Gartner: Outsourcing Contract Tips Offered at Risk Conference

Outsourcing involves several elements of risk that can be very costly unless they are addressed at the negotiation stage between the company and the firm it is hiring, Gartner Research Vice President Helen Huntley said at the Gartner Compliance & Risk Management Conference in Chicago Monday.

“Seventy-five percent of the time negotiating outsourcing contracts is spent dealing with matters involving risk,” Huntley said. “When assessing any liability from outsourcing, make sure that it is relevant to the risk that you are assuming.”

Sometimes the actual risk from the outsourcing contract may be much greater than a firm initially realizes due to poorly defined contract specifications, unclear or improper language or unclear contract expectations.

Major areas where risk is transferred from service recipient to vendor include benchmarking, performance metrics, audits, termination and disentanglement, incentives and penalties, and identification and use of key personnel/subcontractors, said Huntley. “This comes at a financial cost in the deal, and it is critical to negotiate and document the agreements in the final contract. Both sides of the deal must clearly understand the transferred risk and obligations that form the outsourcing agreement.”

Therefore, both sides should consider before entering a contract not only their own expectations but those of their contracting partner, Huntley said.

The primary risks for the contracting firms are over-paying for services; dissatisfaction with service delivery; misunderstanding items or services included or excluded in deal; adaptability of the contract as business needs change; and provider inability to perform.

The risks for outsourcers include incorrect baselines by the client; lack of clarification of client expectations causing dissatisfaction with the outcome; and lack of appropriate retained client staff to handle deal responsibilities.

Items like each party’s responsibilities and liabilities for unmet contract outcomes need to be specified, Huntley added.

“It critical that the contract is negotiated thoroughly and that the written contract is explicit in terminology, conditions and expectations,” Huntley said. “The contract should also include definitions, levels of service, hours of support and similar items of importance.”

Huntley further recommended that service recipients use their own contracts as a starting point and control all document edits, while requiring the vendor to provide comments or proposed changes in writing.

“Avoid starting contentious negotiations until absolutely necessary, and try to keep the negotiations process productive,” Huntley added. “Keep a separate list of issues for negotiation and approach them systematically.”

Among best practices in negotiating outsourcing deals, according to Huntley, is knowing what a company truly needs and what it is willing to negotiate; and building a strategy for each risk element before heading to the negotiating table.