To Negotiate Outsourcing Contracts, Preparation Is Key

by Dr. Sara Cullen, Senior Consultant, Cutter Consortium

So much emphasis has been placed on negotiation in outsourcing contracts that an inexperienced person could believe it is the pinnacle of the outsourcing lifecycle and involves the greatest amount of work and the greatest risk of signing a bad contract. If it does become the pinnacle, then something has gone seriously wrong in an earlier stage.¹

Organizations may have placed themselves at risk in at least five ways:

1. The organization did not draft its desired contract including the SLA (the entire document they want the provider to sign, not just a few conditions) before opening the competitive process.

2. The organization had unrealistic expectations of what the service provider was going to do for the money it quoted and was inexperienced in designing deals that work in practice (not just in concept).

3. The organization chose the lowest price without assessing the viability of the bid -- whether the goods and/or services could actually be delivered in the way the client wants while still allowing the service provider a reasonable profit.

4. The organization did not develop a feasible BATNA, so it had no well-thought-out alternative if the service provider radically changed its offer once at the negotiation table.

5. The organization made itself vulnerable, perhaps by imposing on itself a short signing deadline, thereby giving the service provider the leverage to act opportunistically.

When the outsourcing lifecycle was followed, negotiation simply involved refining the exact wording of various documents. It did not involve give-and-take negotiations over the intent of the deal, because that is when parties win or lose depending upon the particular individuals involved. As one experienced negotiator put it, "Don't negotiate, calculate."

Organizations that had thorough, but relatively brief, negotiations did a number of key things right, and at the right time, before negotiations:

• They prepared the SLA, price framework, and contract before selecting the service provider.

• They then required the bidders to give exact wording changes regarding any item they wished to negotiate as part of their bid in a statement of departure.²

• These changes (and perhaps additions or deletions) were then clarified during evaluation, and incorporated into the evaluation and selection processes.

• The discovery/due diligence required by both parties to verify the information that each has presented to the other concluded before negotiations, thus there were no "known unknowns" before negotiations began.

• The preparations for the mobilization stage of the contract (otherwise known as "transition-in" or "startup") were complete before negotiations (e.g., novated or assigned licenses, asset inventories and condition assessments, market valuations of items to be sold).

• All items to be negotiated were detailed in the negotiation strategy including the client's estimate of each party's position, the underlying drivers of those positions, potential win-win scenarios, and each party's BATNA.

Contracts worth more than $1 billion were negotiated in less than two weeks using this approach, whereas other contracts worth under $3 million a year took months to negotiate, because they did not follow the process. It's not the value of the contract that results in protracted negotiations; it's the preparation.

I welcome your comments on this issue of the Cutter Edge and encourage you to send your insights on the market in general to me at scullen@cutter.com.

-- Dr. Sara Cullen, Senior Consultant, Cutter Consortium

Note

¹For more on negotiations' proper place in the outsourcing lifecycle, refer to the Sourcing & Vendor Relationships Executive Report, Negotiation Planning: Plan to Get Sustainable Results.

²Cullen, Sara. "Competitive Bidding: Getting the Right Deal with the Right Supplier." Cutter Consortium Sourcing & Vendor Relationships Executive Report, Vol. 7, No. 9, September 2006.