When your outsourcer is acquired

If you asked Kevin Smith three years ago what it's like to have your outsourcer acquired by another company, he might have said, "No problem." Today, however, he's got a different tale to tell. That's because Smith, information systems director at U.S.-based Spyder Active Sports, has had the experience not once, but twice. And while the first transition couldn't have gone more smoothly, the second ended in disarray.

It all started six years ago, when the outerwear designer and manufacturer outsourced its J.D. Edwards ERP system to application service provider (ASP) Prentice Technologies. Three years later, when Prentice was bought by Fortrust Solutions, a data center management firm that wanted to move into the ASP arena, the handoff went fine. "It was all well managed," Smith says.

Then, in mid-2004, Fortrust sold its ASP business to a software-as-a-service provider in California. The transition itself went smoothly enough, but over the next year and a half, service levels dropped off, and gradually, nearly all the original Fortrust staffers left the firm, Smith says. "Several times, I asked their management, 'Are you guys serious about this line of business? Because it doesn't appear that way to me,'" he says. "On several occasions, I even offered to pay more for better service, but they never took me up on it."

With his contract up for renewal, Smith began looking for alternatives. This year, he signed on with a new outsourcer, OneNeck IT Services, with which he is currently satisfied.

Smith's dual experiences contain valuable lessons for outsourcing customers, given the consolidation activity in this arena. Outsourcers are eating up other outsourcers to increase scalability, expand global presence, take advantage of lower-cost skills and broaden service offerings, experts say.

"With increasing regulatory pressures, demand for encryption, fears of identity theft and the need for privacy, it's getting harder and harder to be a small service provider," says Dan Scheuble, president of the mortgage division at Fidelity National Information Services, a provider of information products and outsourcing services. Larger providers can leverage their investments across all of their product offerings, he explains.

And the mergers aren't just domestic. IBM, Electronic Data Systems and Accenture have acquired, partnered with or made moves to buy Indian outsourcers. And India-based companies like Wipro, Tata Consultancy Services and Mastek have bought service firms in other parts of the world.

"The race is on, and the goal is more efficient global delivery," says Paul Roehrig, an analyst at Forrester Research.

Here's what you can do now and later to minimize the pain that can occur when your outsourcer is acquired.

Play Detective

As soon as you hear rumblings that your provider is on the block, it's important to dig up as much information as you can about potential buyers.

"What customers want to hear is whether the acquirer will continue to grow the product or just wants the cash flow," Scheuble says. "They want to hear the business strategy."

This can be difficult if your provider can't or won't tell you who the potential buyers are. That's what happened to Maria Richards, director of IT at Trex, a manufacturer of alternative decking materials in the U.S.

In 2003, Richards knew that the ASP that Trex used for its ERP system was for sale, but she felt pretty secure, knowing her contract contained several protections. For instance, her provider was required to give her advance notice of a sale, and Trex could opt out of the contract in the event of an acquisition.

Richards had also stipulated that Trex's application run independently of other systems so it could be extricated if she transitioned to another provider. Finally, she had arranged a depreciation schedule for the equipment that hosted the application in case Trex needed to buy it back.

But there was one thing Richards didn't bargain on: the difficulty of doing due diligence on the buyer when you don't know who it is. "We knew they had three [companies] looking at them, but we didn't know who they were," she says. "And there was nothing in the contract that said they had to tell us."

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