The Outsourcing Agreement and Balance: Preparing for Success or the Consequences of Failure

The following article is an excerpt or derived from Selling Outsourcing Services by Grant Lange.

Preparing for the consequences of failure is not the best way for a strategic supplier and trusted advisor to kick off a multiyear outsourcing relationship with a client. And yet, it is a familiar storyline.

When negotiating the terms and conditions for an outsourcing agreement, it is typical for days, weeks, and months to pass of deal shaping, downward pricing pressure, multiple down-selections, decision gates, and checkpoints, and contentious and parallel negotiations with multiple vendors.

During this period, significant financial resources are wasted, and service commencement and business case benefit realization dates are deferred. The net effect is that the current sales cycle and procurement approach for large outsourcing engagements is inefficient across time, quality, and cost parameters, and an industry shift is inevitable.

Irrespective of the role you play and the party you represent at the negotiation table, I challenge you to think about your most recent outsourcing services negotiation. Was the focus on failure – hashing out the terms and conditions that define the rights and obligations of the respective parties upon termination of the agreement, establishing indemnity obligations and liability limits related to damages claims, negotiating the percentage of fees at risk and defining how many critical service level defaults yield a termination right, or establishing the procedures for and implications of an unfavorable benchmarking report? Or, was your negotiation geared toward success – focused on those terms and conditions and components of the agreement that facilitate timely, quality, and cost-effective delivery, collaboration, joint ownership, and partnership between the parties? Although the answer may be both failure and success, it is easy to conclude that too much time was devoted to focusing on the consequences of failure and the allocation of blame, and not nearly enough time was spent focusing on collaboration, partnership, and success.

The irony of this ongoing dynamic is that for each contentious and heavily negotiated term and condition, a market-relevant standard exists that could easily be the departure point for negotiation. If the parties could simply acknowledge that standard, the negotiation could focus on tempering and fine-tuning those terms and conditions, service level constructs, and fee structures in a way that would yield an acceptable level of risk and reward for the parties and that would be commensurate with the underlying buyer values. Have you ever been a party to a negotiation that starts with extreme positions, is followed by minor concessions occurring over weeks or months, and concludes with a compromise position?

[pullquote align=”left” class=”” cite=”” link=”” color=”#FFA500″]Wouldn’t it be much more productive to immediately move to the compromise position, or at least within its relative range, and then identify a mutually agreeable option that is commensurate with the underlying nature of the solution and that meets the interests of the parties?[/pullquote]

If you have been in this situation, it is obvious that the compromise position is, for the most part, the recognized industry standard for the issue under negotiation and, frankly, the likely landing point anticipated by the parties when they began the process. It certainly raises the question: Why waste time with a series of minor concessions when you could have put your best foot forward? Wouldn’t it be much more productive to immediately move to the compromise position, or at least within its relative range, and then identify a mutually agreeable option that is commensurate with the underlying nature of the solution and that meets the interests of the parties? For the golfers out there, compare this approach to surrounding the hole and then determining the line and pace necessary to sink the putt.

If the market standard is so widely recognized by clients, their counsel, third-party advisors, and service providers, then why is this glaring inefficiency and corresponding waste allowed to continue in perpetuity? The answer may be that there is no incentive for a course correction. As I like to say, it is that simple and that complex. Clients may be immature or inexperienced in outsourcing or may have read countless stories about the importance of selecting the right outsourcing vendor. These clients blindly follow their legal counsel and third-party advisor out of fear that they would select a vendor and agree on non-market-relevant terms that would yield suboptimal delivery results. Counsel and third-party advisors are constantly seeking to move the market with more favorable terms and conditions for their clients and have more risk shifted squarely onto the shoulders of the clients’ service providers. As for the service providers, I am unclear about their motivation for perpetuating the status quo, because they feel most of the pain in the form of increased business development costs and detrimentally impacted relationships. Maybe they are unwilling to put their best foot forward or equate doing so with some competitive disadvantage they would encounter in the negotiation process. Thus, you see the challenge – how do you incentivize people to correct their course when they believe their pace and speed are optimal?

External counsel and third-party advisors are the catalysts for this cycle by introducing contract templates that are not balanced, that are heavily skewed in favor of the client, that are not commensurate with the market, and that do not yield an acceptable level of risk and reward for both parties to the transaction. And let’s not forget about the typically open-ended time and materials billing construct under which external counsel and third-party advisors may be engaged. Although it seems as if the service providers would be the primary proponents of accepting a course change, namely, focusing on delivery capabilities and price as their competitive differentiators, that is not the case. Rather, they embrace the madness out of fear of disqualification and perpetuate these inefficiencies by accepting more risk in an effort to unseat incumbent service providers, defeat their competition, and capture market share.

Unfortunately, this dynamic can put clients in a difficult position, because they are faced with a tightrope-like balancing act on multiple fronts – undermining their relationship with their counsel and third-party advisor, or detrimentally impacting the relationship with the service provider with whom they are about to embark on a multiple-year relationship. This dynamic can also manifest itself when a client’s counsel and third-party advisor are procuring an outsourcing solution that is not consistent with the client’s current delivery environment and user expectations. Assuming an agreement is ultimately executed between the parties, the result is suboptimal. Relationships have been damaged, the best- suited vendor has not necessarily been selected, collaboration and innovation have become an afterthought, and timely, quality, and cost-effective delivery has been compromised.

Given this detrimental and potentially destructive impact, a course change is necessary. It is time to ask difficult questions, to challenge the status quo, and to provide an alternative mechanism to achieve timely contract execution that can be adopted by clients, counsel, third-party advisors, and service providers. At the center of this alternative construct is acknowledgment by all parties that an accepted industry standard exists for each term in a typical outsourcing agreement. All parties to the transaction must focus on putting their best foot forward and agree that the industry standard is the starting point and departure point from a negotiation perspective. This acknowledgment drastically decreases the contract execution cycle time, because many of the multiple redline and iterative processes typically associated with an outsourcing negotiation are eliminated. This acknowledgment could take many forms, either as an industry-standard agreement or a template created by counsel, third-party advisors, and service providers that embodies the same terms. While I understand that this approach is difficult given the competing interests I previously mentioned, a change is inevitable. So, why not now?

To be clear, this acknowledgment does not mean that the negotiation is completed and we can move on to the signing ceremony. Every outsourcing transaction is different, and the underlying client buyer values, the scope of the solution procured, and the service provider delivery capabilities dictate the ultimate shape of the outsourcing agreement. Instead, attention shifts to tempering the terms and conditions according to the underlying solution and focusing on those components of the agreement that are most critical but typically turn into afterthoughts. These components include developing a narrowly tailored statement of work that clarifies the roles and responsibilities of the parties, defining objective, measurable, and verifiable acceptance criteria and service levels, establishing a robust governance process, and documenting all key assumptions and dependencies, especially in a multivendor delivery environment. The focus on buyer values is critical. It is not uncommon for the clients’ stated buyer values to be inconsistent with the negotiation approach and the terms and conditions promulgated by their counsel and third-party advisor. From my perspective, the most consistent buyer values include a vendor that can be trusted, that delivers a low-risk and quality solution, that has global delivery capability, that has a strong reference base, that can deliver on its value proposition, that focuses on innovation and continuous improvement during the delivery term, and that yields predictable results.

To reiterate, I am not suggesting that every outsourcing engagement is the same; that could not be further from the truth, given the broad scope of services outsourced in the marketplace. However, there is a core set of service-type-agnostic terms and conditions that are consistent and do not require extensive negotiation in each agreement. With this approach, the starting point focuses on tempering and fine-tuning the terms and conditions in the agreement to be commensurate with the underlying nature of the solution provided. With this shift in focus, the parties can focus on what really counts – those terms and conditions and key components of the agreement that yield timely, quality, and cost-effective delivery.

Building a Trusted Advisor Foundation

It would seem that negotiating terms and conditions governing delivery in a complex and strategic long-term outsourcing program would establish the foundation for a trusted advisor relationship between the two parties, thereby enhancing the probability of success and creating opportunities for collaboration and partnership. In practice, that is rarely the case. The most heavily negotiated terms and conditions typically set the stage for how the parties address and allocate the consequences of failure. Those items that support collaboration and partnership often seem to be afterthoughts. This failure-first sequence will have a detrimental impact upon timely, quality, and cost-effective delivery.

Ironically, during the sales cycle, discussions between the buyer and decision-maker about the solution and underlying contractual agreement often go smoothly. The focus of these conversations is typically on how the depth and breadth of the service provider’s delivery capabilities help the client achieve its mission and vision, advance the client’s strategic agenda, and realize a significant return on the client’s investment. In return, the service provider expects to build a robust pipeline of opportunities, enhance its reference base, expand its delivery footprint, deliver on its value proposition, and develop a long-term trusted advisor relationship.

When the service provider comes out of the initial sales meetings, the service provider’s confidence is usually high, which helps foster the belief that any ensuing price and terms and conditions negotiation will go smoothly. The focus of any dialogue up to that point centers on collaboration and value creation, and not on low price and risk deflection. Unfortunately, that optimism may fade quickly. The participants at the negotiation table are typically limited to procurement staff, legal counsel, and third-party advisors. It becomes clear that the courting process has ended, and it is time to hash out the terms and conditions of the prenuptial agreement. As many of you know, when this process begins, it may become very emotionally charged and – depending on the reasonableness of the parties and their desire to strictly adhere to their positions – continue this way for some time before reaching closure.

The unfortunate mindset that perpetuates this behavior is that many clients view their service provider’s role in an outsourcing engagement as all encompassing. If you compare this role to building a ship, clients take the approach: “You go and build it. You are the experts, and we will see you at sea trials.” What clients may not realize is that irrespective of the underlying service, you cannot outsource responsibility. Clients and their respective IT and other supporting organizations still own the delivery and the service, and they must work in partnership with their service provider to achieve success.

Let’s Look at the Statistics

If you question the contention that most negotiations and subsequent contracts focus on allocating failure rather than promoting collaboration, consider an annual study conducted by the International Association for Contract and Commercial Management in which feedback was solicited from more than 500 international companies about which terms and conditions they negotiate most frequently. Since 2002, when this study was launched, the results have remained unchanged for the top 10 most frequently negotiated terms. Although there has been slight movement over the years, the overwhelming majority of the most heavily negotiated terms and conditions are squarely centered on the allocation of blame and the consequences of failure. They are as follows:


  1. Limitation on liability
  2. Indemnity
  3. Intellectual property ownership
  4. Price
  5. Termination
  6. Warranty
  7. Confidential information/data protection
  8. Delivery/acceptance
  9. Payment
  10. Liquidated damages

There may be differences, depending on the client and service provider, the nature of the underlying services provided, the geographic region, and the applicable law. It is abundantly clear, however, that most clients – or, at least their procurement, legal counsel, and third-party advisors – view the terms and conditions in the contract as the mechanism by which blame is allocated when a delivery failure arises. While this approach may seem like the most viable option, given the scope and complexity of the underlying engagement and the significant risk associated with failure, it certainly does not lay a strong foundation for success. Irrespective of that complexity and risk inherent in delivery, there is clearly a dichotomy. C-suite executives and true economic buyers communicate a message about collaboration, partnering for success, and the ease of doing business with their organization. At odds with this message are the methods and tactics promulgated by their procurement and legal organizations in the execution of the underlying contractual agreement.

Setting a course of collaboration and partnership starts with adhering to a disciplined approach by which the key terms and conditions that will govern delivery are established. Rather than focusing on the extreme positions that may be initially taken by the parties and the multiple redline iterations that inevitably ensue during the evaluation and negotiation process, the focus should be on putting that best foot forward. To that end, the starting point should be the market-relevant and industry standard approach on each term that can serve as the baseline for the agreement or that, where appropriate, can be tempered based on the nature of the underlying solution. A similar focus should be directed towards the key components of an outsourcing agreement that drive success, namely, the statement of work; any assumptions or dependencies upon which delivery is conditioned; clarity about the roles and responsibilities of the parties, especially in a multivendor environment; objective, measurable, and verifiable acceptance criteria for deliverables and milestone achievement; a well-documented governance process; and a change order process that is understood and strictly followed.

This approach is a radical departure from the current model of starting from a newly introduced template and negotiating a 500-plus page outsourcing agreement. Although this approach may represent a change from the status quo, it is built on a foundation of efficiency and legitimacy, and it is commensurate with the evolving market for outsourcing services that is screaming for speed to value. To that end, this approach is grounded in the following key tenets:

  1. The current process by which outsourcing agreements are negotiated is not efficient from a time, quality, or cost perspective.
  2. The overwhelming focus of the negotiation process is on the consequences of failure and the allocation of blame when there is a performance deficiency.
  3. There is an established industry standard for each of the most contentious and heavily negotiated terms and conditions.
  4. Both parties to the transaction must put their best foot forward and use this standard as the departure point for the negotiation process.
  5. There will still be plenty of opportunity to fine-tune and temper each term and condition to be commensurate with the underlying nature of the solution provided.
  6. The scale must be tipped such that there is a much greater focus on collaboration on those components of the agreement that drive timely, quality, and cost-effective delivery, including the following: a narrowly tailored statement of work that is free of ambiguity and that clearly sets the expectations of both parties; clear service levels that are objective, measurable, and verifiable; a strong governance process; absolute clarity about roles and responsibilities; and a robust set of assumptions and dependencies, especially in a multivendor delivery environment.
  7. There is no value in having each party take an extreme position from which they each agree to minor concessions over an extended period of time and, ultimately, compromise when they both knew their likely landing spot from Day 1 – the market-relevant standard on that particular issue.
  8. Caving in to a position asserted by the other party after months of saying “no” is extremely frustrating, and erodes trust and credibility.
  9. Constantly asserting what other vendors may agree or have agreed to lacks context and is irrelevant. Stop playing games and focus on market relevancy.
  10. There is no purpose in unnecessarily extending the sales cycle and creating tension between the two parties. It will serve only to detrimentally impact a relationship that has yet to officially begin.
  11. An outsourcing relationship requires collaboration and partnership between the parties to achieve success.

Finding the Right Balance

Let’s be clear: The scope of outsourcing services that the largest IT service providers deliver is large and complex. These services require diverse teams with deep functional and institutional expertise for delivery, may span multiple years, traverse multiple geographies, and are mission critical to the client organization. Given those parameters, it is prudent to develop terms and conditions that define the following: the rights and obligations of the parties in a situation of nonperformance or some other occurrence that dictate how a dispute is resolved; the allocation of any related liability; or the termination of the underlying agreement. However, although preparing for the consequences of failure is always a critical component of the negotiation process, it should be balanced with those terms and conditions that focus on collaboration and are a foundation for a strong partnership between the parties that is necessary to achieve timely, quality, and cost-effective delivery.

Clients select an outsourcing vendor based upon its service quality, its brand awareness, and its broad reference base for delivering similar solutions in a timely, quality, and cost-effective manner. Those solutions are competitively priced in relation to the prices of the other vendors in the marketplace and commensurate with the underlying nature of the service provided. Conversely, through successful service delivery, the most successful IT service providers continue to expand their delivery acumen and develop quality, predictable, and repeatable solutions, focus on continuous improvement, fine-tune staff capabilities and functional expertise, and, most importantly, strive to achieve a trusted advisor relationship with their clients. Given this dynamic, the largest IT service providers should put their best foot forward and take the initiative with their clients by promulgating an agenda that focuses on achieving a better balance during the negotiation process. Narrowly tailored statements of work, objective and measurable acceptance criteria, detailed governance models, clarity on roles and responsibilities, a comprehensive set of assumptions and dependencies, and a clear change order process should not be afterthoughts, given the size and complexity of the engagements being delivered. In my experience, afterthoughts are what they have become.

Prudence dictates that the parties prepare for the consequences of failure; failing to do so would be negligent, to say the least. But a focus on partnership and collaboration is much more commensurate with the mission, the vision, and the trusted advisor relationships that every IT service provider strives to achieve with its clients. Finding the right balance serves both parties well and facilitates the key underlying interest of both parties – successful delivery.

If you can embrace these key tenets and are ready to challenge the status quo, then I encourage you to do so without hesitation. Go ahead if you dare – take a chance and put your best foot forward. You might be surprised at the results.

Liked this article? Read the full book: Selling Outsourcing Services by Grant Lange.

About the Author

Selling Outsourcing ServicesGrant S. Lange is an IT services sales and delivery executive with global experience negotiating large and complex application, infrastructure, and business process outsourcing agreements within the public and private sectors.

During his career, he has negotiated outsourcing agreements that have generated in excess of $2 billion in new sales. He is a partner at a leading IT services company and has served in a variety of leadership roles at some of the world’s largest IT services, advisory, and software firms.