4. Dumbly disowning projects

Vice: You've outsourced so much IT that your outsourcer knows almost as much about your customers, your products and your industry as you do. According to Hoffman, the IT department of a major car maker recently realized that it outsourced too aggressively and is now trying to rehire nearly 150 former employees who went to work for the outsourcer. "When they outsourced all of those people, half left because they didn't want to work for an outsourcer, and the other half ultimately got transferred by the outsourcer to other companies," he says. "So they lost all the people who knew their customers, products, the automotive industry and business processes."

Virtue: Don't outsource functions that require you to provide outsourcing vendors with strategic information about your company and your industry. Also, Hoffman advises keeping most of your internal helpdesk activities in-house and discouraging other business units from outsourcing customer-facing activities. You will have more control over which processes get outsourced if you insist on being involved in all discussions about outsourcing. "Run an analysis ahead of time, and get a consensus with business leaders about what must stay in versus what must go out," Hoffman says.

5. Bad assumptions

Vice: Your five-year outsourcing contract failed to take into account that technologies and business requirements would evolve within those five years. Now you can't move forward with new technologies. Giera notes that because of changes in server technology, for example, many companies will need fewer, but larger, servers down the line. If your contract is based on a per-server, per-month formula, you may not be able to change that without being penalized financially, she says.

Virtue: Write a contract that gives you the flexibility to reprioritize projects and resources without a major penalty.

"Technologies change so fast and the needs of clients change so fast, most parties should go into the contract expecting that after the first two years there is a pretty high likelihood that they'll have to renegotiate the contract," says attorney Robert Finkel.

Also, be sure the contract compels your outsourcer to keep costs in line as the market evolves. "Include benchmarking clauses every two to three years so that you can look at what's gone on in the market and make sure that the outsourcer is still competitive," Giera says.

6. Sloppy service levels

Vice: You've signed a contract that gives you minimal leverage on service levels. Now the outsourcer's poor service is interfering with your business, but you've got nothing to back up your demands for improvements.

Virtue: Define service levels in the contract and stipulate penalties for missed service levels. Having the service levels in hand not only helps ensure that you get the quality of service you expect, but it can also help when negotiating the contract's price tag. "It's hard to fix a price without knowing what the service levels are," Finkel says. But he says that it's not uncommon for vendors to want to wait until after the contract is signed before agreeing to specific service levels. That takes away your leverage and makes it less likely that you will reach a satisfactory agreement.

The penalties should escalate on the basis of how frequently service levels are missed and how much the resulting disruption affects your business. "You shouldn't have penalties for one miss, but the penalties should get exponentially larger the more frequently a service level is missed," Giera says. And your contract can stipulate that you have the right to terminate or take back part of the service that the vendor is providing if the number or severity of the service-level problems reaches a certain point, Finkel says.

7. End-game myopia

Vice: You didn't include a transition plan in your contract. Now, as it draws to a close, your efforts to move to another outsourcer or bring the work in-house are stymied. An even worse case: your outsourcing relationship ends abruptly. One of Giera's clients, a mid-size manufacturing company, outsourced all its payroll functions to a firm that suddenly went out of business. "My client couldn't pay its hourly workers on time that Friday. There were no provisions in the contract to get the data and employee records back, so they had to go to a manual payroll system," she recalls. The manufacturer ultimately spent eight months rebuilding its payroll system, including manually reconstructing tax, unemployment insurance and benefits records.

Virtue: To minimize disruptions to your business, make sure your contract calls for the outsourcer to be involved with the end-game transition. "Otherwise, what's the incentive for the vendor to help you?" Finkel asks.

Your contract should stipulate that you may offer jobs to people on the outsourcer's staff who have developed knowledge critical to your company. You should also be able to buy at a reasonable price the hardware and software that your outsourcer is using on your behalf. In addition, be certain that the contract gives you usage rights to any software that the outsourcer develops for you.

And be sure to give yourself enough time to make the transition. "When you terminate an outsourcing contract, you'll probably need more time than you think," Giera says. "Specify in the agreement that you can extend the agreement with appropriate notice at your existing terms, conditions and price for up to 90 days."