IT Outsourcing: Why It Pays to Appraise Your Contract

Most IT outsourcing contracts contain post-execution provisions that, if not reviewed annually, can drive up costs or drive down performance. We've got an 18-point checklist to keep your outsourcing costs and service under control this year.

By Stephanie Overby
Wed, February 03, 2010

CIO — Everyone knows a good outsourcing relationship needs to be actively managed. So does a good IT outsourcing contract.

Most contain what Marc Tanowitz, principal of outsourcing consultancy Pace Harmon, calls "active obligations"—provisions to be completed post contract-execution that require periodic review or that may vary over time. Many of them can have a significant impact on performance and cost if neglected.

[ Outsourcing Contracts: Clause Control ]

Even a seemingly healthy IT outsourcing arrangement can benefit from an annual check-up to ensure that metrics are providing meaningful insight into performance, get an updated understanding of outsourced operations and how well they're running, and ensure that you're getting what you've paid for per the contract. If things aren't going smoothly, such a review can provide a platform for productive discussions with the outsourcer about why the relationship is faltering. And, in the worst case scenario, it can minimize the risks of transition for buyers thinking about walking away from a deal.

"Ideally, the relationship owners have a solid understanding of the contract, but this is often a lofty expectation," says Tanowitz. "The resources who negotiated the agreement are not the same people who 'operationalize' it."

Tanowitz estimates that a thorough contract review can take just four hours or less. So book a conference room, gather the outsourcing relationship managers, business partners impacted by the deal, and—if possible—those who negotiated the original deal, and go back to the beginning with the following eighteen-point review.

1. Resource Commitments

Many IT outsourcing contracts specify the number of service provider resources for each year of the engagement. In many cases the number of resources is linked to productivity or volume commitments. Buyers should ensure that the number of outsourcing employees and related volume or productivity attributes are correct for the current year.

2. Productivity Commitments

The outsourcer may be contractually required to provide specific levels of services (e.g., a certain number of help desk calls per employee). Ensure that productivity commitments are being met through decreased cost or increased transactions.

3. Pricing and Fees

Everything from service volume to resource allocation to annual adjustment provisions can increase prices. Review recent invoices—or better yet, quarterly invoice audits—to determine whether costs per unit are accurate. Go over any price escalators baked into the deal (e.g., cost of living or currency-related adjustments) and pricing algorithms or indices so you can anticipate and verify price increases.

4. Pass-Through Expenses

These fees are usually charged as they are incurred, but they may be subject to restrictions (advance approval, for example). Review these charges to determine the best approach to minimize them before they add up.

5. Continuous Improvement Plans

If your service provider is required to document proposals for increased efficiency, make sure you've received and reviewed them.

6. Benchmarking

It takes time and money, but if you have a benchmarking clause in your IT outsourcing contract, it's in your best interest to use it, particularly if you have limited productivity commitments in your contract. If service or prices seem out of sync with the market, consider an external assessment.

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