Effective Outsourcing Contracts: Best Practices

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Elizabeth Shelton
7 years ago
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1 A R T I C L E Zinnov. info@zinnov.com Fax Phone (US) , (INDIA)

2 1.0 Overview 2 Table of Contents Overview Benefits of well-defined outsourcing contracts Contract structuring framework Contract structuring Process Conclusion...5 Disclaimer:...6

3 1.0 Overview Overview 3 Information Technology and Business Process Outsourcing are now an integral part of corporate strategy for most companies around the world. Companies outsource not only to achieve cost savings but also to improve efficiency and to leverage the domain/technology/process expertise of the outsourcing vendors, these companies often rely on the vendor to help them gain the key advantages of outsourcing. Due to the strategic nature of the outsourcing initiative, it is critical to select the right outsourcing vendor and structure the partnership in such a way that both parties benefit from the relationship. The maturity of the outsourcing industry and the client s needs to closely monitor the effectiveness of the offshore operations has resulted in very long and complex contracts. Structuring the contract with the outsourcing vendor is a critical process in establishing the outsourcing relationship. The current contract structuring processes not only take significant amount of time but also result in expensive legal consulting bills. This article provides an overview of the contract structuring process including discussions on the advantages of an effective contract, basic framework companies should use while structuring their outsourcing contracts and the process companies should follow to efficiently structure their contract 2.0 Benefits of well-defined outsourcing contracts Here are some of the key benefits of a well-defined outsourcing contract Helps in clearly articulating the success criteria to the stakeholders in both the client and the vendor teams. Helps in defining some of the high level metrics used to measure the vendor performance. Helps in clearly defining the project requirements in terms of people, process, security, technology and business continuity Helps in clearly defining the incentives and penalties based on vendor performance. Helps in handling the unpredictable scenarios without causing frustration on either side Helps in structured growth of the partnership

the vendor to help them gain the key advantages of outsourcing.

4 4 3.0 Contract structuring framework 4 Exhibit 1 Having assisted multiple client in negotiating and structuring the contracts, Zinnov had developed a framework to assist organizations with their contract structuring. The framework mentioned above should form the basis for the contract structuring process between the vendor and the clients. In each step of contract negotiations, both parties should make sure that the contract serves the purpose of their short term and long term goals. This will ensure that there are sufficient incentives for both parties to guarantee the success of the outsourcing relationship. It is important to clearly define the requirements for the projects in terms of people, infrastructure, security, business continuity and processes. People related requirements include the skill set of resources, size of the team, duration of ramp up etc Infrastructure requirements include hardware, software, and network etc.. Process related requirements include resource induction process, status reporting, delivery knowledge transfer, quality process etc. Security requirements include physical, personnel and network security. Business continuity requirements include planning for physical theft, data theft, virus attacks, natural and man-made disasters The service levels for the outsourcing relationship and the corresponding incentives and bonus clauses should be clearly defined. This will help the vendor to internally measure and manage the outsourcing projects as well.

In each step of contract negotiations, both parties should make sure that the contract serves the purpose of their short term and long term goals.

5 4.0 Contract structuring Process 5 The governance of the contract in terms of termination clauses, contract breach and governing clauses should be clearly defined. Once the above areas are covered, then the client should discuss on the commercial terms. The client should also be flexible to reduce or increase the scope of the clauses defined above based on the flexibility shown by the vendor during the pricing negotiations Contract structuring Process The contract structuring process should be defined so that the time spent on the process is reduced and the team can start the relationship initiation process before the final contract is signed. One of the best practices commonly followed by companies is to discuss all the operational terms and sign a non-binding term sheet. The project initiation process can start as soon as the term sheet is finalized. The term sheet is then passed on to the legal department of both companies to work on acceptable language for both parties. This process also makes sure that the delays in the project due to any legal discussions are reduced and that the legal resources are used effectively. To reduce the cost of contract structuring Companies can leverage their in-house legal council to draft the contract based on the term sheet. Vendor contract templates can be modified to incorporate the term sheet details and outside legal support can be used only for the final validation of the contract. 5.0 Conclusion Clients should leverage the process and framework defined in this article to negotiate and structure a win-win contract with the vendor partner(s). It often helps to get 3 rd party consultants help in defining and negotiating the contract terms, this will minimize the risks involved in structuring outsourcing relationship and set it up for success. This also enables the stakeholders to focus on planning the outsourcing project requirements, goals, transition and management..

The client should also be flexible to reduce or increase the scope of the clauses defined above based on the flexibility shown by the vendor during the pricing negotiations. 5 4.

6 6 Zinnov is a leading offshore research and consulting firm assisting companies in their offshoring strategy, setup and operations compliance.

6 6 6 Zinnov is a leading offshore research and consulting firm assisting companies in their offshoring strategy, setup and operations compliance. Zinnov s end-to-end solutions, best practices and methodologies have provided immense benefits to the clients sourcing needs. With a solid offshore and onsite presence, Zinnov is able to conduct systematic and objective research on sourcing topics concerning the industry. Zinnov clients include Fortune 1000 companies across business domains. For additional information, visit or send mail to info@zinnov.com Zinnov Locations No. 29/4, 3 rd Floor H M Strafford, 7 th Cross Bangalore India Phone: / N, Pastoria Ave Sunnyvale CA Phone: , South Queenscliff Cir The Woodlands TX Phone: Disclaimer: The information contained in this paper including, without limitation, text, graphics and links, are provided on an as-is basis with no warranty. The information contained here has been obtained from sources believed to be reliable and responsible. To the maximum extent permitted by law, Zinnov disclaims all representations and warranties, express or implied, with respect to such information including but not limited to warranties of merchantability, fitness for a particular purpose, title, non-infringement and implied warranties arising from course of dealing or course of performance. Zinnov will not be liable for any damages of any kind arising from the use of this information including but not limited to direct, indirect, incidental punitive and consequential damages, Zinnov does not represent or warrant that the information provided is accurate, complete or current.

With a solid offshore and onsite presence, Zinnov is able to conduct systematic and objective research on sourcing topics concerning the industry.

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