When we used to assist customers with their large, complex outsourcing contracts we invariably locked horns with the Procurement Department. As a company purchaser they were incentivised to get the lowest price available. While that works really well for non-service agreements, for IT outsourced agreements it can be very risky. Our mantra was “the suppliers need to make money – just not too much money”.
One of the other key elements is that the risk for the parties is far from equal. As an example, Infosys net profit for 2021 was $2.6 billion on a revenue of $13.56 billion.
So, if you as a customer never paid them for the services they have only partially, or have not provided, it would not materially impact them. On the other hand, if they stop delivering all outsourced IT services, your organisation may be at real risk of not being able to operate.
Outsourcing is a tough business. Making a profit can be challenging –
- DXC Technology annual revenue for 2021 was $17.729B, a 9.44% decline from 2020.
- DXC Technology annual revenue for 2020 was $19.577B, a 5.67% decline from 2019.
- DXC Technology annual revenue for 2019 was $20.753B, a 4.51% decline from 2018.
The easy way to improve profitability is to not deliver the contracted services…
Over the years we have reviewed a large number of outsourcing contracts and have typically found that suppliers are very good at managing service level data, pushing in-scope items back onto the customer and linking deliverables such that they never get delivered.
What used to be built into first generation outsourcing deals are now done as projects. The problem is that the incumbent supplier has an an advantage, especially when the documentation is not up to date and other sources of data e.g. CMDB are not fully or correctly populated.
Another approach is for the supplier to persuade the customer that the contract does not cover the full scope of the contractual deliverable, and, so the only way it can be done is for the customer to approve a change request for the “out of scope” items.
Common approaches:
- Quality – don’t deliver to the service level agreements
- Manage service level agreement data
- Link projects together so that they can be delayed and made more complex
- If required to keep within one generation of technology, suggest that the risk is too great
- Use pooled, offshore resources to provide the services
- Dispute contract boundaries to exclude portions of the services
For items like Software Asset Management, the work may have been outsourced to keep within the licensing obligations, but all the risk lies with the customer. This results in the customer having a hefty oversight team, or, doing the work themselves.
How does it work?
The contract is the source of truth in an outsourcing agreement. There was a view that it was proper to negotiate a comprehensive contract and, once signed, leave it in the bottom drawer until needed.
LODESTAR believes a lot of time, effort and expense, from both parties, went into that contract and as such, should be the principal document that underpins all discussions regarding deliverables, timeliness and quality. There will be errors in contracts and new technologies will require the contract to be updated.
As part of the governance processes, each party should bring recommended changes to the monthly operational meetings to better clarify scope and responsibilities. Once agreed, these become contract amendments.
LODESTAR works with the customer to review the contract and reviews supplier reports, interviews stakeholders and assesses the difference between the contract deliverables and what is actually being delivered.
The gap for each item is costed based on tools, benchmark date, etc.
Once reviewed and agreed with the customer, LODESTAR engages with the supplier and presents the report provided to the customers. At that point, the data that formed the report is reviewed and discussions with the supplier start to take place. If required by the customer , LODESTAR will undertake negotiations to amend the contract to include disputed areas, or lower the price.
LODESTAR, if requested, will deliver a Contract Management class to the customer (and supplier) on the contract deliverables, quality, timeliness and areas that still need boundaries to be very clearly defined. As an example, does the wiring contractor plug the cable into the device or is that another supplier’s scope?