The hard work of putting together an effective IT outsourcing request for proposals (RFP) is behind you. You gathered requirements. You baselined your service costs. You set the rules for the process. You put in place your required contract terms. You outlined a detailed negotiation schedule. Now it’s time to sit back and watch the RFP responses roll in.
But don’t relax yet. Hidden within those vendor replies may be details that look great on paper but are actually ticking time bombs set to go off only once the deal is well underway. Watch out for these nine outsourcing proposal red flags:
1. Deep Discounts
Beware the provider the presents a price that’s more than 10 percent lower than all the other bidders. “Competitors know roughly what each other charges,” said Mark Ruckman, an outsourcing consultant with Sanda Partners. “Any vendor that low-balls their price is either trying to buy the business or doesn’t understand the scope.”
2. Gainsharing Offers
What’s not to love about stipulating that client and provider reap shared financial rewards resulting from improvement or innovation? A lot, it turns out.
“These commitments too often are constructed as mechanistic price reductions intended to deliver assured savings to the customer and to force the provider to innovate in order to preserve its margin,” said Randall Parks, co-chair for the global technology, outsourcing and privacy practice group at Hunton & Williams. “The customer, with savings in hand, has little economic incentive to participate in the hard work of process re-engineering. The provider may have the incentive, but without the customer’s enthusiastic participation, is handicapped in meeting the goal.”
Most gainsharing agreements are too vague, according to Esteban Herrera, COO of outsourcing analyst firm HfS Research. “Even when they are specific, they tend to take a toll on the relationship because getting on the same page about what the real investment and real return is can be debilitating.”
And shouldn’t the IT service provider seek such improvements as a matter of course? “Customers should take the perspective that capturing these savings should be contractual obligations of the vendor—not margin entitlements,” said Steve Martin, partner in outsourcing consultancy Pace Harmon.
3. Penalty Earnback Provisions
Providers often propose that their service-level agreements (SLAs) include both service credits—a financial credit to the buyer’s invoice for a missed SLA goal—and earnbacks—a way to earn back those credits for subsequent good performance. But the apparent value proposition of those arrangements often does not hold up, as earnbacks can easily offset the credits, according to Betty Breukelman, partner at outsourcing consultancy Everest Group. “While initially appealing, the existence of service credit earnbacks for the supplier can completely negate the credits, especially if they are achieved too easily,” Breukelman said.
4. Too Much Agreement
Think you don’t want a provider that pushes back on your RFP? Think again. When providers don’t raise any objections or bother to delve into the details of the service agreement, that’s a red flag, according to Herrera of HfS Research.
“It’s tempting to say ‘we agree’ to everything in the RFP response, but that is not likely to lead to a trusting, partnering relationship,” he said. “The provider that says yes to everything usually doesn’t know or doesn’t care what they are doing. At a minimum, they should seek clarification on some SLA and other performance commitments.”
5. Travel Costs
The transition phase of an outsourcing deal can be quite expensive. Some IT service providers may propose the use of pass-through charges for all travel related to the transition, rather than baking it into their own costs. That almost always leads to problems.
“[It] can be a source of considerable effort and consternation,” said Marc Stark, director of KPMG Shared Services and Outsourcing Advisory. “It can become a difficult process for the client to manage.”
6. Continuous Improvements
Continuous SLA improvements can be a good thing, but only if they offer value to the customer. However, Herrera warned that, “it makes no sense to ratchet up SLAs and wind up paying for levels of service the business doesn’t actually need.”
Similarly, vendors may also propose bonus or incentive payments for exceeding SLA targets. “In practice, however, these types of incentives are essentially tantamount to higher fees, as performance improvements typically do not translate into meaningful value in terms of reducing the customer’s expenses or increasing their revenues,” said Pace Harmon’s Martin. “The bottom line is that a vendor’s reward for exceeding service levels should be that they get to keep providing the service.”
7. Late-Breaking Proposals
Approach any vendor that asks for an extension or delivers its proposal late with extreme caution, even if the provider was on your mental short list. “The inability to organize resources or meet timelines during the honeymoon period is a clear indication of bigger issues within a vendor,” said Ruckman of Sanda Partners.
8. Reciprocal Billing Rights
Through these arrangements, what a vendor really wants is to secure the right to invoice for past charges as long as possible after the charges were actually incurred, while also limiting the window during which the customer can dispute invoices. “As an act of perceptional compromise, they typically offer to make the two sides reciprocal,” said Martin of Pace Harmon. “The vendor can invoice for charges for 120 days and the customer can dispute the charges for up to 120 days.”
Trouble is, it’s not really reciprocal. “The vendor has 100 percent control over the invoicing process and should have contractual obligations to invoice for all charges as soon as practically possible, generally within 30 days after the charges are incurred,” Martin said. “Customers, on the other hand, should have liberal rights to perform invoice audits within conventional timeframes for such activities—generally up to at least two years after receipt of the invoice—and thereby reserve the right to make good faith disputes long after the invoices have been paid.”
9. Premium Staffing
It’s relatively easy to benchmark the price per skill in an outsourcing proposal. But what many customers overlook is the level of skills proposed. “A client may leave a lot of value on the table by failing to recognize [an] over-skilled team or a skill pyramid skewed toward high-price resources,” said Ross Tisnovsky, a senior vice president at the Everest Group.
Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section.