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Managing an Outsourcing Initiative-3

Originally published: February 2011


Phase 3 – Designing the Outsourcing Contract and Other Documents

A sound agreement is critical to the success of an outsourcing engagement. It allows both the organization and the outsourcing vendor to maximize the rewards of outsourcing, while minimizing the risk. Each party must understand the reasons for the outsourcing decision and approach this phase with a "give and take" attitude.

All outsourcing agreements, should be
  • jointly developed by both parties, creating a win-win situation.
  • living documents that are reviewed often and can be revised as unanticipated issues or requirements arise.

The Contract

It is essential that the outsourcing contract reflect all issues critical to both parties:
  • Term of the agreement. This should include length of the agreement and any renewal options. Depending on the function to be outsourced, and how much of that function will be moved to the service provider, an agreement could be as short as six months or as long as several years.
  • Scope. In order to protect both parties, the contract should specify the services to be provided in as much detail as possible – including a complete list of all services to be performed, service levels, deliverables, etc. (See Service Level Agreements below.)
  • Confidentiality. Specify that all information submitted to the outsourcing provider is owned by the originating organization and is to be kept strictly confidential.
  • Service Level Agreement (SLA). A document that provides the objective criteria for managing the initiative. (See below.)
  • Force Majeure. These are provisions that excuse the vendor from liability for non-performance under certain unexpected or uncontrollable events, such as a natural catastrophe.
  • Warranty. Statement indicating that the vendor will provide the services as defined in the agreement and will accommodate a specific increase (or decrease) in requirements.
  • Dispute procedures. Addresses disputes between the organization and its outsourcing provider.
  • Pricing. Flexibility in pricing can be tied to the SLA, so that business risk is spread between both the organization and the outsourcing provider. Then each  will have a significant interest in the business performance. (See Service Level Agreements below.)
  • Termination plan. Specifies the manner in which a decision to terminate the relationship will be executed in a fair and equitable manner, without resulting in disruption for either party.

Service Level Agreement (SLA)

SLAs are generally a section of the Outsourcing Contract. However, they can stand on their own, as a legally binding contract. (Some outsourcing providers may replace the SLA with a Project Requirements Document (PRD) and Performance Scorecard.)

The SLA is a negotiated agreement between the two parties (client and service provider). It records the understanding about services, priorities, responsibilities, guarantees and warranties. It should be written in plain language, without industry acronyms or technology-specific terms.

When developed in detail, Service Level Agreements provide the information required to fully understand the quality of service the outsourcing provider is delivering.

Typically, SLAs include:
  1. Executive Summary describing the general purpose of the document, the duration of the agreement and the stakeholders involved.
  2. Scope and objectives of the services to be provided.
  3. Detailed description of services and the agreed performance levels.
  4. Service Level Metrics applied to measure and report the actual performance levels (see below).
  5. Service Level Management documenting processes to track, measure, and report on the various service level metrics; problem resolution guidelines; the escalation process; change and new services requests and implementation procedures; the service level review process.
  6. Roles and Responsibilities required of all parties to ensure the objectives are met.

Service Level Metrics

The SLA is an effective means of quantifying the outsourcing services, ensuring objectives are met. It also provides a basis for improvements, as necessary.

Service Level Metrics are the means by which performance against objectives is measured and reported.

To be meaningful, each service level should include:
  • Objective: Business reason for measuring the service level.
  • Definition: Specific definition of the service level.
  • Method: Description of how performance will be measured (the Metric) and how often.
  • Period: Time through which the performance will be measured.
  • Target: Minimum and optimal targets acceptable to both parties.
  • Action: What happens when the service level is met (performance incentives) or not met (penalties).

Performance Incentives

Building performance incentives into the SLA based on attaining service level metric targets gives the outsourcing provider a stake in the ongoing improvement of the process and the overall success of the initiative. Performance incentives should focus on:
  • Clear understanding of the areas impacted by the outsourcing relationship.
  • Identifying the Key Performance Indicators (KPIs), which help define and evaluate how successful the outsourcing initiative is.
  • Defining the handoff between the internal organization and the outsourcing provider.
  • Putting substance behind the attainment of service levels.
Properly structured performance incentives and penalties enable the outsourcing provider to work with your organization as a partner, be accountable for their performance, and tangibly demonstrate the value they bring to your organization.

The most successful outsourcing relationships result from the outsourcing provider and the organization participating in continuous process improvements.

Benefits of Well-defined Outsourcing Contracts and SLAs

Drafting well-defined outsourcing documents provide a basis for a successful initiative because they
  • Define the project requirements – necessary roles and responsibilities, project processes and procedures.
  • Clearly and concisely articulate the success criteria.
  • Delineate the incentives for success and penalties for failure.
  • Provide a means of handling unanticipated scenarios.

Phase 4: Implementation