By: Stephanie Overby
When plans change or performance is poor, it may be time to break off an outsourcing commitment. Here’s how to make the process as pain-free and productive as possible.
Not all outsourcing relationships last. And it could be any number of reasons that might suggest an IT service provider relationship is worth breaking up over. The outsourcing vendor’s performance may be poor. The client may feel they’ve lost control of their IT organization. Costs and fees may have ballooned. The contract may be nearing its end with little desire to re-up.
No matter the rationale, there is one common issue at the core of most dissatisfied outsourcing customers’ complaints: Things have changed.
“The most important reasons are that the business is changing, the market is changing, the dynamics are different, the solutions being used were built for a different time, or the scope of services needed have changed and the customer may need a different firm with capabilities in a different area and with more innovation,” says Doug Plotkin, managing director in Deloitte Consulting’s Technology Strategy and Business Transformation group. “When we hear that a provider isn’t doing a good job, what the company may really mean is that the services they receive are no longer appropriate for what the company now needs, and they are frustrated with the provider’s inability to pivot.”
It’s important to examine the root causes and conditions underlying an underperforming outsourcing arrangement before even considering terminating a deal — and to give the provider an opportunity to remedy them.
“It is common for companies to redefine their outsourcing relationships as natural changes in business often drive the need to shift program scopes,” says Marc Tanowitz, managing director with business transformation and outsourcing advisory firm Pace Harmon. “However, if a client decides to terminate an outsourcing relationship, it should be based on realities of a provider breaching the terms of the outsourcing agreement and pursued as an option after governance and escalation processes and strategies have been attempted and exhausted.”
If the provider fails to rectify the situation, though, then what? Terminating an IT outsourcing contract — even with cause — is no trivial matter.
“It’s important to remember that transitions are also expensive. Ending a contract is hard if you have a traditional relationship and you’re in year two of a five-year contract,” says Plotkin. “You must find a new provider, negotiate a new deal, and transition that work. You also can lose a knowledge base that has developed on your service provider’s side.”
However, there are actions that CIOs and other IT leaders can take to make the process as pain-free and productive as possible.
Document the facts
Make a list of requirements versus realities, advises Tanowitz. “If the termination is for cause, make sure that you have adequately documented the failures constituting the breach, and have complied with the requirements for an early termination,” says Ganiban.
Making an attempt to exhaustively apply governance at multiple levels — at existing steering, executive, and governance committee levels — is also critical. If the root cause of the problems doesn’t lie entirely with the provider, “clients should evaluate how to ensure the same problem doesn’t occur again with a new provider or with internal staff,” Tanowitz says.
Research your options — and test them
Before breaking up with an incumbent provider, IT leaders should ask themselves, “What are the alternatives, and will the alternatives address the concerns arising under the existing agreement,” says Jeff Ganiban, a partner in the Washington, D.C. office of law firm Drinker Biddle.
Develop a new environment — either internally or externally — first and make sure to test it out, advises Plotkin.
“Clients must fully understand how they are going to transition and perform the services,” Tanowitz says. “Terminating the agreement is really the last step in an important process of determining exactly how to solve to root cause of service delivery challenges.”
Calculate all the associated fees and costs
Every outsourcing agreement includes early termination fees. “Termination charges, where they do exist, generally ramp down each year, so be aware of the contract terms and how to use them, as the provider surely will,” Plotkin says.
Also add on the transition costs both for people and any necessary data transfer, says Ganiban.
Understand your rights and their limits
This is especially important when it comes to issues related to human resources. “Know your rights you have to hire the vendor employees, and if not, what penalties may apply if you do hire the vendor’s employees,” Ganiban says. Make sure there is a well-thought-out HR plan in place for transitioning employees if the intent is to bring the IT services back in-house.
Prepare the internal organization for the transition
“The internal preparations can be started long before notifying the provider,” says Tanowitz. “This is especially critical in cases where termination notifications need to be given with a 30-day minimum [as] this may not be enough time to accomplish all necessary disengagement activities.” Prior to that notification, clients should ensure all standard documentation — such as run books, systems inventories, and roles and responsibilities documents — are located. It’s also wise to create a messaging plan for IT employees and business users who will be impacted by the termination, Ganiban says.
Don’t rush it
Never end an outsourcing relationship rashly or reactively. “A company will want to have continued communication with their provider and internal stakeholders, plan ahead, and do it in a fact-based way, not in a moment when something is going wrong,” Plotkin says.
It’s better to end a deal during a change in the agreement, such as the term coming to an end, or make use of the insourcing clause included in many modern outsourcing contracts.
“If you have correctly negotiated the agreement there will be various exit points that you can take,” says Plotkin. “The important thing is to try to minimize contention in the negotiation. If the negotiation to terminate can be done with consideration and grace — where the parties can save face both publicly and within their organizations — concessions are often more likely.”
It’s not soft to do so, Plotkin says; it’s smart.
Create a knowledge transfer plan
Make sure you’ve determined how this will take place, including what intellectual property — such as user manuals, training materials, software, and hardware — you have a right to retain after the relationship ends, says Ganiban.
Ensure vendor cooperation
While many contracts require a terminated provider to participate actively in transitions, it’s important to make sure collaboration happens. “Establish coordination between the terminated vendor and the incoming vendor or in-house team, as applicable,” Ganiban says.
As the IT outsourcing market continues to move toward more multi-sourced IT services portfolios and increasingly adaptable agreements, termination and transfer of work will likely become more common. “Companies can, if they’ve correctly structured a flexible agreement, start to terminate pieces of a contract and gently slide the scope over to other more capable providers for those particular elements,” says Plotkin. “This will become ever easier to do because the scope of services outsourced is becoming more commoditized and contracts are becoming ever more variable. Traditional providers must recognize that clients’ needs are changing so rapidly, and the flexibility is so valued that they need to accommodate this shift.”