No one asks, "Why outsource?" anymore. Since Kodak signed the first major IT outsourcing contract 12 years ago, even the most skeptical CIOs have come to realize that they can cut costs, improve service levels and gain access to better technology by placing at least some of their IT assets in the hands of a vendor. But what\u2019s the right way to outsource? That\u2019s the trick. To master it, one must focus on two fundamental challenges: how to get into a good deal and, just as important, how to get out of a bad one.How to Cut the Best Deal Larry Godec, newly appointed CIO of Santa Ana, Calif.-based First American Title Insurance, is weighing a decision to outsource First American\u2019s help desk. It\u2019s a big decision, and he\u2019s taking his time. He\u2019s also taking advice from STI, an outside consultant based in League City, Texas. Why hire a vendor to help make a decision about another vendor? Here are three good reasons.\n 1.When the typical IT shop outsources, it\u2019s often a unique experience for it. But outsourcing attorneys and consultants see these deals every day. "They have experience in best practices," Godec says. "They can compare what you\u2019re doing to what other people have done?what\u2019s succeeded, what\u2019s cost-effective and efficient." When Tom Boardman, CTO of San Diego County, outsourced the county\u2019s entire IT operation in 1999, he hired Gordon & Glickson, a Chicago-based law firm that specializes in IT outsourcing. "They know what everyone else has agreed to in their contracts," Boardman says. "Even if they can\u2019t reveal those figures, they can keep negotiating until they reach the point where the vendor has been willing to go in the past."\n 2.CIOs know what their IT organization can and can\u2019t do, but typically they don\u2019t understand how the rest of the enterprise perceives their department. An outsourcing consultant interviews the users and helps establish an IT baseline?what are the current service levels and response times, and how do internal IT customers feel they are being served? It could be that your own IT organization is already providing efficient service. Dennis McGuire, chairman and CEO of Houston-based Technology Partners International, one of the first and largest outsourcing consultancies, says 30 percent of his clients choose not to outsource after this initial baseline analysis. Prior to this analysis, "even relatively good IT organizations only know where 60 to 70 percent of their costs are, and there are often no [established] service levels," McGuire says.\n3.Everyone appreciates the importance of a contract in which you spell out the terms of the deal?how long and for how much. But equally critical is the initial RFP circulated to vendors. Here the consultant can combine knowledge of the marketplace with details about your company\u2019s needs and emerge with a document that spells out exactly what is to be outsourced and what results are expected. And it\u2019s not just the prospective vendor\u2019s expectations that are being set; so are the users\u2019, who need to know exactly how their life will change. When the state of Connecticut attempted to outsource its IT operations in 1999, officials failed to spell out all of the terms of the deal in the RFP, and the prospective deal died in conflicts over service levels and costs. Boardman learned from this mistake when he negotiated San Diego County\u2019s deal. "Success is determined in the RFP," Boardman says. "An outside consultant can really help you determine what it is you\u2019re buying and what should go into the RFP. I won\u2019t say we couldn\u2019t have done it, but they did it a lot more efficiently and effectively."How to Get Out of a Bad DealVendors like to say that outsourcing deals are like marriages, and John Davis, vice president of purchasing, engineering and information systems at National Steel, agrees. "Fifty percent of them are breaking up," he says.Davis knows. Since becoming CIO of Mishawaka, Ind.-based National Steel in 1994, he\u2019s inked more than $50 million in outsourcing deals with big-name vendors such as EDS and IBM. Today, Davis outsources everything but IT management?only eight of his 120-member IT staff are full-time National Steel employees. But not all of Davis\u2019s outsourcing relationships have been happily ever after. One?a seven-year, $63 million deal with the former MCI Systemhouse signed in 1995?ended in divorce. When MCI Systemhouse was acquired by EDS in 1999, Davis exercised his contract\u2019s change of control termination clause. "We didn\u2019t do good due diligence, and they didn\u2019t either," Davis says about the dud deal. "We didn\u2019t do a good job telling [MCI] exactly what we needed, and they were never able to perform the services we thought should be performed." It\u2019s never an easy decision to call it quits, but in National Steel\u2019s case the sting was eased by contractual provisions Davis built in that protected key assets and personnel that could have been lost in a custody battle. The lesson learned? CIOs needn\u2019t be slaves to their outsourcing contracts. But the key to freedom: Don\u2019t just have an escape clause, have an escape strategy.\nPlan for the end from the beginning. All outsourcing deals expire. Knowing this, spell out up front the exact terms for a full or even partial termination (in case you want to bring some functions back in-house but still outsource others). Gordon & Glickson Partner Mark Gordon recommends identifying which IT assets (hardware and software) and key personnel you want back when the deal ends, and what price you will be willing to pay to regain them. And be sure to track these assets and people in case the vendor reassigns them. "Much easier to say than do," Gordon concedes, but worth the effort when the breakup arrives. The alternative, says Davis, is a lose-lose proposition. You know you can walk away from the deal, hurting your vendor, but your vendor knows it can walk away with your best people, wounding you.\nBuild key milestones and penalties into the deal. Rather than wait for contract-renewal time to assess the merits of the deal, build in milestones along the way?key rollout dates, transition targets or service-level goals?and marry them to significant penalties if they\u2019re not met. "This way you can arrest problems right away rather than watch the deal crash and burn," says McGuire. And if the deal really is doomed to failure, you\u2019ll know sooner rather than later. Davis argues for including escalation clauses, which require top-management meetings between vendor and customer if milestones are missed consistently. "These are effective because CEOs don\u2019t like to have to explain why their companies are failing," Davis says.\nReserve the right to bring in a new vendor. First, resist the urge to outsource everything to one vendor. Once a single vendor has control of all your assets and personnel, you\u2019ve lost the ability to disentangle cleanly if the deal falls apart. Plus, the price leverage afforded by having another vendor on the scene is especially powerful during renegotiations. \nExpect pushback from management. Breaking up isn\u2019t just hard to do, it\u2019s expensive, especially when you start adding up the costs of buying back outsourced assets or rehiring personnel. In big deals, it\u2019s likely the vendor has developed strong relationships with your senior management. Anticipate management will push back if you want to end an outsourcing deal, and be prepared to present a solid business case to support the decision.\nMake it painful for the vendor to quit. There\u2019s a bait-and-switch tactic common in outsourcing deals: The vendor puts its A Team on the account during courtship then switches to the B Team (or worse) after the deal is done. To avoid that, and a resultant decline in service, CTO Boardman added an interesting wrinkle to his disentanglement clause with the Pennant Alliance, which holds a seven-year, $644 million contract to run San Diego County\u2019s IT operations. If the county terminates all or part of the agreement because of failure to perform, Pennant must pay 20 percent of whatever remains on the contract to the county or to the vendor that takes its place. Were this penalty invoked, Pennant would be in the position of cutting checks to a competitor. "We really want to make it unpleasant for the vendor to walk away," Boardman says. Incidentally, when National Steel\u2019s Davis terminated his contract with MCI Systemhouse\/EDS in 1999, he did a new RFP, put it out to bid and ended up signing a new five-year deal...with EDS. The difference: This deal set the right expectations and terms, and EDS assigned a whole new management team to it. "We\u2019ve learned to do [outsourcing] right," Davis says.