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How to close your next IT outsourcing deal: Handshake vs. contract

Stephanie Overby | May 6, 2013
Should you trade your clear-cut written outsourcing contract for a simpler agreement and a handshake with your IT services provider? Thomas Young from Information Services Group (ISG) says you should consider what he calls 'evolutionary contracting.'

How would one of these deals evolve over time?

Young: If we're working together in a dynamic market, I may not even be able to articulate what I want six months or a year from now. Maybe I start with developing a mobile app. But as we start to get customer feedback, the work changes. And as the work changes, the service levels have to change. And as the service levels change, the pricing has to change. So pricing, service-level agreements, and statements of work--the meat of any outsourcing agreement--evolve to meet changing needs.

At the beginning of the contract, you keep it simple. Here's how we'll do things and let's see how it goes. As time goes on, it becomes more sophisticated. Ideally, you move from an input-based metric, where you're paying from a rate card, to output-based pricing for a turnkey solution.

So then, I'm not selecting my provider based on price or service levels then because much of that is to be determined. How would one figure out the best fit with a provider?

Young: In the past, customers used a request for proposal (RFP) process to select a partner. They put a big RFP on a street, invited vendors to reply, and used that process to determine their partner for five to seven years. I wouldn't do that today. I would use a request for solution and pick a service provider based on whether I liked or trusted them or whether I thought they could solve my problem. Then we would build a services framework on that.

That would require much more engagement and management overhead for the customer over the long term.

Young: Historically, what we at ISG and other outsourcing consultancies have anchored our business around is that brokering and transacting of the 1,000-page contract. It's episodic, and three to five years later we come back and do it again.

We need to get away from that episodic role and think of the work as continuous with us acting more as a referee or a counselor in that long-term relationship. You have that documentation around the handshake, and we are that neutral third party to drive communication, make suggestions, and facilitate transparency. That transparency is the hardest hurdle to overcome. Most people don't want to embrace open book outsourcing.

It sounds like a way to drive more billable consulting hours over the life of the outsourcing deal?

Young: We'll move from becoming the higher-price consultants that are episodic to a managed services model at a lower price. We'll only get hired if we continue to provide value.

Senior IT leaders are frustrated with the lack of innovation from their outsourcing relationships. When you get under the covers of that, you find that the way we start these deals is part of the problem. Those 1,000 pages choke innovation. If it's 2013 and you're still operating based on a cloud strategy you developed in 2010, what are the chances you got that right? And we're part of that problem.

 

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