| ""One of the biggest problem areas for deals | | | | in both sides and are they the right ones? Having |
| gone wrong is that advisors have squeezed | | | | said that many customers, especially right now, |
| perfectly sensible commercial arrangements to fit | | | | start a discussion with suppliers with the absolute |
| the kind of model they are used to. Too often, | | | | idea of reducing cost. And advisers understand |
| that means a fixed price model for a fixed price | | | | that goal – it's easy to write down, and a lot |
| service; which can lead to all sorts of trouble."" | | | | of deals have been structured that way before, |
| As the markets adjust to the new economic | | | | so they can just "crank the handle" on their |
| reality, what has the impact been on outsourcing | | | | documents. The trouble is, if you start a |
| contracts? In the first part of a two part series, | | | | discussion on reducing cost, you inevitably force |
| SSON speaks with Richard Cumbley, Partner, | | | | yourself down a route based on a fixed price or |
| Technology, Media and Telecoms, Linklaters LLP, | | | | fixed saving contract ("because I want my cost |
| London | | | | saving, I've put it in a powerpoint presentation to |
| SSON: Richard, over the past year it seems that | | | | my boss" says customer) and a fixed scope |
| outsourcing contracts have become longer and | | | | ("because it's the only way I can deliver that |
| more complex. Is this really necessary? | | | | crazy saving you want" says supplier). So every |
| Richard Cumbley: A great question. And no, we | | | | time you, the customer, want to make changes |
| don't need complex agreements at all! Certainly as | | | | to the service — and you will — more costs |
| far as Common Law jurisdictions go — the US, | | | | are incurred — above the number you |
| Canada, Australia, UK, Ireland — we constantly | | | | committed to your boss. So as a customer, if |
| see contracts being signed, which don't entail | | | | your mindset is on reducing price, incurring extra |
| three- or four-hundred page agreements. But you | | | | costs does not bode well for the health of the |
| need to think about why they can do this: It's | | | | relationship. You risk setting yourself up to fail |
| because throughout the process of | | | | with this approach. |
| implementation of these agreements, no one has | | | | SSON: So, what's the solution? |
| a leverage advantage over the other. The | | | | RC: Well, you need to reassess the initial |
| moment you construct a deal where one side | | | | discussion. In terms of getting to simpler |
| does have such an advantage, the other will | | | | contracts, a first step is to try to get beyond the |
| demand protection — and reams of paperwork | | | | idea of "I just want to save money," because |
| to support this protection. Put differently: if a | | | | that will lead only to fixed process/fixed scope |
| provider has spent millions on a pitch process, and | | | | contracts which are recipes for conflicts. So you |
| is funding some of the initial operation up front, | | | | need more meaningful metrics, to get at the real |
| they are vulnerable and will require protection via | | | | economic drivers of a deal and the behaviors you |
| a contract. | | | | want to promote. |
| Big outsourcing deals can mean 10 million dollars | | | | An interesting question for a supplier to ask a |
| for the pitch and another 40-50 million dollars | | | | customer in the first meeting would be: "Tell me |
| spent on the transition, never mind what a | | | | what success looks like to you." If the answer is |
| supplier has to spend on buying assets from the | | | | "cheaper price," then the next question should be: |
| customer. At that point, the supplier is completely | | | | "How will that happen?" Suppliers often shy away |
| in the customer's pocket and needs to protect | | | | from that question because it suggests they don't |
| himself. Similarly, if a customer sells all his assets | | | | know something about how to do a deal, but |
| to the suppliers, say in an IT or accounts payable | | | | there's no harm in asking! On a BPO deal, the |
| (AP) outsourcing deal, he'll want to know that at | | | | customer often translates cost savings into |
| the end of the arrangement he has the right to | | | | generating efficiencies out of your FTEs. So, |
| buy them back. If he can't buy them back he | | | | rather than having 50 FTEs processing 500 |
| potentially has no AP function! | | | | invoices a week, you'll have 25 FTEs processing |
| If one party does have an economic advantage | | | | the same. So make that a definition of part of |
| at any point, then the contract snowballs. | | | | the service, a generator of revenue benefits. In |
| Customer says, in the above example, "I need to | | | | other words: Scratching away at the surface to |
| be able to buy assets back from you at the end." | | | | find out what saving money really means can get |
| Supplier says, "OK, but how do I know I will get a | | | | to much more meaningful metrics than just |
| fair price?" Customer can't say "we'll agree" | | | | "price." |
| because what happens if the supplier doesn't | | | | If you do fall into the fixed price/fixed scope |
| agree, and the customer has no assets? So | | | | arrangements, recognize that you will want to |
| instead he says, "my advisors have prepared a | | | | change and buy yourself some "free change" as |
| short asset valuation schedule which I know | | | | part of the contract. In other words: give yourself |
| you're going to just love . . ." | | | | a margin of error – say x number of changes |
| So the balance of economic position between | | | | worth say 5% of the revenue as "free change." |
| both parties is key — the extent to which one | | | | Change is inevitable, so don't pretend your service |
| party is exposed to the other. If you can build a | | | | scope will be the same for five years. |
| deal where no party is ever disadvantaged | | | | Something else we are doing a lot more of now, |
| significantly, even during transition and exit, then | | | | than four or five years ago, and which has really |
| your contract can be pretty short. Where that's | | | | helped improve supplier relationships is |
| not possible, and contracts do snowball, that's not | | | | multi-sourcing. Customers are setting themselves |
| the supplier's fault, or the customer's fault, or the | | | | up with two or three suppliers, which creates a |
| adviser's fault. | | | | constant competitive force and puts less pressure |
| SSON: Doesn't that imply that it's always the | | | | on signing really long, complex contracts. It |
| commercial models that drive deal complexity? | | | | creates good economic drivers and behaviors. |
| RC: OK! OK! I take the rap for my profession. | | | | Relationships are fresher as a result of this |
| Every deal is different and every commercial | | | | approach, and tend to be more flexible. The |
| model is different – which ought to mean the | | | | downside is it tends to cost more to set up these |
| way each agreement is structured ought to be | | | | multi-sourcing contracts, but the costs are made |
| different, too. But you're right, one of the biggest | | | | up over the life of the agreement. A good |
| problem areas for deals gone wrong is where | | | | example was Vodafone's applications development |
| advisors (not just lawyers) have squeezed | | | | deal, last year, for global applications support with |
| perfectly sensible commercial arrangements to fit | | | | both EDF and IBM. It gave the company more |
| the kind of model they are used to. Too often, | | | | flexibility to pick and choose. |
| that means a fixed price model for a fixed price | | | | SSON: what about length of agreement? 10-year |
| service, because that's the approach most | | | | deals used to be the norm, especially given the |
| advisers know best; which can lead to all sorts of | | | | significant costs involved with pitching and |
| trouble. And advisers, by and large, are turning to | | | | transitioning. Is this changing? |
| those long fixed price/scope deal documents they | | | | RC: Yes, we are definitely seeing fewer long deals |
| have used before for their next deal, for the best | | | | now; five years tends to be the norm. Given so |
| of reasons – drafting a document for a client | | | | many changes in the industry, neither side is keen |
| is much cheaper if you simply change the names | | | | to pin themselves down for longer anymore, so |
| on a deal document you have used before, rather | | | | five years seems to hit the sweet spot. I haven't |
| than spend five or six weeks really working out | | | | seen a deal past 10 years for a long time in the |
| how the client's commercial model might work | | | | private sector. |
| best. And the adviser can say to their client, "look | | | | _ |
| how little money you have spent drafting this | | | | This article was first published on the Shared |
| agreement, but look how long it is and how | | | | Services & Outsourcing Network (SSON) - |
| quickly I have produced it for you!" In an ideal | | | | Read it here: |
| world, a client would say "I don't want your | | | | About The Shared Services & Outsourcing |
| precedent deal document you have used 50 | | | | Network (SSON) |
| times before Mr. Advisor, because my deal is | | | | SSON is the largest and most established |
| unique, and I'm going to invest in creating the right | | | | community of shared services and outsourcing |
| deal document up front because it will save me | | | | professionals, with over 25,000 members. |
| $millions more over the life of the contract." | | | | SSON provides the roof under which key industry |
| SSON: So, should we be pushing for simpler | | | | experts and organizations share their experience, |
| contracts? How do we get there? | | | | knowledge and tools, and practitioner peers |
| RC: There's a mind set that needs shifting – | | | | connect with other all over the world, both face |
| cost vs. value. Drafting a short agreement, unique | | | | to face and online. |
| to a deal's commercial model, requires an | | | | SSON focuses on developing its members through |
| investment by clients up front. That costs more | | | | providing training, tools, and networking |
| in the short term, but delivers massively on value | | | | opportunities. SSON staff works from international |
| over deal life cycle. So invest time and money in | | | | offices in New York, London, Singapore, Sydney, |
| working through your commercial model with your | | | | Berlin and Dubai to research current trends and |
| advisers and helping them draft an agreement | | | | developments in shared services. |
| that really works for you. In particular, clients and | | | | More information visit the Shared Services & |
| advisers need to work through the economic | | | | Outsourcing Network (SSON) website. Stay up to |
| drivers of deals: what behaviors am I motivating | | | | date with SSON's latest twitter posts at twitter. |