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How to structure an outsourced IT project for less risk, more leverage

Stephanie Overby | June 22, 2015
Large-scale IT outsourcing deals are doomed to fail if you don’t structure the project properly. Therefore, it’s imperative that during the negotiating and contracting phase you lay the groundwork to mitigate the risks and maintain leverage.

Specifically, when approaching a major, single-sourced program, IT organizations should contractually commit only to the work that can be discretely specified, scoped and planned in the near term.

"We recommend that buyers limit the scope of work to that which can be defined with specific activities and deliverables that are within the control of the provider," Alpert says. "With this, the provider can commit to a fixed or capped fee for a known quantity of work that is within their control. In exchange, buyers receive the comfort of knowing what they will get in the form of deliverables and budget certainty." Then they can use the traditional design phase of the project to identify detailed functional specifications.

These deliverables "enable the client to scope and potentially compete the next phase of work (for example, technical design and build) vs. [creating] a higher-level of design with provider promises to capture the additional design detail during the next phase of work,'" says Alpert. In this way, buyers will ensure that project milestones are structured to maintain the ability to compete future phases of work if the incumbent provider is not "staying hungry," Alpert explains.

The goal is to make the most of the single-sourced approach while managing the inevitable drawbacks of locking into one supplier. "The optimal approach is to leverage the potential scale of the project to create a comprehensive structure that provides for committed rates, discounts, governance structure, resource and staffing requirements, commercial terms, and performance structure," says Alpert.

 

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