Optimizing Outsourcing Deal and Negotiation Processes
Companies seeking to outsource or re-source business functions are strongly motivated to move as quickly as possible to accelerate associated cost savings and benefits. Moving faster can also reduce transaction costs, and reduce the risk of changes that require significant rework. However, the underlying business functions tend to be complex and important to numerous stakeholders with limited experience in outsourcing. The deal process tends to involve bidders who have different goals than the company and who have sales teams who are adept at seeking process control and business value.
This chapter provides recommendations for optimizing the outsourcing deal process in two categories: planning and execution. In the planning phase, we recommend aligning internally on goals, building a team, gathering relevant facts, developing a detailed ask, and having a clear plan. In the execution phase, the focus should be on controlling the deal process, maintaining options, sequencing issues, and investing in completing the contract to the extent possible.
PLANNING
Planning adds value in outsourcing processes because mistakes in planning cost less to correct than mistakes in execution. Also, a planning phase with only the company and advisors who share its goals provides an opportunity to decide what the company wants, instead of allowing suppliers’ marketing teams to shape the company’s perceived goals toward buying supplier services.
Align on goals
The first step is to establish company’s objectives for doing the deal, and their relative priority. Different parts of the company may have different views of why the deal should be done (or whether the deal should be done at all), the key value drivers and risks, and the “key deal terms.” For example, cost saving must be balanced with other goals, such as transformation, quality, treatment of affected employees, and access to scarce skills. Clarity on the company’s priorities will inform the development of the request for proposal (RFP) and the proposed contract documents.
Build the deal team
Knowing the company’s objectives will allow the company to build a deal team. Large outsourcing deals often benefit from a balanced team of technical, operational, sourcing, business, finance, governance, subject matter, and legal specialists. Having a complete team allows the company to define its specific needs and objectives in detail and avoid costly pitfalls. Smaller outsourcing deals might be staffed by a smaller team of generalists, accepting the risk of some knowledge gaps.
The deal team should include an inside lawyer sufficiently experienced to make judgment calls on the meaning of contract language and to involve other members of the law department and outside counsel as necessary. Other subject matter experts (SMEs) should be involved early on in the contract drafting and negotiation process if there is any chance that their input will be material. In addition to tax, employment, compliance and other SME functions, experienced outsourcing advisors bring vital experience, market knowledge and tools to outsourcing efforts.
Finally, involving both corporate and business unit leadership can help align with strategy at both levels. Strategic deal making at the corporate level can maximize savings by consolidating enterprise volumes, efficiently allocating work between internal and external suppliers, and avoiding gaps and overlaps with the company’s other outsourcing deals. Equally, having business unit leaders as part of the effort helps to win outsourcing deals that perform well operationally. Further, involving business unit leadership will better prepare them to transition to using the resulting supplier.
Collect relevant data
We recommend that companies carefully perform their own financial and operational diligence of the in-scope functions before seeking solutions from potential suppliers. This due diligence includes documenting the in-scope functions, business processes, service levels, personnel, assets, licenses, and other third-party contracts. Sourcing advisors or consultants can be helpful in this process.
Performing this due diligence up front allows the company to get better offers faster. Bidders will be able to offer more commitment faster because they have the data they need. By making bidders more confident in the facts, the company can reduce any “risk premium” that bidders may feel compelled to add to their pricing to adjust for perceived faulty or incomplete information from the company. Better information about the current service delivery environment allows the company to more confidently negotiate contractual commitments from suppliers and avoid rework.
Clarify the ask
Having a full team in place and a deeper fact set allows the company to clarify its ask. The company may only be ready to ask for solutions to a problem from a business perspective. However, we find most of our clients ready to describe a preferred deal structure and key concepts well enough to include contract templates, such as a master services agreement, statements of work (SOWs), pricing schedules, and service level agreements (SLAs). Lawyers can be uniquely helpful in preparing SOW, pricing, and SLA documents for an RFP because of their training in asking questions and taking an outsider perspective.
There are many benefits to including all of these contract templates in the RFP and requesting that the bidders mark up the company’s proposed terms at the same time they make their solution and pricing proposals. It allows the suppliers to create more fully informed responses, which can speed negotiations and avoid rework. It also reduces the gap between the suppliers’ proposals and what they will agree to in the contract. Furthermore, it enables the company to make an “apples-to-apples” comparison of each supplier’s mark-ups to the other suppliers’ mark-ups and to the company’s preferred contract terms. This comparison is possible, but unreasonably difficult, if each bidder provides its own supplier-favorable form contracts. Finally, it reduces the risk of discovering red-flag legal issues only after down-selecting.
EXECUTION
Control the process
Process determines results. The party that controls the process can capture more of the value generated by the deal. As a result, bidders may field expert sales teams to challenge the company’s control over the process. A well-led, well-advised, and capable team with executive support can deliver tremendous value to the company in maintaining process control.
Speak with one voice
In reality, each deal has numerous stakeholders with varying perspectives and knowledge. However, the goal of the contracting process is a contract between two companies. Thus, for efficiency, each company is represented by a team. That team should speak with one voice, avoiding noise and confusion. This requires internal preparation and control over who speaks on what topic.
Adapt as needed
In an ideal process, the company sets an aggressive, yet realistic, negotiation schedule and defines a clear process. All teams comply with that process and manage to that schedule. The parties identify and resolve key issues first, allowing “show stoppers” to narrow the field of bidders early instead of surprising the company at the end of negotiations. Each party has a small, well-prepared, high-performing team able to make the needed decisions quickly. Commitment and clarity increase at each stage, and closed issues remain closed. The results of negotiations are documented in real time. Limits on the number and length of negotiation sessions focus teams on what is important, making the process efficient and effective.
We recommend setting an initial plan as close as possible to the ideal process, then adapting based on new information. Perhaps a bidder with a good solution is unable to meet the company’s negotiation schedule or the only major issue in a bidder’s markup is a vast array of small issues. Perhaps new information arrives late in the process, causing one or both parties to backtrack. If so, we recommend using a process similar to the agile software development approach, with “sprints” followed by team meetings to assess results and make new plans, both on substance and process. Of course, this flexibility makes speaking with one voice and controlling the process ever more important.
Build long-term relationships
Success in outsourcing depends on a good working relationship between the parties. The negotiation process provides an opportunity for the people involved to form an effective working relationship by solving a complex set of contract problems together. The people involved can build trust by demonstrating a win-win approach, respecting the other party’s autonomy and contributions, and being transparent. There is thus great value in having supplier and customer representatives who will be responsible for managing the relationship in the room for the negotiations. Conversely, it may be valuable for lawyers and advisors who will not be part of the ongoing relationship to lead discussions regarding more contentious topics.
Retain options
Companies can achieve better results and get to the finish line faster by retaining the options to do no deal or choose a competitor. The bidders move faster because they know that they will lose the deal without timely offering value. The company moves faster because it has a straightforward decision between options, instead of needing to decide what is “acceptable,” or “waiting to see who blinks.” Also, a competitive process is smoother because the company is coaching the bidders on how to offer more value and make a win more likely. As the company reduces its other options by, for example, moving to a sole-source process or announcing the deal to employees, the negotiations move from creating value to dividing value, which is a more contentious process and more difficult to control.
Complete the contractible elements
For various good reasons, outsourcing negotiations leave certain issues to be resolved after contract signature. There are issues that can be resolved only after a knowledge capture stage during transition, for example. However, during negotiations, it can be tempting for the company’s negotiating team to “get the deal done” by leaving issues to be resolved after signing that would be more efficiently and effectively resolved by the negotiation team before signing. After signing, the governance team likely will lack the leverage, decision rights, knowledge and contracting skills of the negotiation team. Both parties will lose focus on resolving contract terms as they prioritize transition and move deal teams to other projects. That favors the supplier because, generally, the open issues relate to whether the supplier will make a firm commitment to deliver needed services, at acceptable performance and compliance levels, with the right technology, for a reasonably firm price. As a result, even if it is too early to reach agreement on particular issues, we recommend agreeing on what is contractible, such as a process and parameters for reaching that agreement.
CONCLUSION
As in other projects, success in outsourcing negotiations requires effective planning and efficient execution. In the planning stage, we recommend that companies focus on aligning internally on goals, building a capable deal team, collecting relevant data and clarifying their ask. In the execution stage, we recommend that companies control the process, speak with one voice, adapt as needed, build long-term relationships, retain options, and complete the contractible elements of the contract before signing. Companies that invest the time and effort to optimize their process, and avoid the temptation to take shortcuts, will set themselves up for success in the long run.
