IT strategy – In too deep: outsourcing contracts aren't always easy to cancel

The old Neil Sedaka song warns that breaking up is hard to
do. Though the ballad was penned with affairs of the heart in mind, the main
principle it espouses applies in spades when it comes to the world of IT
outsourcing. Because once you’ve handed over core technology systems and
processes to a third-party outsourcing specialist, there is no easy way back.
Commitment levels vary from case to case, but most companies that have
outsourced core processes are closer to the pig than the chicken in the
production of an egg-and-bacon English breakfast: whereas the chicken is
involved with the meal, the pig is committed.

The honeymoon period, when companies could not outsource core technology
processes to India fast enough, is rapidly becoming a distant memory. According
to research outfit Forrester, unprecedented numbers of UK and US companies are
now reviewing their Indian outsourcing deals. Some want to end their outsourcing
agreements entirely, while others are scaling back arrangements or changing
providers.

Companies that previously jumped on the offshore outsourcing bandwagon are
realising that providers are increasingly suffering from a toxic combination of
their own resourcing problems and escalating costs. As outsourcing enjoyed rapid
success, providers steadily expanded the scope of their offerings to encompass
ever more core areas and business-critical activities. In the past, if
outsourcers failed to perform adequately, the impact was relatively
insignificant for most clients as the processes being outsourced were often not
core. However, as critical projects were taken on by outsourcing providers, the
potential downside to clients greatly increased.

India’s outsourcers have become victims of their own success when it comes to
resourcing levels.

As the sector boomed, the quality of staff and resources allocated to client
projects sometimes suffered. This led to a sharp rise in the number of projects
exposed as underperforming, or even failing entirely.

A further factor currently souring the Indian outsourcing revolution is
simply a matter of cost. Outsourcers are now charging substantially more than
they have in the past. Forrester notes that, historically, clients were willing
to deal with relatively sub-standard work because the labour rate made it
acceptable, but as offshore rates and related costs climbed, client tolerance
for poor work has dropped in tandem.

So if you have reached the end of your tether and need to extricate your
business from a failing or underperforming outsourcer, what needs to be done?
Forrester says getting out of outsourcing is never an easy option to take, but
points out that there are a number of rules to help protect companies from what
it somewhat dryly describes as the “worst ravages of engagement failures”.

The first rule, according to Forrester, is to realise that disengaging from
such relationships should be considered a last resort. Only after repeated
unsuccessful attempts to solve problems with the relationship should the final
sanction of termination be attempted. It advises companies preparing to cut the
outsourcing strings to focus on two separate, but parallel, lines of attack.
First, existing contracts need to be scrutinised to determine the exact legal
position with regard to termination, in addition to ascertaining the
outsourcer’s obligations. Second, it is vital to determine the level of
dependency on the vendor and the impact of any service disruption.

The list of questions is long, but obviously a key concern is the amount of
cash that needs to be paid to enable an orderly exit. Exit clauses based on
inadequate performance are likely to offer the cheapest means of escape, but it
will be necessary to prove that the outsourcer is at fault. If it is not
possible to prove that performance has been sub-standard, it is likely to get
far more messy, as companies attempt to invoke “exit for convenience” clauses.
Forrester advises those in this position to use money owed as leverage.

It is vital to know if there are service level agreements specifically for
the exit period. Is the provider allowed to start pulling resources and key
staff from the project before the end of the exit period? It may be beneficial
to offer employment to one or more of the provider’s staff, if this is not
contractually forbidden. Then there are thorny issues around intellectual
property: what is the legal position with regard to technology developed during
the relationship? Also, ownership of hardware and software needs to be
confirmed.

Having examined the contract, it is time to examine and mitigate risk.
Companies must conduct a thorough vulnerability assessment to determine
potential impact from service disruptions. To codify this process, Forrester
advises developing a provider vulnerability and risk matrix.

The final stage in the process is to look to the future. Lessons need to be
learned. It is crucial to know why the relationship failed, so that mistakes can
be avoided before engaging a new partner. Because if you marry in haste, you may
well face a long and expensive repentance.