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Unfortunately, many IT managers approach outsourcing relationships without fully realizing the potential benefits and end up with shallow or baseless goals. By fully understanding the benefits, you can articulate specific objectives in a contract. These objectives translate into performance metrics you can use to gauge the success or failure of the relationship.

Of course, selecting the right provider is key. But managing the ongoing relationship through a properly structured contract or agreement makes or breaks the outsourcing arrangement. If you are involved in a strategic outsourcing deal, such as desktop support or PC maintenance, it may be good to seek outsourcing consultants or legal counsel who know the process well. These outsourcing deals can last from five to 10 years and involve millions of dollars. If you are negotiating a tactical outsourcing arrangement, such as application development, you may not need a hired gun, though even those deals can be complex, especially if application development is done offshore. And all outsourcing contracts should be crafted with care and attention to detail.

Most service providers, after all, have the negotiation process down pat. If they don't, you may question their ability to service your enterprise needs. Providers have discussed their services with potential clients hundreds of times and usually come prepared with a standard contract. These standard, or boilerplate, contract forms come with the usual parts for financial arrangements, schedules and limitations of liability. Although these are important, they are best left to lawyers and accountants. IT personnel should focus on the products and services that will be delivered to the enterprise and the responsibilities of the parties in making that happen. And a standard contract is only the beginning.

A Serious Affair

Outsourcing should not be taken lightly. The process removes business functions from the enterprise and places them in the hands of a external organization. The risks are apparent. You will lose control of the outsourced activity and may lose the internal expertise to handle it. Outsourcing may also interrupt workflow and jeopardize the IT department's reputation. It will directly affect employees and become an added management task that needs monitoring and maintenance. That said, the potential benefits in reduced costs and increased service levels remain a tempting goal for many enterprises.

What's Being Outsourced Click here to enlarge

Beyond cost and service levels, it helps to know which related business processes you'll outsource. For example, if service and support for desktop hardware are on the table, will you also off-load the associated call-center functions and application support for end-user systems? If you outsource Web hosting operations, are portals and e-commerce initiatives also part of the strategy?

Once you identify the services you want to outsource and the benefits you aim to achieve, you can advertise your needs to potential providers for alternative solutions. To negotiate the best deal, you should look at service providers as strategic partners and know their interests and risks in coming to the table.

Ready ... Set ...

Engaging in a relationship with a strategic partner is like picking a partner in a three-legged race. Your partner should help your stride, not hinder it. Together, you should have good balance and a mutual desire to win. Ideally, your team will have a good sense of humor as well. That way, you can both step into the race on equal ground and balance each other over the long haul. Similarly, you want to know the strengths, weaknesses, motivations and interests of a strategic outsourcing partner. This will help in negotiations and make for fewer surprises in the long run.

The obvious motivation for a service provider is to make a profit. But before that provider makes a profit from you, you should know what makes the company get out of bed in the morning (and, for that matter, who else is in that bed). Major service providers in this arena, such as Computer Science Corp. (CSC) and Electronic Data Systems (EDS), want your service and support business because that is their business. But if you're considering local or regional providers, there may be more to it. Perhaps they're looking to enter the enterprise market for service and support. If so, will your company be their proof of concept to support a large enterprise? Or perhaps the provider needs a way to get a foot in the door to become your Internet or application service provider. A little knowledge can hedge a price or wedge a new service where there was none before. But remain focused on negotiating services that meet your needs, and make sure your provider can grow with your business and change with the times.

An outsourcing contract is not a last will and testament. The document should live and respond to the changing needs of both parties. For example, service and support contracts run for fixed terms with fixed prices, but providers may reduce operating costs over time to increase profit margins, perhaps by outsourcing their own services to third parties as cost-cutting measures. Recently, EDS moved its Global Delivery desktop support group to strategic suppliers.

The point? Don't get hooked on how a service is provided, as it may change. Your service provider should have enough experience in the matter outsourced to bring its best practices forward. Rather, take the results-oriented approach. Focus on what is provided, and leverage those practices for your enterprise. Remember that rights and duties under contract can be assigned or delegated. If you focus on results, these savings can be passed on to the enterprise in periodic reassessments of the contract price.

... Go!

At the outset, you want to negotiate the best service for the lowest price. But service providers want to charge the highest possible price while maintaining relatively low risks. Low-risk ventures for providers involve delivering standard services such as call-center functions or standard application support. If you have highly specialized needs--for example, legacy hardware or software support--a provider will see high risks if the services are not generally available in the marketplace. In other words, if the provider can't deliver services from its own resources, it may need to procure them from a third party. But if the provider has experience in your industry and knows what to expect from your enterprise, the risk is relatively low. In general, a provider sees risk where the factors are out of its control--for example, where services are difficult and unfamiliar or where they involve subcontractors.

It is in your best interest to understand the risks the provider bears. You want to achieve a balance between the price for services and the perceived risk of delivering them. You can even reduce the perceived risk. For example, if a provider is unable to support a legacy application, offer to train the outsourced staff to provide the support. It is also important to notify the provider of the benefits you want to get from the relationship. With the benefits and risks understood, you can move from the negotiating table to contract in no time.

Require regular visits with the provider to review service levels, performance and payment schedules. Plan for change based on increasing service needs, new technology or any circumstance that affects the relationship. You can arrange to renew the terms of the contract annually, rather than every five or 10 years. Such an arrangement may be tedious and cost extra, but the ability to respond to change will be valuable. For long-term relationships, you can also agree to meet on a regular basis to discuss modifications to the contract for new payment schedules or other consideration.