by Stephanie Overby

Switching Outsourcing Providers: 10 Tips

Mar 21, 2011

IT leaders are doing as much re-sourcing--bringing work back in-house or transferring it to a new provider--as they are signing new outsourcing deals. But "recompeting" an IT services deal isn't simple: Consider this expert advice before switching outsourcing providers.

If at first you don’t succeed with outsourcing, should you try again with a new provider? Many IT leaders are doing just that.

In recent months, IT services customers are doing as much re-sourcing—either bringing work back in-house or transferring it to a new provider—as they are signing new outsourcing deals, says Steve Martin, partner in outsourcing consultancy Pace Harmon. Jeffrey Andrews, a partner in the Houston office of law firm Thompson & Knight says he’s spending about a third of his time restructuring outsourcing contracts and half of that effort is spent on transferring work to new vendors—a process known as “recompeting” the deal.

An uptick in recompetes is a good sign, says Stan Lepeak, Director of Research in KPMG’s Shared Services and Outsourcing Advisory group. It “illustrates a willingness and ability of both buyers and their service providers to regularly reshape deals to support current market needs and conditions, which is preferable to living with an ill-fitting deal,” he says.

While insourcing previously outsourced work can be prohibitively expensive or difficult, some IT leaders view re-sourcing to a new vendor as a more viable solution to a deal that’s become too costly or ineffective. “Outsourcing customers do not have to hire personnel and procure other applicable resources as they would when in-sourcing services,” says Andrews. “Yet in other ways it can be more difficult to re-source than insource.” A successful transition from one vendor to another requires cooperation between the two. “Incumbent providers rightly view replacement providers as competitors. They are not inclined to provide replacement providers with the same knowledge transfer and access to their personnel, intellectual property and other proprietary resources as they provide to their customers,” Andrews says. And customers do not have much leverage to negotiate such provisions later on in the deal.

“While organizations should not take transitioning lightly or conduct it without thorough preparation and planning,” says Lepeak, “they should also not stick with a bad deal or provider situation simply to avoid the cost and effort of making the transition.” Here are ten tips for succeeding at the recompete.

1. Go Back In Time. “Remember why you outsourced in the first place,” says Edward J. Hansen, partner in law firm Baker & McKenzie. “If the reasons to outsource are still relevant, then you should consider changing providers rather than abandoning the strategy. If, on the other hand, the drivers for outsourcing have changed, insourcing may be a good option.”

2. Consider The Deal Lifecycle. “Contractually it is often easier—though not easy—to shift work from one provider to another at the end of a contract term rather than in mid-term when various penalties may be incurred,” says LePeak.

3. Consult Your Contract. Those termination fees—and there likely are some—are laid out in the legal documents you signed so many moons ago. There may be other potential problems or remedies lurking there as well. “Contracts range from being virtually silent on an incumbent vendor’s obligation to assist in transition activities to clearly prescribing specific transition responsibilities, resource levels, and activities that the incumbent vendor must perform during the wind down of its services,” Pace Harmons Martin says. Your contract could include exclusivity provisions, minimum spend commitments, or rights of first offer or first refusal for the provider that contractually limit or prohibit resourcing.

4. Question Your Motivations. “I recommend spending the time to determine what is motivating the customer to pursue this path, and whether it may be possible to make the current relationship work,” says Hansen of Baker & McKenzie. “Often the processes used to do the original deal were so fundamentally flawed that the deal was destined to fail. It may be possible to reset the relationship, renegotiate the contract and avoid the operational risk of moving.”

5. Question Your Outsourcer’s Motivations. If your reason for recompeting is service- rather than cost-related, ask yourself why. “If the service is bad, it may be an indication of an unprofitable deal for the supplier and they may be motivated to move away from it,” Hansen says. “On the other hand, if you can have a good honest conversation about this, you may be able to renegotiate the deal and leave the services where they currently sit.”

6. Prepare for People Problems. The outsourcing deal you signed may limit your right to solicit and re-hire provider personnel or make it difficult for the new provider’s employees to shadow or conduct other knowledge transfer work with the incumbent’s people, says Andrews.

7. Select the Right Silo. Some types of “commodity” IT work, like data center services or disaster recover, may be easier to transfer — though it depends on the structure of the deal. “Towers where an incumbent outsource provider has included labor, hardware and software as part of the service offering will be much more complex to transition to another service provider than that same tower being provided under a labor-only model,” says Pace Harmon’s Martin. “Also, towers are inherently more straightforward to transition when accurate hardware and software inventories are maintained, processes are well documented, and trouble ticket history has been accurately captured.

8. Calculate the Cost of Disruption. There will be a price to pay for moving the work to a new provider so figure out what it is before first. “Do your homework,” Lepeak says. “Understand the risks, costs and the level and nature of the likely disruption, and weigh that against the benefits of the transition.”

9. Master Multisourcing. Rarely do IT leaders move an all-encompassing IT services deal from one vendor to another. Rather, most of today’s resourcing work involves a partial transfer of outsourced functions resulting in a multi-provider environment, says Andrews of Thompson & Knight. Coordinating multiple providers takes time and effort. Andrews advises that new contracts address some of those challenges including cooperation among providers, customer consent and approval requirements, and common access or usage rights to software or other proprietary materials.

10. Make it Easier on Yourself Next Time. You’ve consulted the contract, calculated the costs, and made the decision to recomplete. When it comes time to sign on the dotted line with the new provider, apply what you’ve learned. “The outcome of a re-sourcing often depends on leverage,” says Andrews. Make sure you have some in the new contract. “Think about what you will need and make sure you can get it,” says Hansen of Baker & McKenzie. “The idea is to take some of the ‘stickiness’ out of the relationship. In addition to allowing a smooth transition out, this will also help keep market economies in your deal.” Work through issues like milestone payments for successful transition work, inventory management, right-to-hire provisions and termination fees now rather than later.