Contracts with teeth - the future of outsourcing

9th March 2016

Contracts with teeth - the future of outsourcing

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Outsourcing is a tool used by most organisations, enabling them to focus efforts on their core business. While cost saving is still a real driver for any outsourcing arrangement, the use of outsourcing has matured and has become a powerful tool for driving business change.
The dilemma
All too often, businesses are faced with bold promises about the services they will receive from their outsource providers; they are drawn in by the “ideals” pitched to them and ultimately find themselves disappointed with the outcome, as those services fail to live up to expectations.

This is a dilemma that arises time and time again for organisations that procure outsourced services. Outsourcing is undoubtedly a powerful tool for improving performance, driving business change, and achieving efficiencies within an organisation. However, it should not be forgotten that any deal requires significant up-front investment from the buy-side organisation, including the costs of undertaking transition and transformation, the need to reconfigure the retained organisation, and other deal costs. What happens if the outsourced services just aren’t cutting the mustard?
The survey
It is paramount for the buy-side organisation that any major outsourcing contract includes sufficient levers to incentivise good supplier performance. Deal teams spend a huge amount of time forming, negotiating and then drafting outsourcing contracts. Where is this time best spent? The aim of this survey was to collate data on those contractual provisions in outsourcing agreements which are actually being used by customers at the coalface, to ensure that their suppliers perform. Which terms are being included and which are actually making a difference?

Respondents to the survey covered all sectors, including financial services, consumer, energy & utilities, manufacturing, TMT, public sector customers and a range of professional services.
What we found
It is clearly a topic that generates interest and respondents were keen to provide real-life examples of outsource relationships, where particular contractual provisions have been used to great effect, and equally those that have not had the value that organisations expected when the contract was signed. Our report covers:

The push factors


  • service credit regimes - In the additional commentary provided by respondents, service credits come up time and time again as a helpful way to push supplier performance. Despite this, they are not seen as the perfect solution.

  • remediation planning, audit reviews and the use of third party experts

  • step-in rights


The pull factors

  • senior escalation - how it has been used by respondents

  • amending contract terms

  • payment incentives


Conclusions
Many respondents were vocal around the importance for a contract to recognise the relationship element of an outsourcing arrangement, such as:
Continual working together and review of performance, using relationship and communication as opposed to contractual remedies.
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