handed over the responsibility for running mainframe systems, legacy software and telecommunications as well as supporting PCs. On paper, a perfect match; in reality, considerably less so.
In late 1998, Xerox stopped honouring bills from EDS. EDS had to write off $200 million – almost half of its 1998 profits – attributing it largely to “billing disputes” with Xerox. In 1999, EDS filed a multi-hundred million-dollar lawsuit against Xerox. The companies reconciled by November of 2001 with the signing of a $1.5 billion, five-year extension to their outsourcing contract and a $50 million contract to include Xerox products in an EDS’ Navy deal. In this case both parties gave the relationship another go, but both paid the price of teetering on the edge of break-up.
One of the biggest changes on the outsourcing scene at the moment is at the Inland Revenue, where Cap Gemini Ernst & Young is taking on a 10-year, $5.2 billion IT outsourcing contract that will replace separate ones with EDS and Accenture. The switchover took effect in July although transition work began back in January.
EDS was responsible for developing and managing most of the agency’s major systems and supports its desktop PCs under a contract that was signed in 1994 and has an estimated total value of $3.5 billion. Inland Revenue said it also has paid EDS an additional $700 million to cover capital expenditures that were outside the scope of the original deal. Accenture manages a system that’s used to process insurance contributions. That contract was awarded in 1995 and has been worth a total of about $350 million.
To manage the handover, the Revenue put together a team of senior executives to oversee and assist with the transition in an effort to ensure that existing IT projects aren’t jeopardised by the change. EDS appeared to fire a warning shot over the Revenue’s bows when it lost the bid by claiming vital tax credit payments could be delayed by the handover. In a statement after being informed it was out, EDS said it believed that it had offered “best solution at the best value”, adding that if it had been chosen it would have ensured an “uninterrupted flow of tax revenues and credits”. Presumably the implication is that choosing another supplier risks interruption.
Cap Gemini will subcontract the management of data centres and disaster recovery provision to Fujitsu Ltd.’s Fujitsu Services unit while BT Group will support the agency’s wide area and voice networks. About 2,250 EDS and Accenture employees who now do work for Inland Revenue are expected to join Cap Gemini’s UK unit with another 900 IT workers due to be transferred to Fujitsu Services.
John Yard, who is director of business services at the Revenue, has been closely involved in the transfer process. Yard originally started out as a tax inspector for the Revenue and worked his way up as a project manager to run the department’s IT, handling the outsourcing of 2,000 Revenue IT staff to EDS in a 10-year deal in 1994. Since then he has overseen the integration of the Contributions Agency and the £145m Accenture national insurance system contract as well as handling the competition for the new outsourcing deal – codenamed Aspire.
“You need to make sure that your IT is going to continue during the competition,” he argues. “There is a nervousness that builds up, especially when the supplier sees that they’re not going to get that juicy slice of income. You need to ensure that they carry on doing the work. Someone has to continue providing the service.
“You need to get the incumbent provider on side. You have had all the things you need to have built in to the contract anyway, but you have to be able to continue with the partnership approach. The incumbents have options and they’re different before and after the decision. Before, they think they can win; afterwards they’re depressed and down. You need to think how you will help them with their months of disappointment. We use referencability as a tool. People are looking for an exit reference so you should be upfront about what you will say about them on a month-by-month basis. Keep their feet on the fire.”
He concludes: “An outsourcing deal is like a marriage on the cover of Hello. You know there are pre-nuptial agreements in place. You need to start thinking about the divorce before you walk down the aisle with a supplier.”
Written by Stuart Lauchlan. Originally published in Outsource issue 2, Autumn 2004 p49