Tim’s article on the complexity of contracting exactly relates to what I’ve seen in outsourcing: a basic legal framework with innumerable details memorialized in hundreds of pages of schedules.  The schedules are drafted by technical experts who generally lack any understanding of contracting.  Consequently, Tim argues,

In IT, outsourcers often bid low initially in the belief that they will later be able to improve margins by exploiting the contract’s or customer’s deficiencies. The obvious point to make is that once the contract is signed, it’s set in stone unless both parties agree its variation. So, if contract development or negotiation is rushed, it’s guaranteed that many unpleasant and costly issues will arise after the paperwork has been signed.

Tim is dead-on accurate.  Many schedules, like service level and pricing schedules, are drafted by authors with very limited contracting experience and very often rushed.  These areas then turn into change orders (aka “death by a thousand cuts).

Tim’s article is a very worthy read.

Related posts:

1. Another Tale from “When You Don’t Have Vendor Management Governance”
2. Offshore Outsourcing Vendors, Customers, and Advisors: They Should Know Better
3. The Black Book of Outsourcing – Invaluable Resource or Red Herring?

Offshore Outsourcing Contractual Conflicts Never Payoff.

Today’s Dallas News included an interesting article on the State of Texas’ seven-year, $863M IT offshore outsourcing contract with IBM.  What makes it interesting?  The doom and gloom comments by the esteemed outsourcing advisors, Equaterra and Sierra Systems Group.

“In the final analysis, the current relationship is not sustainable,” the advisors say.  Then they suggest that the offshore outsourcing contract be rewritten by February.

The State’s alleged problem? Last year, governor Rick Perry said IBM failed to perform, “…the crucial backup of data for more than 20 state agencies.”  He then suspended the outsourcing project.  This year, EquaTerra’s commented that “…for some agencies, once a week backup may be adequate. For other agencies, where they do large volumes of transactions … it’s not adequate.”

Let’s be serious.  This is backing up data, which is arguably one of the simpler outsourcing tasks to perform and probably not worth $863M annually to perform. It is a minor task, something that should, if properly managed, be included in regular daily, weekly, and monthly reviews with IBM.  Why are the parties heading toward litigation?  It should have been resolved years ago.  Especially on a public contract.

Equally interesting, is EquaTerra’s suggestion that the contract be renegotiated.  This is a massive contract that was publicly bid and folks want to renegotiate it? This is exactly what vendors love to do.  Outbid other vendors and allow the requirements of the customer to drive renegotiation when the vendor’s knowledge of the requirements and negotiation leverage is significantly greater.  Of course, advisory firms love to play a role in renegotiation, so maybe fees are of interest?

We know of one situation where the vendors bid in a competitive process on a commercial contract for data entry worth $4M annually, deciding to not charge implementation fees.  After winning the contract, the client then issued over 150 change orders in the first three months of the project.  Total charges for changes: $1.5M.  Total increase to cost per transaction rates initially negotiated: 15%.  The percentage of service levels achieved in the first 3 months? 0%.  In Texas’s case, Grant Thorton has suggested the State of Texas has saved a mere $500,000, compared to the goal of $24M of annual savings.

What’s the problem?  Undermanaging offshore outsourcing vendors results in underperformance.  Advisors seek contract renegotiation as a means of resolving non-performance of contractual obligations.  Undermanaging internal stakeholders results in erosion on offshore outsourcing ROI.

You’ll never mimic Texas’s problem if you get it right up front, manage the vendor effectively, and govern changes.

Related posts:

1. Offshore Outsourcing Management – What’s the Problem?
2. Offshore Outsourcing RFPs: Are They Encouraging Copy and Paste?
3. Vendor Management Differentiates in a Commoditized Offshore Outsourcing Industry

“It’s odd that you can get so anesthetized by your own pain or your own problem that you don’t quite fully share the hell of someone close to you.” — Lady Bird Johnson

If a pound of carrots doesn’t drive outsourcing vendor performance, maybe a little pain will? Read on to learn how to structure service level credits to incent vendor performance.

Many services, outsourcing, and vendor management programs are governed by service level metrics and key performance indicators. When the vendor fails to meet established standards, they are financially penalized. This is a form of liquidated damages.

With little doubt, penalties in small quantities, as well as the threat of greater financial impacts, drive vendor performance. While not every vendor will be enterprising enough to strive for incentives, no vendor likes to forgoe margin. However, nickel and diming a vendor wont get attention. A structured performance management program will squarely drive root cause analysis and performance improvement, but a significantly sized penalty catches the attention of vendor account management executives and CFOs.

It is important to establish this structure in your contract before or during negotiations, as seeking penalties without a contractual framework is next to impossible. This part of negotiations is significantly difficult to resolve because questions of fairness, profitability, and integrity are frequently discussed.

Without any doubt, vendors price risk into their contracts. No vendor expects to achieve 100% of all service levels on a regular basis, thus they pad their profit margins to accommodate some performance issues. The most sophisticated vendors run probability models to determine likely impacts to their profitability, and they price this into their model. This is why vendors frequently ask clients for historic performance over the last 6-24 months. It helps them understand how much they must pad their margins (in addition to understanding the severity of the measurements or the desperation of the client to find a higher performing solution). Sharing this information can be hurtful and helpful – use judgment when considering the release of performance data.

Service level penalty/credit structures typically have the following key characteristics:

• Capped Risk – Unlimited risk is difficult for anyone to handle, so vendors will principally focus on capping the maximum payout for poor performance. The numbers range from 2% to 200% of weekly, monthly, quarterly, or annual invoice amounts. While it’s fair to exempt certain fees from being included in the invoice amounts (for example, travel expenses), almost everything else should be included as the fees are all supposedly tied to the performance of the vendor.
• Weighted Metrics – Undoubtedly, clients have a certain number of metrics they want measured. Since they have different values to the client, the client weights the metrics differently. This can be done by allocating a fixed number of points across the metrics or simply identifying different penalty amounts for each metric which reflects the metric’s importance. Clients who have too many metrics will find the penalties to be too small. A good number is between two and six. Remember to avoid “double jeopardy” situations where failure to achieve one metric causes other metrics to not be met (except in catastrophic situations).
• Accelerators for Significantly Poor Performance – In a black and white world, performance either meets or fails to meet expectations. However, a vendor who misses the goal by .01% versus 75% should be impacted differently. In addition, a vendor who consistently misses the same goal, should feel the pain level ratchet-up. Vendors will often offer termination for breach, but most companies aren’t going to terminate, as the switching costs are too high. As a result, clients need to include mechanisms that multiply the penalties until the problem is resolved.
• Excused Non-Performance – The vendor isn’t always at fault for failure to meet expectations. Either figure a way to carve the work impacted by a company or uncontrollable event out of the calculation or allow the vendor to be excused from a portion or the entire metric.
• Date When Penalties Go into Effect – Establish an effective date for each metric to ensure the vendor knows when the penalties will go into effect. Potentially ratchet them up to full strength over a period of time to ensure smooth implementations. Remember, a classic move by a vendor in the middle of implementation/transition is to ask for a delay in this effective date to accommodate learning curves. Generally, do not provide forgiveness, but a good alternative if the reason for the delay is not solely the vendor’s problem is to offer an earn back if the vendor achieves the performance metric one or two months late.
• A Framework for Change – As operations often change, as do their leaders, its important that clients reserve the right to change metrics as needed. Vendors would love to force this through change control, as it gives them a second opportunity to negotiate down the penalties. Good contracts allow clients flexibility to add and delete metrics, as well as change their relative weighting.

Lastly, one of the most important issues clients need to realize is that there have been many, many bad clients who swindle vendors into agreeing to performance metrics that the vendors could never reasonable achieve. These unscrupulous clients use service credits to receive discounts on the services. This is not fair and you should never permit this to occur – it destroys the foundation of a good client-vendor relationship.

Do you use other other methods of managing service level penalties or credits? Leave a comment!

Related posts:

1. Outsourcing Contract Incentives: What is a Pound of Carrots Worth?
2. Paying Outsourcing Vendors
3. Offshore Outsourcing Vendors, Customers, and Advisors: They Should Know Better

Do you wonder if contractual performance incentives work? These are the “bonuses” vendors get for exceeding service level agreement (SLA) performance targets or achieving certain milestones earlier than expected.

We do, too. Take the poll survey, view the results, and read our nine suggestions on how to make the best use of contract incentives.

There is a tremendous amount of academic and business research on economic incentives. Most of the academic research pertains to controlled environments too dissimilar to normal business situations to be applicable. The business research is non-conclusive and the authors lack sufficient objectivity. Therefore, you’re treading into generally foreign waters.

When you are considering incentives, keep a few concepts in mind:

1. Don’t offer incentives for “showing up”. Incentives should be offered for significant performance achievements. If the vendor has offered to do xyz, actually doing xyz shouldn’t earn an incentive. In fact, failure to do xyz should result in a penalty.
2. Understand the economics of the metrics. Incentives frequently do not make sense to offer. For example, a call center frequently tracks abandonment rates. Reducing abandonment rates frequently requires different workforce management ratios. The cost of these ratios frequently exceed the value of the incentive – so the vendor isn’t driven to achieve this incentive.
3. Use clear language. Just as with any metric, KPI, or transformational goal (we’ve authored articles on all three areas), clearly define the threshold and payment calculations. Check out the “$1 Million Comma” for an example of poor contract drafting.
4. Cap your exposure. Never, ever offer unlimited or undefined maximum payments to vendors. If there are multiple incentives, cap the aggregate at risk amount you have.
5. Use graduated incentives. Don’t offer a 5% incentive for exceeding normal performance by .01%. Offer gradually greater incentives for gradually better performance.
6. Consider penalty/credit earnbacks as an alternative to incentives. For example, consider a weighted yearly average of monthly performance metrics and be willing to credit a certain percentage of those credits if yearly performance exceeds certain targets.
7. Don’t offer incentives that drive perverse behaviors. Providing an incentive to a vendor to achieve a certain productivity goal may result in lower quality results. Consider using double barreled incentives to eliminate this from occurring.
8. Consider the magnitude of incentives. If a vendor expects a regular 10% profit margin on services and the cost of achieving an incentive is negligible, but it provides a 5% bonus on gross revenue, you’ve increased profit margins by 50%!
9. Track incentive payments. Use this information to understand the true cost of performance and to negotiate lower rates for same performance at contract renewal points.

If you have additional thoughts, share it with the ever growing readership of 360° Vendor Management by leaving a comment.

Related posts:

1. Outsourcing Contract Penalties: Do Vendors Respond to the Pain?
2. What Will You Do When India’s Tax Incentives Vanish?
3. Impact of Foreign Currency Exchange Rates on Outsourcing

One year from today, March 31, 2009, the Software Technology Parks of India tax scheme will sunset. When this happens, Indian companies will find their taxes increased from 10% to 20%. Depending on your specific contract terms addressing taxes, material changes, or other sections (talk with your legal team), vendor managers may be confronted with higher rates. What can you do to manage this?

First, some background information. STPI was created in 1991 to create tax incentives to stimulate India’s then-fledgling software export industry. It provides a combination of incentives, but the big incentive is the 10-year corporate tax exception granted to new organizations (Indian companies consistently create new organizations to restart the 10-year clock). Today, 95% of India’s software and BPO exports are subjective to this incentive. Exports are the services you are buying if you or one of your vendors outsourced work to a foreign country. Indian companies have been unsuccessfully lobbying the Indian government to extend STPI, but one never knows.

Whether it is next year or further in the future, the Indian government, given the social pressures of the country’s government faces, is clearly looking to cash-in on the enormous industry. This year, they introduces a Minimum Alternate Tax. They have also established Special Economic Zones (SEZs) that will will give tax incentives for fifteen years (100%, 50%, and up to 50% exceptions for each consecutive five year period). However, not ever Indian company operates in a SEZ, and it is unlikely will when STPI expires.

“If” is not the question, but “when” is. When it does, one thing is sure: the Indian outsourcing industry’s tax burdens will increase and they will undoubtedly look for you to pick-up the bill. More to the point, almost every country with significant ITO and BPO industries have similar tax incentive programs, and these governments will be carefully watching how India’s mature industry is monetized.

Here’s what you can do to mitigate your risk:

• Get more knowledgeable on this subject now. Talk with your attorneys, analysts and consultants. Do not wait for your vendor to “educate” you. There are many layers of taxes and your advisors will be able to separate hearsay from fact.
• Negotiate your pricing terms to reduce your exposure to changes in Indian taxes.
• Use the risk as another reason to diversify your offshore vendors and locations. Multi-location, multi-vendor strategies mitigate a wide variety of risks.
• Recognize that this change will not kill the Indian industry – it will just level the comparative costs among countries. India will likely become just as expensive as the Philippines.
• Adjust your financial plans now as you enter into 2009 budgeting and planning.

Other ideas? Other information about STPI or other incentives? Please share it by posting a comment!

Related posts:

1. Outsourcing Contract Incentives: What is a Pound of Carrots Worth?
2. The Philippine Outsourcing Dilemma
3. Impact of Foreign Currency Exchange Rates on Outsourcing

Most US clients have not budgeted for the level of increases they are now experiencing. Furthermore, the financial business cases associated with offshore labor can be shattered by dramatic price increases. Even if higher rates do reflect savings in comparison to US domestic rates, the multiple is no longer as advantageous…and with no end in sight, it is unlikely that US buyers are going to experience 1:6 savings again. 1:2 or 1:3 savings simply isn’t as appealing when one calculates the high cost of telecommunications, vendor management, and the risk a company assumes by outsourcing (which could cost millions to transition).

Most offshore vendors with experienced financial teams have deep experience in currency hedging, but few vendor managers do. Vendor managers should consult their treasury teams to seek a fast education on the available options. We aren’t financial advisors, don’t wish to offer you financial advice, and don’t make any recommendations. Get advice from the experts.

Keep in mind that most vendors do protect themselves from currency fluctuations. Consequently, don’t necessarily allow your prices float based on indices. Everything is negotiable, but also remember that your vendor will provide lower service if they are not profitable. Vendors track project profitability on a weekly basis and over the entire multi-year contract term. Remaining a strategic client means that your vendor must be profitable.

One element that all outsourcing executives should keep in mind is that labor arbitrage is a fleeting opportunity. Outsourcing should provide your company with significantly improved capabilities and performance. If you’re just outsourcing for cheaper labor, you are truly missing out on the greatest opportunity that outsourcing provides.

How do you manage currency risk with your vendors? Leave a note below or send us one.

Related posts:

1. The Philippine Outsourcing Dilemma
2. Human Resources Outsourcing: Where’s the Value?
3. Outsourcing Contract Incentives: What is a Pound of Carrots Worth?

1. MECE – SLAs should be Mutually Exclusive and Completely Exhaustive (MECE). By this, no two SLAs should measure the same thing, and there should be a SLA for every important aspect of the program. Too often we see SLAs that overlap, creating double jeopardy situations and misleading positive or negative performance reports. In addition, we often see important areas that are left unmeasured due to oversight.
2. Defined – Service levels must be thoroughly defined. For example, abandonment rate within a call center ought to be defined so that parties know whether blocked calls (trunk blockage), calls that terminate in the IVR, calls that terminate in the first 5 seconds (we don’t agree with this, but someone people do), or calls that answered by agents but are the “wrong number” are considered abandoned calls. Check this Q&A section out if you need some idea of how varied definitions are. If you don’t define the service level, you don’t know what you’re measuring.
3. Calculated – Even though you spend time defining service levels, you need to define any calculations. For example, if the service level is abandonment rate, the calculation should defined as “the number of Abandoned Calls divided by the total number of Offered Calls”. Where we use capitalized terms, these are predefined earlier in the SLA section. Vendors and vendor managers should never, ever be surprised by calculations. Give examples in your written SLAs.
4. Measurable – Don’t waste anyone’s time with SLAs that can’t be measured. For example, if you’re measuring customer satisfaction in a call center environment (typically done via a 3rd party after the primary call is concluded), but you don’t have the means to measure customer satisfaction (e.g., your call center doesn’t have the ability to use 3rd parties or your agents aren’t trained to collect satisfaction data), its a waste of time. Typically, angry customers will whip out unmeasurable SLAs and argue that vendors failed to achieve them, which is a huge waste of effort.
5. Easily Measurable – It’s one thing to measure something, its another thing to spend oodles of dollars to measure the same thing. If the cost of measurement doesn’t warrant the benefits of the SLA, don’t use it. The best example of this was a measure where customers call to complain about a bad transaction they’ve recently received in the mail. The vendor didn’t manage the call center, just the backoffice transactions. So, the call center needed to take notes on bad transactions and track them in a manner that allowed auditors to identify if the vendor was the cause of the bad transaction or not. Since the vendor only handled one of six steps in the backoffice process and the mainframe systems didn’t track transaction history, it was impossible to determine who caused the error without significant system modifications.
6. Time Frames – SLAs should cover a specific time period. Daily, weekly, monthly, quarterly, annually, etc. They should also only be assessed once. The example provided in #4 is a bad example of this, since customers could call to complain months after the transaction was completed, making it difficult to understand when to assess a month’s quality number. Essentially, the vendor would be in jeopardy forever, since a customer could complain at any time about a month – and every complaint would only lower the quality score, until the vendor had to pay penalties.
7. Singled Barrels – A SLA should contain only one measure, not two, three, or even four measures. If you’re SLA is “99% of transactions must meet quality standards and achieve customer satisfaction requirements” you need to track both conditions, which is nightmarishly difficult. In questionaire terminology, these are called double-barreled situations, and typically provide misleading or inaccurate pictures of operational performance.
8. Serve a Purpose – In some contracts, a minimum number of SLAs are required (to reduce the vendor’s risk, of course). That’s great when you need 3 or 4 SLAs, but what if you only need two SLAs and are therefore required to make-up another one or two to meet the contractual guidelines? These typically become “gimmes” and are a waste of time. Every SLA should serve a purpose.
9. Actionable – Every SLA should be capable of being influenced through actions of the vendor or the company. If the SLA can’t be influenced, don’t bother. A bad example may be measures of employee satisfaction with compensation in a HR outsourcing relationship, where the vendor has no control over compensation or employee /supervisor communication/training program. Since all employees will naturally dislike their compensation to some degree, the vendor has very little ability to create positive results.
10. Realistic – Look, we all want to be perfect, but those who belong to the cult of zero defects don’t understand contracting and real-life BPO and ITO. Achieving 100% of anything is simply unrealistic in most situations. Your goals can be aggressive (or evenly progressively more aggressive over time), but they should achievable.

We want to hear your comments! Let us know what you’re thinking by commenting below.

Related posts:

1. Outsourcing Service Level Agreements: The Monthly Close
2. Another Tale from “When You Don’t Have Vendor Management Governance”
3. Outsourcing Vendor Metrics

• Scope - One of the principle purposes of a SOW is to provide both the vendor and the client a high-level description of the work the vendor will provide – and the work the vendor will not provide. Remember, the vendor will be bidding on the work described within the SOW. The better authors avoid ambiguity and uncertainty in a SOW, the less risk vendor will “price” into their bid. Furthermore, it’s important that both parties know what they are supposed to do – a point that becomes incredibly important during discussions on material changes or when there is a contract dispute. I often ask the authors describe the transaction types and customers (internal or external) the transactions support in this section.
• Business Process - The purpose of describing a business process is to allow vendors to fully understand the work their agents will perform. Descriptions of business processes are generally medium-level, numbered outlines. Every action needn’t be described (leave that to the detailed design documents co-developed by the company and vendor). Swim-lane diagrams are a wonderful manner of clarifying tasks and processes – and they’re even better when each action is cross-referenced and elaborated in a sentence or two beneath each diagram. Be sure to define the service level expectations for each process. Consider quality, turnaround time, and backlog expectations. We’re going to blog an entire article on SLAs soon.Remember to include all processes. Frequently forgotten processes are vendor returns (the transactions vendors return to the company, typically because they are out of scope), exception processes, and reporting.
• Transaction Volumes - The purpose of describing volumes is to allow vendors to develop accurate capacity and staffing models. Describe the types of transactions and quantify them. Provide annual, monthly, weekly, and daily volumes. Be sure to depict accurately days when transactions are received and when they are not received, including weekends and holidays. All seasonal fluctuations need to be described. In addition, typical transaction processing should be included for each transaction type. You should expect that vendors will improve upon current productivity rates, but it gives them a good benchmark. Finally, describe any year-over-year expectations of transaction increases or decreases.
• Technology - Technology can be an enormous enabler, but it can also present limitations. Batch windows, system latency, and large high-quality, bandwidth-hogging file transmissions can cause tremendous challenges in an outsourcing relationship. In addition, system stability can be a key issues – especially when its the company’s system that’s hampering a vendor’s productivity [gasp!].Describe every system that will be used and the corresponding desktop PC and bandwidth/connectivity requirements. Provide physical and logical system infrastructure diagrams that show how systems connect. Where interfaces are required, describe the file formats or real-time interfaces. Finally – if systems don’t exist, be sure you say so…Remember, vendors’ capital investments are critical to calculating pricing and setting your implementation time frames. Spend time to get this correct.
• Responsibilities - I’m not an attorney, but I can’t count the number of times that lawyers have stared dumbfounded at vendor and clients’ writing and asked, “Okay, so who is going to do this?” Contracts and SOWs are the exception to the rule that there is no “I” in “Team”. SOWs should contain no “We” or undefined responsibilities. Each party should know what they are going to do, including who is going to write training manuals, deliver training, provide training facilities, provide systems and PCs, etc. The absolute last thing you want is for either party to say to the other, “I thought you were going to do that.”
• Contractual Language and Cross-References - SOWs should be subject to contracts, so don’t replicate language in each place, otherwise you’ll just create unintentional conflicts in language. The best example is term of the contract versus term of the SOW, including termination rights. Try to avoid conflicts and just point to the contract, and leverage terms that were defined in the contract. Consult with your lawyer…

Related posts:

1. Scheduling: One Reason Outsourcing Deals Fail

The most interesting dynamic is that the vendors have negotiated many more deals than customer has – and they’ve managed many relationships, so they know where the risks are and what your pressure points are. Most operations people spend the bulk of their time managing internal functions and politics. Maybe you have experience buying cars or homes. Outsourcing deals are nothing like this type of transaction. If possible, find an outsourcing pro to assist with negotiations. What follows are considerations if you are budget strapped and fool-hardy

Know What You Have and Fear Material Changes – The number one issue buyers should manage is being sufficiently self-aware to know what you know – and to know what you don’t know. There are so many processes, procedures, and exceptions in today’s operations areas, its difficult to know them all. In addition, there are areas where good performance is challenging, season volumes ebb and flow, and your customers’ needs are the exception to the rule. It could take 2-3 months to document everything. Do it and do it well. There are two reasons for this. First, experienced vendors know that their customers always have skeletons in their closets and that they cannot come hat in hand begging for price increases for each one. So, they inflate pricing to give themselves contingency. The less risk vendors have to take, the lower the price you will need to pay.

Second, any major change to an assumption (e.g., systems that won’t work internationally, customers who refuse to allow you to process their transactions overseas) will become a Material Change. Material Changes can carry significant price increase, and always open the door for vendors to renegotiate pricing. Throughout the duration of the contract, vendors will actively defend their profit margins by requiring price increases for any Material Change, such as wage inflation, system changes, new training requirements, etc. Think about it. You’re going to have to have a Material Change anyway, but why open the door for them early in the process when internal acceptance of outsourcing is at its weakest point?

Performance Expectations – Commonly referred to as Service Level Agreements, performance expectations can encapsulate day-to-day performance requirements of the program, as well as planned milestone achievements (e.g., on-time implementations, system conversions). Every performance expectation should be very well documented, quantifiably measured, and carry incentives/penalties for performance. The biggest mistake beginners make is to exclude key expectations. The second biggest mistake beginners make is define a performance expectation that cannot be measured.

A quick word on incentives and penalties: while you clearly cannot expect a vendor to lose 100% of a program’s revenue for every failure, don’t have too much sympathy for your vendors. Profit margins in this business are fat and you shouldn’t allow your vendors to think of your program as an annuity with guaranteed profit margins. That’s not how you view your business, and it shouldn’t be viewed differently by your vendors. Make your expectations clear up front, and don’t back down.

Give Vendors Incentives to Manage Your Risk – Contracts, in a large part, are about managing risks and rewards. If you’re handing over your call center business to a vendor, and they now have access to extremely confidential types of customer information, you are at risk. Vendors will attempt to limit their risk, typically to some portion or multiple of anticipated annual fees. However, what happens if a breach of confidentiality occurs, which results in a class action law suit? Such cases could have legal fees that equal your annual vendor invoice amounts alone, and carry penalties many times more than this. Who pays for this? This is why you need a good lawyer, experienced with outsourcing, to assist and advise you. Whatever you do, don’t take everything your potential vendor has to say at face value. Just like any politically biased journalist, the message contains a twist.

Vendors need to have sufficient skin in the game to put necessary controls in place to prevent a catastrophe. What incentive does a vendor serving a mega-international bank have if their liability is limited to $250,000? The cost of notifying your customers of a breach of confidentiality could exceed this many times over if you consider just postage and printing costs. What about potential lawsuits or regulatory fines?

Give Yourself An Out – Times change, people change, and businesses change. Experienced outsourcing professionals understand that relationships evolve and that deals must be sufficiently flexible to support change. One such consideration is termination for convenience. Again, vendors want predictable revenue and to protect their employees (and their companies’ reputations in the local job marketplaces and regulatory environments). However, don’t fall for guaranteed minimums or huge payments. Termination for convenience should always be priced at a sufficiently high price to avoid impulse decisions and to make the vendor reasonably whole, but keep in mind that the outsourcing business is growing fast, which allows vendor employees to be allocated to other projects, given sufficient notice and planning.

No matter what you negotiate, leave absolutely no ambiguity or placeholder. A specific amount of money and a required minimum notice provision should be included. I terminated one outsourcing relationship that was negotiated by an attorney many years prior, and the language didn’t define the specific amounts to be paid. Instead, it allowed the vendor to calculate the amount of unamortized investment it had made in the account. Pretty soon after our letter was received, the vendor provided a very, very lengthy list of investments (including sales incentives given to salespeople!). Of course we negotiated the outcome, but the situation could have been avoided altogether with some forethought.

This is a snippet of what beginner buyers should consider. As always, work closely with your legal counsel and consult with a professional if at all possible.

Related posts:

1. Outsourcing Contract Penalties: Do Vendors Respond to the Pain?
2. Outsourcing Contract Incentives: What is a Pound of Carrots Worth?
3. What Will You Do When India’s Tax Incentives Vanish?