Five steps to mitigating outsourcing overbilling risk
The recent incident regarding Infosys’ overcharging of Apple for outsourced services demonstrates that overbilling is not just theoretical, and that you don’t have to look far afield for proof. The first line of defence is developing an outsourcing agreement correctly in the first place, as it establishes the provisions that can be used to help minimise the potential of overbilling. In addition, there are steps that can be taken in the day-to-day management of an outsourcing agreement that can help preserve the projected value of the deal. Here are five best practices that outsourcing customers should be using to guard against being overcharged.
Get the deal done right
Outsourcing agreements are complex. Governed by a Master Agreement or Service Agreement, these lifeblood documents typically include numerous schedules, exhibits and attachments that define all manner of provisions and are designed to help manage the lifecycle of a customer-supplier relationship. One of the most essential elements of the agreement is how the supplier is to be paid for its services and, as such, the combination of the pricing schedule and compensation framework must describe the basis on which the charges will be determined, as well as the underlying unit rates, fixed fees, etc. For a more broadly scoped outsourcing arrangement where there could be dozens of billing metrics, there is typically a large list of additional details that must be documented (e.g., use of volume tiers, tier aggregation, productivity enhancements, resource unit exclusions), that collectively clarify how the underlying work performed by the supplier is to be charged to the customer.
Although seemingly “motherhood and apple pie,” an agreement that provides a more recipe-like approach toward what can be charged, how/when the work volumes will be determined, and how the prices are to be converted into invoiced charges, is not something that should be overlooked. Leaving such detail to the discretion of individuals to determine later can diminish the benefits that may have been derived from hard-fought negotiations, as well as establish the basis for disputes that can sap attention from the supplier’s ability to focus on delivering the underlying services.
Document with detail
Among the pricing documents should be a definition of the resource units on which the charges are to be calculated, as well as the systems of record or books of truth, on which the volume of the resource units are to be based. As billing problems oftentimes stem from ambiguity, ensuring that the definitions of the resource units (for example, “Virtual Linux instances that are owned by the customer and for which a gold service level applies” rather than “Servers”), and the systems of record for such resource units (e.g., configuration management database, IT service management system) are clearly stated from the get-go will help avoid discrepancies (scrupulous or not) down the road, and reduce the non-value-added time required to manage the disagreements that are sure to follow.
When in doubt regarding how detailed the recipe for billing should be, consider the degrees of freedom that could be introduced in its absence, coupled with the tendency for nearly everyone to bend processes in directions to which they are accustomed.
Centralise information and communicate
Excluding those that are the intended recipients of the outsourced services (the users), everyone involved in requesting or managing such services, including the payment professionals, needs to have a well-grounded understanding of the pricing provisions and operational mechanics, the current scope of the services, and how changes in the environment (e.g., adding another application to a maintenance portfolio, making more calls to the service desk, removing a number of network devices) will be accounted for from a resource volume perspective. Further, they need to understand the implications of errors (e.g., one-time, recurring, cumulative) made to any billing element (e.g., resources, volumes, COLA index values, pricing caps) involved in the calculation of the charges.
As with all functions that involve multiple people operating from different perspectives on a common event (e.g., implementing a new product in an enterprise, changing how the services are delivered), billing issues can arise when the underlying managers (e.g., service delivery managers, accounts payable managers, technical managers, relationship managers, performance managers, country managers, audit managers) remain siloed in their efforts rather than performed cohesively as a team. The complexities of building and managing such a team (and its success when performed sufficiently) arise from the integration of the disparate roles/perspectives into a functioning whole (oftentimes highly virtual and spanning multiple geographies) that acts as a single all-knowing entity rather than as separate components with limited peripheral vision. For outsourcing to be controlled and the team to be able to correctly act on information that has implications across multiple fronts, the “left hand” needs to talk to the “right hand” and all of the relevant parts in between.
Review the systems of record
Diligent review of the invoices and the associated data on which such invoices are based is critical to helping identify billing problems. So too is performing, albeit on a less frequent basis, more aggressive reviews of the underlying data (e.g., independent validation/verification of the resource volumes, review of the transactions that produced the resource volumes, access to the output produced by the tools that collected the resource volumes), as not all problems are discernable from inspection of the surface of an invoice (i.e., digging deeper is required and so too are the skills required to comprehend and analyse how, when, and what occurred).
The likelihood of encountering resistance when attempting to perform such reviews can be mitigated by structuring the rights to do so up front, including the frequency, locations, breadth and even the amount of advance notice that is required to be provided before such reviews can be conducted. Clearly, it is a delicate balance that must be struck between intrusiveness, cost control, and risk. The ability to perform meaningful reviews on a cadence and at sufficient depth that is appropriate for the relative size, scope and importance of a given outsourcing arrangement is an incredibly important tool to have to detect overcharges.
Remember the totality of charges
Part of constructing a sound outsourcing agreement is to ensure that while there may be thousands of functions that the supplier is to perform, and a relatively small number of billing metrics, that absent agreement by the customer and supplier otherwise, such billing metrics are the only permitted charges. That means, for example, that while the statement of work for storage management may call for the handling of back-up media either directly or on an implied basis, even though the billing metric that covers the back-up functions may be seemingly unrelated (e.g., gigabytes of active storage), the supplier is not at liberty to include additional items on its invoice for the effort. Assuming the agreement supports a totality of charges notion, the customer should generally expect to receive all of the services described (or implied) in the statement of work at the committed levels of service for the applicable charges arising from the named billing metrics. As this can be a slippery slope, outsourcing customers should be careful to avoid re-architecting their compensation frameworks simply by agreeing to additional charges that look reasonable based on the narrowness of a billing metric.
All in all, the potential for overcharges in outsourcing exists no matter where the supplier is based – on a different floor of the same building in which the customer is located, in a different city, a different state or on the other side of the world. The best approaches to mitigate the risk are to develop a robust outsourcing agreement that clearly defines the recipe for billing. This includes establishing a process of reviewing invoices that takes into account the sum total of knowledge in the customer’s organisation rather than in isolation, remaining diligent about reviewing the data that underpins the charges, and holding the line on agreeing to pay more for functions that are described in the scope of services, but seemingly aren’t covered by the billing metrics.
About the Author
Douglas Parker is a principal at business transformation and outsourcing advisory firm Pace Harmon. For over 25 years, he has been providing strategic and operational consulting and management services for Fortune 500 firms with a primary focus on large-scale IT outsourcing engagements.