Factors in managing outsourcing contracts

Harry Angel
Harry Angel | Sales Director North Amercia, East

There is an accelerating trend for organizations to contract with external providers to run important functions of their business operations. For example, Apple has always outsourced manufacturing and many companies outsource IT operations to the likes of Capgemini and Accenture. The market is also driving the providers to simultaneously expand the services they offer.
Outsourcing contracts can take months or years to define and negotiate, leaving both parties with hundreds of pages of Master Services Agreements, Local Service Agreements, Exhibits and Schedules. The goal is to define the expectations and the operations model for everyone involved of the outsourcing agreement.

The reality is that hundreds of obligations are buried within hundreds of pages of documents, and all of them must be met for the life of the agreement. The obligations can have different frequencies of commitment (e.g. one time, periodic, as requested), can have different formats (e.g. deliverable, report, audit), can have different locations of performance, can be assigned to different people based on the obligation and can require substantiation that the obligations are met.

Shared document sites and spreadsheets require significant manual effort to maintain and quickly fail to provide the level of accuracy and granularity needed to insure compliance with the agreement – for both parties involved. The consequences can be significant due to lost revenues, increased costs or penalties for non-compliance.

Contract management systems are typically not built to define, manage and report to the level of details needed for outsourcing agreements. The requirement is to essentially manage each obligation as if it was its own mini contract. And it is also important to know the source of the obligation in the contractual documents.

Graphical representation of the critical components for managing outsourcing:

There can be multiple variations of this diagram, but the essential component is that each obligation can be managed as a separate work-unit. It is important to define each obligation with enough detail and documentary support to ensure visibility for both parties in the agreement. This approach is evolving to the point where both parties can share a single repository for managing and reporting on the status of the Outsourcing agreement.