Mega outsourcing contracts – some key advice (Poland)
Piotr Rutkowski, SourceOne Advisory
The Polish outsourcing services market has been around for almost two decades and perhaps now we can finally say that it has become a mature market. There is however one important issue that continues to distinguish us from more developed countries in the area of outsourcing (ex. the USA, Great Britain). This issue is our small experience in regard to so-called “mega-contracts”. The value of these agreements is usually in the hundreds of millions of PLN and aside from outsourcing services,they also cover the building of special financial models to settle services, taking over large groups of employees, and the buyout by the outsourcer of fixed assets with a significant value.
We only had a few such projects throughout should be closely examined and as many conclusions as possible need to be drawn from them. On the basis of my own experience in regard to working on such contracts, I would like to share a few conclusions with the readers. My goal is not to write a handbook titled “How to conclude big deals?”, but rather to indicate a few of what I believe to be key issues in such undertakings.
“An outsourcing contract is like a marriage” – this saying is already known in our industry, but nowhere does it fit as much as in the case of large outsourcing contracts. If from day one, you do not treat your megaproject as beneficial platform for long-term relationship for both Parties, you will face serious trouble. This rule has many aspects that clients are not always aware of.
“A contract is like a marriage” means that when negotiating an agreement, we will not negotiate “to the bottom” knowing that the outsourcer is already on the threshold of profitability or even below it. Such contracts cannot be treated like the process of buying computers in which it is possible to clearly specify and standardise the technical parameters., and the choice of the offeror will be limited solely to the issue of the lowest price.
In a large contract, will you expect your provider to be innovative and invest in relations with you, notify you of new technologies, monitor the newest business trends, and provide periodic educational workshops for your employees? How can you expect this from an outsources if during negotiations, you led to the situation in which the profitability of such an agreement to the provider is close to nothing? “A contract is like a marriage” also means that when choosing one’s outsourcing partner, aside from hard and easily calculated criteria, you will also take into account such soft factors as cultural proximity, the specific nature of both organisations, or the quality of references which cannot be quantified. Limiting oneself when choosing a provider to a simple table based price calculation, the number of references, and, for example, the number of the outsourcer’s employees and multiplying this by the weights assigned to individual categories may result in disappointment already during the contract implementation stage.
From the first day of the implementation of an agreement, it may turn out that the organisational cultures on both sides are radically different. We want to do things quickly, they want everything on time. Out decision making authority in regard to the mega-deal is in the hands of one person, while in their case, different people are responsible for each area, and they don’t necessarily communicate well with the rest of the team. In our cultural circles, “NO” means “NO”, in theirs, “NO” means “LET’S DISCUSS THIS”… the entire history of our Polish market.
Another key issue in large outsourcing projects is the complete involvement of the highest level of the management of your organisation, both during the tender and selection of an outsourcer, as well as during later day to day cooperation.
Due to the large scale and complexity of outsourcing mega-contracts, the tender, the selection of a provider, and the negotiation of an agreement must take a long time. Based on my experience, this project stage usually takes organisations from 10 to 18 months to complete.
In these times, when the speed of the changes to which businesses are subjected is huge, during the selection of an outsourcer in the client’s organisation so many changes take place that when we try to describe the project and build an appropriate financial model for it, it turns out that upon the completion of this stage of the works, their results… don’t exactly correspond to the actual state of affairs. In such cases, without complete support from the CXO level, which gives us the power to freeze certain changes in the organisation and elements of the project, we would move around in circles, unable to “close” this stage.
The support of the CXO is also an important element in accelerating the process. The key participants of the process must be available for this project and have no excuses in the form of their current duties, and data from different parts of the organisation must be delivered on time, because everyone knows that “tomorrow”, it will be seen by the president and decisions will be made on its basis.
The involvement of the CXO is also a means for resolving numerous conflicts of interest that take place especially often in large projects. The bigger the project, the more parties are involved in it,and each of them has its own interests to take care of and feels the need to address the threats that they see in the outsourcing contract.
The final issue that I would like to discuss in this article, and which is especially important in large outsourcing contracts, is the need to have people in one’s organisation that have experience in agreements of this scale. Hiring such employees full time or obtaining the support of an appropriate consulting firm is superfluous. The bigger the outsourcing project, the bigger its complexity. I’m notjust talking about building an
optimal agreement, which is always hard to do in outsour-cing, and in acontract of this scale constitutes a significant challenge (among others, the creation of an optimal SLA model that is linked to a well descried catalogue of services, adding monitoring/reporting mechanisms and tools, and building an appropriate settlement model for the agreement). How you set up the entire outsourcer selection process, who you will invite to participate in the tender, how you will conduct negotiations, at what price levels you will terminate negotiations, etc. is also equally important.