Value added partnership

At a time of unprecedented change there are obvious problems in setting rigid contracts. How can any organization be certain enough of its IT requirements over a four or five year contract? How can anyone be certain that the desktop equipment currently in use will not be out of date in just two or three years’ time?

Nevertheless, I accept that there are a small number of client organizations who will feel that the function or group of processes to be outsourced is pretty stable – nothing much has changed over the last ten years, why should it change over the next ten? Where there is such confidence that change will not be a problem, then and only then, should a client organization contemplate a rigid contract. For the vast majority of situations, however, the outsourcing will take place in an atmosphere of future uncertainty.

Of necessity then, outsourcing arrangements ought to be flexible enough to allow for accelerated change, whether that change comes from technology, market changes or the client organization’s market share.

The value added partnerships all have one thing in common – the ’risk/reward’ element. Some of the very early outsourcing deals were so rigid that they allowed for almost no change to take place during the life of the contract. This enabled service providers, who may have been working on very tight margins to increase their profits significantly when charging for extras. Clients, who because of acquisition or growth in core business asked the provider for 20 per cent more work and expected a 20 per cent increase in charges, were often outraged when providers wanted to increase the charge by 50 per cent or more. Typically, independent assessors used to estimate the fair additional cost to be somewhere between the warring parties’ own estimates. Obviously, change is not just something that happens as a result of growth or acquisitions. Consequently, extra and special tasks are part of the outsourcing service provider’s lot and payment for these tasks can be a very delicate issue.

In theory, risk/reward partnerships enable the client to offset the risks implicit in a rigid contract by offering the provider a deal that restricts increases or decreases in charges to some pre-agreed formula in exchange for a share in measurable improvements that the provider makes to the service. In reality, human nature being what it is, the service provider often strives to remove most of the risk and the client does the same with the reward. For that reason not all risk/reward contracts achieve what was originally intended.

Nevertheless, for an outsourcing to be successful in both the short and long term, the service provider must be offered a carrot as well as a big stick.