The client’s perceived risks

During the early outsourcing discussions it is only natural for the client’s management to have serious doubts about the desirability of transferring key business areas to a third party. Some of these doubts will be viewed as real risk areas, others will be seen as relatively vague concerns that may or may not come to represent a real problem.

What do we do if we want to take the service back?

The answer, as far as there can be an answer, is to build an exit strategy into the contract. The exit terms open to the client will depend to a very large extent on its own negotiating power and how keen the service provider is to secure the business.

Any worthwhile exit strategy will need to put the client back in a position to carry on the business without disruption. Therefore, if the people, equipment and property have been transferred then the exit strategy should either allow for them to be transferred back or alternative arrangements made. Both parties need to be particularly careful where property is being transferred if the provider is intent on using the site for other clients’ business. It is also worth stating that even where the contract allows for the return of the staff, the chances are that they would prefer to remain with the provider and as a result some disruption might result.

What happens if the service provider is taken over or merges with another company or goes bust?

Any client organization considering outsourcing its finance and accountancy to a member of the Big Five must give this matter serious consideration. No one expected that the recent merger between Price Waterhouse and Coopers & Lybrand that formed PricewaterhouseCoopers was going to be the last example of consolidation between this group of large firms. But few outsiders really expected the sale of Ernst & Young’s consultancy division to Cap Gemini to take place and at the time of writing several others of these large firms are considering splitting off their consultancy operations.

We used to argue that the worst scenario in outsourcing finance would occur when the client’s service provider merged with their audit firm. In this eventuality the client would either have to find a new service provider or a new auditor and for reasons stated elsewhere, it is reasonable to expect the accountancy firm to offer to give up the audit in such circumstances. However, if the Ernst & Young example becomes the norm, then this potential problem would disappear because it is invariably the consultancy divisions of these large firms than provide the financial outsourcing services.

The major IT service providers such as EDS and CSC are all growing quickly and many have been in acquisitive mode in recent times, particularly in buying firms of consultants. In the circumstances it would be surprising if further mergers and acquisitions involving them did not take place in the near future. Generally speaking, the outsourcing market has been as prone to mergers and acquisitions as any other industry and one must expect some more activity as potential providers seek opportunities for growth.

A service provider involved in such a merger will need to make extra efforts to ensure that the service level is maintained and communication with the client treated as a major priority. However, a merger or acquisition is not predestined to seriously affect the relationship because in all probability the same people on the client’s side will still be dealing with the same people on the provider’s side and most of these are likely to have transferred from the client.

Not all service providers are blessed with top quality management and they are not immune from the range of problems facing other types of businesses, such as making bad decisions or enduring bad luck. Service providers can, therefore, collapse leaving their clients in trouble. It is to be hoped that, in most cases another provider will step in quickly to pick up the pieces. Nevertheless, the clients are always going to suffer in such circumstances and this factor alone justifies the careful study of providers even before they are short-listed.

Will the service be flexible enough to cater for major changes?

The addition or loss of business due to acquiring or selling divisions or whole companies will usually require a great deal of extra effort and creativity to manage whether the service is outsourced or not. In the traditional business environment the future uncertainty of such changes to workload is such that planning for their eventuality is largely ignored.

In an outsourced situation, however, the client can request that unexpected business demands be allowed for. For example, it might be written into the contract that the agreed service level would be maintained and charged for at a proportionate rate, even if the workload increased or decreased by say 20 per cent. The necessary terms to ensure that this happens will need to be spelt out in the contract. In addition the spirit behind this approach should be written down and form part of the management culture.

It may appear unfair that allowing for these unexpected business demands should form part of a contract when the client would not be in a position to obtain the same benefits if the service was to remain in house. However, the service provider will be in a completely different situation as regards potential business growth. This will be particularly true if the provider can see the service growing on the site from other developments with other clients.

Disrupting business during the transition to the service provider

The transfer must carry with it the risk of disruption to services and this will be particularly so when other major changes, such as implementing new ERP systems, are being carried out within the transition period.

In order to reduce the chance of this happening both parties must carry out their own risk assessment studies, although this could take the form of a joint pre-contract risk assessment. However, when the risk assessment is carried out it should result in an implementation plan that identifies all the really important events along the way. This plan should clearly illustrate the nature and quantity of the resources that will be required and highlight, for all to see and understand, the phased transfer of functions or processes. Overall the plan will need to allow, as far as possible, for unexpected business demands. Any element of the transfer that looks ’tight’ should be analyzed in detail and every opportunity pursued to ease the timing.

The senior management of both parties will need to be particularly observant and supportive in organizational matters during the transition period.