Cross The T's And Dot The I'sCross The T's And Dot The I's

Most companies that outsource IT operations or business processes expect to cut operating costs. But the potential savings can quickly evaporate if they fail to effectively manage the relationship with their services vendors.

"A thorough contract is how you maintain leverage with a vendor," says David Guzmán, CIO at medical-supplies distributor Owens & Minor Inc., which outsources the bulk of its IT work to Perot Systems.

Executives with experience managing outsourcing relationships agree that services contracts should be as comprehensive as possible to prevent time-consuming and possibly expensive disputes once the contract is in effect. The first choice is between fixed or variable pricing for the services provided. Owens & Minor insists on fixed, and therefore predictable, pricing for basic services such as routine infrastructure services, application maintenance, and software development, Guzmán says. The fixed price should be based on industry benchmarks that are widely available from consulting firms, he says. For more strategic services, such as a transition to Web-based customer service, Guzmán says the contract should specify prices based on business outcomes, such as the number of customers served.

A broad IT-services contract also should stipulate the circumstances under which a specialist organization can be brought in to perform a subset of work. Owens & Minor reserves the right to bring in a separate contractor for its radio-frequency identification work. "It's a way to ensure we can always get the cutting edge," Guzmán says.

Others say an effective contract should spell out in writing the gains the customer expects to achieve through the outsourcing relationship. "Many of our contracts specify that there has to be a 10% productivity gain for each year of the contract," says Steve Morrison, director for Global Delivery Centers at outsourcing pioneer General Electric Co. Morrison advises, however, that outsourcing buyers hoping to reap big productivity gains give their vendors the tools to be successful. GE, he notes, provides employees of its services vendors with basic training in GE's Six Sigma quality-control program. "We then expect them to implement that in their own organizations," he says.

With the growth of business-process outsourcing, legal experts say that the scope of what's specified in an outsourcing contract needs to expand. What differentiates most BPO relationships from typical IT-outsourcing deals, they say, is the fact that the BPO provider will often take control of sensitive customer or employee data. As a result, additional safeguards need to be added to the contract. "When you think about BPO, think about liability," says William Bierce, an attorney and partner in Bierce & Kenerson PC. Bierce says a BPO contract should specify which party is liable if a customer's or employee's privacy rights are breached.

Others note that the contract should specify the extent to which a vendor can adapt the process to fit its own service capabilities. Robert Zahler, an attorney with Shaw Pittman LLP, says BPO vendors want to apply a cookie-cutter approach to the services they take over. "That's how they make money, so you really have to decide if you want to give the vendor a free hand to change your business process," Zahler says.

The bottom line is that a solid contract anticipates most of the contingencies and specifies how they're to be dealt with. Linda Cohen, a research director at Gartner, says most organizations still fall short when it comes to effective contract management. Says Cohen, "In a lot of companies, it's still the missing link."