Contracts at heart of outsourcing success

Many outsourcing projects are doomed before the ink dries on the contract because the contract stipulations don't correspond with the clients' expectations, a Gartner Inc. analyst said Thursday during a presentation at the company's Symposium/ITxpo.

When outsourcing contracts and expectations are misaligned, clients end up feeling that the service provider failed to deliver on goals and objectives, said analyst Chris Ambrose during his presentation titled "All outsourcing contracts are not created equal." Gartner estimates that up to 50 percent of outsourcing projects fail, and many of those failures can be traced back to the contracts, he said.

To draft an appropriate contract, clients need to understand that there are three different types of outsourcing deals:

-- utility deals, which are the most common (80 percent of all deals) and involve the transfer of mature and commoditized IT operations, such as IT infrastructure management, and whose goals are maintaining a consistent delivery of services with incremental improvements at low costs compatible with industry benchmarks;-- enhancement deals, which make up between 15 percent and 17 percent of all deals and which call for the outsourcer to deliver measurable productivity enhancements in, say, human resources or finance operations, to drive specific business goals, something involving a higher level of risk and complexity for both parties;-- and transformation deals, the more ambitious and less common type of deal (3 percent to 5 percent), which often involve the creation of a partnership or joint venture between the client and the outsourcer and whose goals are the creation of new business opportunities, such as the development of new products or the penetration of new markets, and thus require the highest degree of innovation and risk.

An outsourcing engagement's likelihood of success increases by 50 percent if the client knows what type of deal it wants to enter into before the contract is drafted, Ambrose said. "Enterprises must determine what sort of sourcing relationship best meets their business needs," he said.

Each deal typically involves different pricing schemes, delivery methods, technology approaches and customization levels, he said. Moreover, service providers are typically more adept at one type of deal, so being aware of the type of project will also help the client choose among outsourcing vendors, he said. "Matching the right type of supplier and the right type of engagement model will become increasingly important," he said.

Contracts must also be structured in a flexible way so that they allow for modifications as the client's business evolves, expands or shifts course. "Plan for change," Ambrose said.

Moreover, clients must continually supervise the outsourcing project and manage the relationship with the outsourcer. This close oversight lets the client enforce service level agreements, address problems early before they spin out of control, and identify areas of the engagement that need to be modified, he said.

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