How to Succeed in Outsourcing
The keys to successful outsourcing lie in good and careful preparation, preparedness for changes, and in active project and contract management. Below are some tips on how to succeed in these from the beginning of the outsourcing project.
How to Prepare for an Outsourcing Project
Outsourcing projects require a lot of planning, coordination and preparation. Therefore, it is worth planning a project and preparing for negotiations well in advance. It is good to plan and carefully consider, among other things, project objectives, prioritisations, resourcing, project schedule, disengagement of current suppliers and criteria for selecting an outsourcing partner.
1. Be clear on legislation related to outsourcing. At the preparation stage, be clear on the legislation applicable to outsourcing. If employees transfer in connection with the outsourcing, the potential business transfer risk should be identified well in advance. It can affect not only the project schedule, but also the substance of the negotiations. Sharing of costs arising from the business transfer often emerges as an important issue in the negotiations. Hence, it’s good to involve your lawyers and HR well in advance.
It is important for the outsourcer to identify any potentially applicable industry-specific regulations. Public sector outsourcing should always be conducted in accordance with public procurement legislation. Outsourcing in the banking and insurance sector, in turn, are subject to the strict regulations of the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the Finnish Financial Supervisory Authority. Banking and insurance operators must also extend the obligations set out in those regulations to their suppliers.
When outsourcing, you must never forget data protection regulations, which nowadays affect almost all business activity. Privacy issues come up especially when companies start using cloud or SaaS-based solutions. With regard to data protection, you should pay special attention to the location of the servers. The location of the servers and their potential transfer should be expressly agreed upon.
2. Disengage current suppliers without service disruption. When preparing for outsourcing, you should go through agreements with those suppliers that may be subject to disengagement. In particular, check the provisions related to termination assistance in order to ensure that the disengagement does not cause disruption upon termination and expiry of the agreement.
Make sure that the current suppliers, in cooperation with the new service provider, commit to disengage and transfer services within the transition period to the new provider. It is important to take care of this, especially if there are no provisions committing the supplier to provide termination assistance. Providing some incentives to current suppliers may be a good idea to consider so that service levels do not deteriorate during the transition period. Plan a disruption-free disengagement of the current suppliers in advance: these situations are traditionally prone to conflict which, in the worst-case scenario, can have a significant impact on the service levels and project schedule.
What Should You Specifically Take into Account in the Outsourcing Agreement?
In the outsourcing agreement, the parties should try to agree clearly on the sharing of responsibilities between them in the performance of services. With IT environments being increasingly multivendor environments, all outsourcing and subcontracting agreements should contain provisions on the duty of suppliers to cooperate with each other. Otherwise, you could easily find yourself in the middle of a time-consuming supplier dispute.
In an outsourcing agreement, pay particular attention to the following:
- Changes in the customer's IT environment and legislation during the contract term. In the outsourcing agreement, carefully agree on the changes to the services that the supplier must make at its own expense. Preparing for changes during the contract term may also involve the customer having a right to terminate parts of the services or independent services during the contract term.
- Duration of the outsourcing agreement and determination of pricing. Many customers prefer a price lock between 2 to 5 years, during which the price of the outsourcing service cannot be increased. You should carefully agree upon the pricing mechanism and possible maximum price increase after the end of the price lock. Also, an important part of pricing is determining fixed-price and time- and materials-based services. Seemingly affordable outsourcing can become surprisingly expensive if much of the service is produced on a t&m basis and the fixed-price share of the total price of the service is small.
In some cases, it may also be justified to agree on a bonus/malus model, which better incentivises the supplier to commit to the outsourcing targets.
Tips for outsourcing and project management
The implementation of many outsourcing projects is nowadays carried out using agile methods, the management of which also requires active involvement and resourcing from the customers. In agile projects, you should pay particular attention to the drafting of provisions related to acceptance of the project and iterations (sprints), as well as a warranty period. In particular, agree on when the entire project is deemed accepted and when the warranty periods for the project and its iterations begin.
Pay attention to the ownership and transfer of intellectual property rights. This is of particular importance for iterations and unapproved iterations, as well as agreeing on how ownership and rights of use in these cases are allocated between the customer and the supplier.
In the implementation of the project, make sure that changes are documented appropriately and in accordance with the agreement. This ensures that the changes made and agreed on a project level have been implemented in accordance with the terms of the agreement, and that the contents of the agreement have not been implicitly changed in an unfavourable manner. Involve your lawyer in negotiating and documenting the changes well in advance.
The management of and planning for changes is also closely related to the governance of the agreement. In our experience, regular meetings with technical, operational and strategic management teams, as well as pre-arranged escalation processes, reduce the number of agreement disputes.