by Stephanie Overby

IT Outsourcing: 9 Legal Mistakes That Can Cost You Big

Dec 02, 2009

Outsourcing attorneys share the costliest legal mistakes their outsourcing clients make and suggest ways you can avoid them.

Good legal counsel can be worth every penny when putting together an outsourcing deal. But those legal fees can add up quickly if you’re not careful. Worse yet, some common mistakes customers make when working with an outsourcing attorney can prove costly not only during contracting and negotiations but over the life of the deal.

To prevent you from falling into those traps, experienced outsourcing attorneys shared the biggest blunders IT services customers make and ways to avoid them.

1. Hiring the wrong attorney. Not all outsourcing attorneys offer the same services or expertise. Take Edward J. Hansen, a partner in the business and finance practices at Morgan Lewis and Brockius, as an example. He tends to take a lead strategy role in negotiations. He says his strengths are leveling the playing field for clients with less outsourcing experience and keeping the parties focused on the big picture. He admits that he might not be a good fit for a deal being done by an experienced internal team with years of outsourcing experience, or for a contract requiring specific technical advice, such as foreign tax law.

“There is a perception in the marketplace that we all have fungible skill sets, and that is just not true,” Hansen says. “It can be a very costly mistake to pick an attorney whose skill set does not match the deal philosophy of the client, or who doesn’t have the skills or desire to properly counsel the client.”

2. Calling too late. Sure, attorneys’ billable rates can take a bite out of your bottom line, but waiting too long before calling in counsel can cost you even more. That means you may want to hire a lawyer even before you send out an RFP.

“Waiting may be a false economy,” says George Kimball, a lawyer in the San Diego office of Baker & McKenzie. “Consult counsel before making fundamental decisions that may be difficult or impractical to reverse,” advises Kimball. “A little time spent on terms, structure and probable issues before may save time, money and grief later.”

[ The Best Time to Negotiate an Outsourcing Contract ]

And be candid with your attorney. “Lawyers have to keep secrets, so share the whole story with them—goals, reasons, tensions, organizational quirks, the works,” Kimball says.

If you find the attorney is not adding value in an early stage, adds Hansen, you may have the wrong lawyer. Likewise, if any other external advisors you’ve hired don’t want counsel in the room, you may want to shop around for another consultant.

3. Focusing on the wrong terms. Not everything is worth the fight. For example, some clients get hung up on limitation of liability—that line in the sand that says how much financial risk the vendor is willing to assume. While there may be no limitation of liability for serious offenses, like breach of confidentiality, limitation of liability is usually anywhere from one to three times the value of the contract on an annualized basis, says Jennifer Wolfe, founder of Cincinnati-based law firm Wolfe LPA.

What’s more, vendors rarely yield in this area. If they do, it comes at a cost. “Vendors will typically price into the deal the amount of risk they are willing to shoulder,” says Wolfe.

Time arguing over liability or other intractable issues is better spent on performance indicators or practical remedies for problems that may arise over the course of the deal. “It’s much better to use the time to ensure that there are clear policies, procedures and remedies in place to address problems rather than arguing about dollar limits,” says Wolfe. “Most vendors are willing to talk about how problems are solved, steps to solve those problems and credits for failing to do so.”

4. Contract complexity. “Thoroughness is a virtue,” says Kimball. “Complexity is another matter.” You pay attorneys to sweat the small stuff, but no contract can address all possible contingencies in outsourcing. “When things go wrong and surprises occur, as they are bound to, good processes may be more useful than detailed prescriptions,” Kimball says. “Unwieldy documents that clients barely comprehend—or worse, misunderstand—are not helpful.”

Seek clarity and brevity. Shorter documents not only take less time to negotiate, they’re easier to manage. “The goal is to use the contract as a roadmap for problem-solving once you are working with the vendor,” says Wolfe.

5. Adversarial negotiations. Contentious contract negotiations can be stoked by any number of parties involved in an outsourcing deal, but no one gets hurt more than the client. (In fact, the advisors and attorneys may rack up more fees during heated talks.) So check emotions at the door. Even better, hire an attorney who will keep you in check (not all of them will).

“Adversarial thinking and behavior too easily infect these relationships, unwittingly encouraged by the competitive instincts of too many purchasing professionals and lawyers,” says Kimball. “When adrenaline flows and blood pressures rise, it is easy to forget that these relationships rarely succeed unless both parties succeed.”

Collaborative negotiations yield better returns in the long run. “Negotiate for value,” advises Wolfe. “This is all about allocating risk while building a foundation to work as partners going forward. Vendors have fairly standard parameters in their contracts within which they will work. The key is to understand those parameters and communicate what is most important to you.”

No one likes to be bullied, even if you are the “big guy” at the table. “Providers are human,” says Hansen, “and making them feel threatened will make them more risk averse, and lead to longer, less beneficial negotiations.”

6. Lack of business buy-in. Outsourcing is difficult enough when everyone is singing from the same hymnal, says Kimball, but it’s even harder when the customer has failed to build consensus among its business units and internal organization.

A lack of consensus early on will cost you during contract negotiations, says Wolfe. To avoid infighting that may protract negotiations, Wolfe recommends facilitating a strategy session to review outsourcing goals, anticipated return on investment, alternatives available, vendor selection criteria, key expectations and concerns, and greatest wants, needs and risks you’re not willing to take.

“Put that strategic plan on paper and consult it on every red line change [during contract negotiations] to stay on focus.”

7. Ambiguous governance. The single most common, yet avoidable error Kimball sees his outsourcing clients make has little to do with law; it’s weak management of the contract.

“Form governance documents are thrown thoughtlessly into the closing binder, then ignored as responsibility passes to a short-handed team that may not, at least initially, fully appreciate the difference between managing operations and managing a contractor,” says Kimball.

[ An Ounce of Prevention: Guarding Against IT Outsourcing Failure ]

Governance schedules have a tendency to be drafted sloppily, agrees Hansen. “I have seen negotiations where we work very hard to make sure that there are clear lines of responsibility in the contract and its statements of work, just to see a bunch of language in the governance schedule that talks about joint responsibility,” he says.

Build robust and tailor-made governance and communications processes into the contract and discuss them thoroughly with the team that will manage the deal, advises Kimball.

8. Speed sourcing. “Legendary UCLA basketball coach John Wooden used to admonish his players to ‘be quick, but don’t hurry,'” says Kimball. “Now, more than ever, customers want to complete negotiations quickly, reduce transaction costs, and accelerate anticipated benefits.”

They’re worthy goals all, but not always worth the risk. “Pains taken to assess current operations, weigh alternatives, check references, plan transitions and make other essential preparations are generally worthwhile,” says Kimball. If you’re looking to speed up the process, he adds, explore simpler documentation or streamlined processes, but don’t give short shrift to outsourcing fundamentals.

9. Last minute changes. In outsourcing parlance, “last minute” means any time after negotiations have begun. “The more up front work that is done before the formal negotiation process starts, the better,” says Wolfe. “[Otherwise] all costs will be significantly increased—legal costs, advisor costs—not to mention opportunity costs in the time that is wasted.”

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