How to Negotiate a Collaborative Outsourcing Deal

You say you want more from your IT outsourcing service provider, yet you fall back on the same old negotiating tactics. To find out how to develop a more collaborative relationship with service providers, CIO.com talked Kate Vitasek, who wrote the book on the subject.

IT outsourcing customers say they want more from their service providers. Yet they often use the same old negotiating tactics to set up their outsourcing deals.

Kate Vitasek
Kate Vitasek, author of "Getting to We: Negotiating Agreements for Highly Collaborative Relationships."

If you want a more collaborative relationship with IT service providers, it has to start at the negotiating table, says Kate Vitasek, author of "Getting to We: Negotiating Agreements for Highly Collaborative Relationships," based on research conducted at the University of Tennessee Knoxville.

CIO.com talked to Vitasek about what's driving the need for more collaborative outsourcing relationships, how traditional negotiating tactics destroy value, and how to set up an IT outsourcing deal that benefits both customer and supplier.

CIO.com: You introduce the concept of "vested" outsourcing, in which customer and supplier are equally committed to each other's success, several years ago. Have outsourcing relationships become any more collaborative since then?

Kate Vitasek: Collaboration is certainly an often-heard buzzword these days, and I believe collaborative outsourcing relationships are gaining traction. A recent Gartner analysis (which focused on outsourcing in the logistics sector) said that by 2017 about 20 percent of logistics outsourcing will use collaborative, value-based relationship principles, up from about 10 percent today. That is a strong and encouraging growth curve.

[Related: How to Close Your Next IT Outsourcing Deal: Handshake vs. Contract]

Is the same kind of growth also occurring in the IT realm? I don

Is the same kind of growth also occurring in the IT realm? I don't have hard data or an analyst's prediction to point to. But I can say that we are seeing a great deal of interest in our work in the IT sector with people taking either our online or in-person courses in the University of Tennessee's Vested Certified Deal Architect program.

CIO.com: What are the biggest hurdles to establishing more collaborative IT outsourcing deals?

Vitasek: Funny you ask because I do a great exercise on this exact topic in our courses and when I speak at supplier summits or customer forums. Overwhelmingly the number one answer to your question is "trust," or more appropriately a lack of trust.

It's sad. Why do companies outsource if they can't trust their supplier? If they need to change suppliers, they could do so. But what we find is that they don't trust any suppliers.

Lack of trust was something that plagued Dell in their outsourcing relationship with GENCO, which had managed Dell's North American reverse logistic operations for eight years. The two decided to have a strategic meeting in a neutral location to discuss their lack of trust and what was causing it.

Tom Perry, GENCO president of reverse logistics, said, 'There was a moment of truth in that June meeting. I did not want to proceed because I didn't have enough trust to move forward.' But his colleagues convinced Perry to stay the course. Perry is glad he did: 'I had an epiphany. If you can't get past absence of trust, you can't ever make it work. I can't say enough about how that's changed everything.'

One of the things the Vested team at UT has done to help companies address trust issues is to create a compatibility and trust assessment. It's an anonymous survey taken by the buyer and supplier and the results are shared in facilitated workshop. It helps pinpoint the magnitude of the trust issues companies have and what types of behavior are driving the mistrust.

Companies that have addressed their trust issues straight-on have had a great deal of success is working through them. It's often an issue of perception versus reality.

CIO.com: Your latest book, Getting to We, is about negotiating collaborative outsourcing agreements. How important is it to be collaborative with service providers from the very start?

Vitasek: One of the biggest roadblocks we see companies encounter when trying to create a vested agreement is understanding that they need to use a different mindset for negotiating. When you stop and think about it, it makes sense that highly collaborative relationships need different negotiation rules.

The whole concept of the book was born when I was sitting in a conference listening to a Fortune company share their "negotiations" best practices, which involved strategic gamesmanship to basically screw over their suppliers at the 11th hour. How can you have a trusting relationship when you are using negotiations tactics such as 'good cap, bad cap' and 'bluffing'?

CIO.com: What's the typical or traditional IT outsourcing deal negotiation like and what's wrong with it?

Vitasek: I'm not sure there is a typical or traditional outsourcing IT deal negotiation. Each deal is different based on the parties' prior experience, current market conditions, corporate cultures and what they want to accomplish.

Having said that, I have found three major problems with most outsourcing deals.

First, they remain stuck on old-school, highly legalistic, I-win-you-lose contract terms that seek the lowest price while shifting risk and avoiding liability.

Second, companies rely on a conventional transaction-based business model rather than using more collaborative and flexible outcome or investment-based sourcing business models that will best meet their business needs.

I call this the 'activity trap:' we get caught up in negotiating over the cost of activities and forget that real business value comes from solving true business problems like reducing transactions altogether through automation, reducing the overall total cost of ownership, or improving market share. We miss the big picture when we are focused on buying activities instead of business outcomes.

Third, they fail to lay the foundation for the relationship before they begin negotiating the deal points. It is imperative that you negotiate the essence of the relationship before you begin to negotiate the specific deal points.

CIO.com: Why should customers and suppliers approach the negotiating phase differently?

Vitasek: I think a better question is, 'Why not?' Business people have three basic ways to think about value. Most think about value exchange as the result of a competitive bid process and settling on a market price where they give the supplier one dollar for a unit of service.

In some cases, companies focus on value extraction by using their power and leverage to get the same unit of service for 80 cents. In both cases, they are losing sight of the potential to create real value. A better approach should be to ask, 'How can we work together where I optimize my one dollar to drive efficiencies, effectiveness, market share, and cost reduction, and create 50 cents in additional value we didn't have before?'

In today's era of constrained economic and financial resources, it's more important than ever to find the right business partners -- compatible partners you can trust and create value with for the long haul. This is especially important for highly strategic relationships.

Unfortunately -- and all too often -- individuals have incentives to simply get the deal done, get the best deal for their companies, and then move on. Take, for example, the procurement metrics of purchase price variance. It motivates buyers into thinking about short-term value extraction rather than longer-term value creation that may likely generate a much higher ROI for both the buyer and the supplier.

Many companies have created a culture of short-term opportunism and don't view that as a bad thing. This mindset can and does create negotiation norms that foster destructive behaviors and actually destroy value rather than promoting value creation through mutual self-interest.

While contract law has evolved over time, the basic negotiation approach has stayed pretty much the same over the years. People enter contracts at an arm's length to pursue material ends, and the more powerful party pushes risk rather than focusing on working together to mitigate risks. The sad thing is they should be realizing that the risks don't go away, and that it would be far better to work collaboratively and transparently to mitigate risks through a contract that promotes mutual advantage.

CIO.com: What are your top three tips for negotiating a more collaborative outsourcing agreement?

Vitasek: First, adopt a 'what's in it for we' mindset based on trust, transparency and compatibility.

Next, recognize that creating a collaborative outsourcing agreement is a process that takes work and commitment, especially if you a seeking an innovative strategic partnership. You'll need to abide by six fundamental social norms that we outline in the Getting to We book. These are reciprocity, autonomy, honesty, loyalty, equity and integrity.

Third, if you are not familiar with how to craft a highly collaborative outsourcing agreement, seek advice. Our goal at UT is the teach people the methodology and we hope that one day all large companies have at least one certified deal architect on staff that understands the art and science of creating a highly collaborative outsourcing agreement.

CIO.com: Can you take collaborative outsourcing too far?

Vitasek: I don't see how. I suppose there could be such a thing as being so collaborative that results get lost in the shuffle. But I've never seen that happen. It's not about collaborating simply for the sake of collaboration.

Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section. Follow everything from CIO.com on Twitter @CIOonline, Facebook, Google + and LinkedIn.

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