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Designing Flexible Outsourcing Contracts

by: Admin

Friday, June 4, 2010 |

Flexible Outsourcing Contracts

There are many outsourcing and offshoring buyers that will lock a deal with a service provider and fail to account for the changes that are bound to occur throughout the partnership. Throughout its development, the outsourcing industry has gone through a variety of different phases. The first phase was typified by long-term IT outsourcing. As the industry aged, however, these “mega deals” are now replaced by best-of-breed, multi-sourcing, and offshoring. Throughout its life span, however, the factors that can create changes in an outsourcing partnership remain the same: economic, social, technological, environmental, and legal.

Whereas the scope of contracts once reached as much as 10 years, business decision cycles nowadays are much shorter. There are budget cycles subject to mid-year revisions, and strategic plans are revised for quarterly reporting. Tactical plans can change monthly, weekly, and even daily. As such, it is critical, now more than ever, that an outsourcing/offshoring contract is flexible enough to adhere to such changes.

So how do we identify a non-flexible contract? The main reason for the inflexibility of an outsourcing contract today is the discomfort that surrounds an ambiguous business partnership on both sides. The customer wants to receive a specified outcome, while the supplier wants to set in stone exactly what is to be delivered and it will generate profit. It is therefore not enough that a contract be flexible, but it must also be able to guarantee that the partnership is mutually beneficial.

So how is a flexible outsourcing contract designed? There are many things that service providers can do to incorporate flexibilty in their contracts. If, for instance, a large contract is involved, it can be split into multiple elements, allowing each to be addressed and modified separately. With the proliferation of global-centric offshoring providers, it is also possible to use more than one supplier - creating an opportunity to benchmark. You could also shorten contract terms, or provide break clauses, enabling services to be retendered more frequently.

Among the key elements of successful outsourcing and offshoring contracts are effective governance, gain-sharing, market testing and benchmarking, and break-clauses. Another area that may be overlooked at times is the contract's ability to factor in publicity. There are many publicly held views that hold outsourcing and offshoring in a cynical light. This can adversely harm a buyer's reputation with its customers. At the same time, the service provider's ability to prove itself capable of delivering maximum return on investment to other prospective customers requires such disclosure of the buyer-supplier relationship.

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