Large-scale outsourcing is inherently complex. So is the process of securing commitments in a large-scale outsourcing contract. By helping to manage this complexity, contracting tools can allow deal teams to build better contracts faster and at less cost.
This article describes tools that we have found to be particularly valuable when helping customers enter into large-scale outsourcing contracts. These and similar tools can make customers more effective and efficient in any sourcing process.
Identifying Deal Terms
Reaching early internal alignment on the business objectives helps the customer’s deal team to focus its energy on the most valuable parts of the deal and ask for the right deal terms in its initial draft. The challenge in achieving alignment is that outsourcing often involves a large number of issues and stakeholders. We have found two tools particularly effective.
The first tool for identifying deal terms is a preliminary questionnaire to be completed by the members of the deal team. This questionnaire contains a detailed set of questions that are designed to reveal important deal terms, including both factual detail and the customer’s primary objectives. Using a questionnaire to gather this information allows recipients to take the time required to investigate the answers. This can provide more complete and accurate information. Also, later in the deal, the deal team will be able to go back to the responses to know who said what in case of any confusion.
In sending out a questionnaire, there is a risk that the people who fill it out may not understand or answer the questions fully. As we are seeking to be faster without cutting quality, one of the key goals is to make sure the correct information is obtained. There are several ways to mitigate this risk. One is to be judicious about selecting people to fill out the questionnaire. Another is to tailor the questionnaire to the recipients and to ask about the underlying business interests instead of particular terms. A third is to include explanatory commentary.
The second tool for identifying deal terms is an interview checklist. The benefit of an interview is that it allows both the questions and the answers to be refined and expanded during a detailed discussion. Ideas that might merely be implemented if included in a response to a questionnaire can be examined and tested. In some cases, an interview provides the information required to follow up with a detailed questionnaire.
The interview checklist is a tool to avoid missing points in the interview. An interview checklist allows the lawyer to quickly identify the points raised in similar interviews, and also allows a team of interviewers to ask consistent questions. We recommend developing a comprehensive list of questions that can then be selected and tailored for the particular deal. We prefer to create the interview checklist for a specific deal from an over-inclusive comprehensive checklist.
Creating Initial Documents
Large-scale outsourcing contracts tend to include dozens of documents. Some of these documents contain specific legal terms and conditions while others have lists, diagrams or other data. Breaking a contract into many separate documents is efficient because it allows individual review teams to work on the separate documents in parallel. Also, different documents are best described with different software products (e.g., pricing in a spreadsheet application and terms in a word processing application). At signing, however, all of these documents need to fit together. We have found two tools particularly helpful in making the end-to-end process of creating a clear, consistent and comprehensive contract faster and less costly.
The most valuable accelerator is a well-designed, carefully reviewed suite of contract templates aligned with the initial questionnaire and interview checklist. Contract templates serve as a repository for best practices and help to build quality into the documents at the start (avoiding the need for corrections at the end). A good contract template quickly guides the team to decision points and is easy to adapt to the deal. A collection of templates for the contract schedules speeds the gathering information required in a final contract, avoiding rework and delay close to signing. Strong initial drafts also help clients capture value in negotiations by winning the points that do not get negotiated because they are overlooked or seem too small to raise.
Of course, templates can only take the deal team so far. They do not include the deal-specific facts. There is a risk that people will have difficulty knowing what to modify, or that they will assume that the templates represent the right answers instead of a starting point for review. Thus, the deal team also needs background, context and guidance on how to bring the templates in line with the facts of an individual deal.
GUIDE FOR DOCUMENT PREPARATION
A “guide for document preparation” is a tool to help the deal team through the document preparation process. The guide typically covers what data are needed for the contract, the organizational structure of the data and how to present the data in a contract document that is clear, complete and consistent with the remainder of the contract terms. Such a guide can prove invaluable in assisting the teams to quickly bring the pieces of the deal together, particularly when there are multiple deal teams working in parallel.
Negotiating the Contract
Once the contract documents have been distributed and the bidders have responded, the deal team will need to know, on an ongoing basis, about the progress on the deal, time to completion and outstanding issues. The following tools enable the deal team to answer these and other important questions and to respond effectively to management inquiries.
The contract negotiation is a project. We find that deal teams are more successful if they start with a thorough project plan that takes into consideration any dependencies on non-contract activities (e.g., due diligence, technical reviews, risk reviews, etc.). The form of the project plan can be as simple or as detailed as the customer feels necessary, depending on the circumstances. There is particular benefit in allowing people to schedule their time to turn documents, gather facts, obtain approvals and participate in negotiation sessions.
The core of project management is deciding who will do what next and then following up to see what has been done. In large-scale outsourcing deals, teams are generally responsible for specific documents. As a result, we recommend the use of a “document tracker” that shows who is responsible for the next step(s) on each document. A good document tracker will provide each team with a centralized, regularly updated overview of progress on a document-by-document basis and will help each team member know what to do next.
Although the document tracker will tell you the status of each document, it will not tell you which issues remain. As a result, we often use an “issues tracker,” which is an organized description of open issues. The best issues trackers express each issue neutrally enough so that the tracker can be shared collaboratively between the customer and supplier teams and can thus be used as a focal point for discussions.
Caution and discretion should be used when framing concepts in an issues tracker because a poorly framed issue might result in making a decision on the wrong question or the wrong facts. Ideally, the issues tracker will focus attention on the most important issues and will speed resolution of escalated issues.
The issues tracker can tell you what issues are open, but it only addresses risks that are being allocated to each party in the contract. A “risk register,” on the other hand, is an internal tool of the customer’s that helps the core deal team assess how the deal team is mitigating risk and thus increasing value.
For each risk that the customer’s team identifies, there are generally four options available: (i) change the deal to eliminate the risk (for example, by removing a risky service from the scope); (ii) place the risk on the supplier through risk allocation clauses; (iii) retain the risk to be managed through governance; or (iv) place a value on the risk and factor it into the deal’s financial model. Any risk that is mitigated is reflected in the risk register to show how it was addressed and to detail the positive impact of its mitigation on the overall risk profile of the deal. This tool is of increasing interest as companies focus on risk in outsourcing in addition to the potential rewards when looking at value.
The final category of tools for negotiation is collaboration tools. There have been tremendous improvements recently in this area. Data rooms can allow deal teams to share documents. Webex and other web meeting tools can allow a virtual meeting where everyone is on the same page because they are looking at the same words on the screen. Document repositories can provide robust version control and document integrity functions; and word processing software, such as Microsoft Word, offers change tracking and document comparison tools that allow people to present changes in a way that is easy to find and verify.
We have found that effective use of these tools requires the development of standards, procedures and process rules for recording and preserving issues and maintaining document integrity and version control. Experience shows us, too, that different tools work well with different corporate cultures.
Deciding Whether to Sign
In deciding whether to sign a sourcing contract, the customer must consider whether the value of the contract is greater than the value of alternatives that the contract precludes. Financial modeling indicates value, but risk must also be considered. For the customer, the choice might be between two bidders, between a bidder and internal processing, or both.
The best tool here depends on the customer’s decision-making process. For example, a customer approaching a difficult down-select in a competitive outsourcing process might use a side-by-side chart of key issues organized by bidder. A comparison chart could be built based on the issues tracker and risk register described above. This approach works particularly well when there are only a few issues separating the bidders.
If there are a large number of issues separating the bidders’ proposals, the customer might use a scoring matrix that combines a simple 1-2-3 score with a customer-reviewed weighting for each issue to produce a composite score. This tool can sometimes provide surprising results. In some cases, the final score will show there are no significant differences among bidders, even though the responses look very different on their face. In other instances, the tool can show there is a material difference. In any event, the scoring matrix tool can synthesize a large number of differences.
A customer choosing between internal processing and outsourcing might use similar tools. This can also produce surprises. A deal team that has focused on the risks in an outsourcing contract may be surprised to find that many of the same risks are present—and perhaps to a greater degree—with internal processing.
Another useful tool is a scorecard that evaluates risk in a more nuanced way than the 1-2-3 scoring matrix. For example, a scorecard might describe the outcome of negotiations on the incentives, commitments and options in the contract and place a value on each. A scorecard is particularly useful when working with a series of similar deals because it allows comparisons across time and across deals. Ideally, the scorecard will produce an adjustment to the financial model.
Facilitating an Effective Transition
The final leg of the contracting process is the transition to the governance team. Effective governance is critical to the success of an outsourcing relationship, and effective transition from the deal team is essential to the success of the governance team. We believe the best practice is to have some overlap between the deal and governance teams, but our experience and research shows that this overlap is generally limited.
We have identified three tools as particularly useful in transferring knowledge about the contract from the deal team to the governance team. The first is a milestone list that includes all date-dependent activities and deliverables shown in any part of the contract. The second is a detailed or a high-level contract summary identifying key areas of the contract on which the governance team should focus in its day-to-day management of the relationship. The third is governance training that allows for interactions between the teams to ensure that the governance team can ask questions when information or contract provisions are unclear.
The specific contracting situation drives not only overall strategy, but also choice of tools. Tools are aids to successful contracting, not substitutes for experience and judgment, and they must be used with care to avoid creating misimpressions. However, we have found that tools can assist deal teams to maximize value and avoid pitfalls by helping to manage the inherent complexity of outsourcing and by increasing the speed, efficiency and effectiveness of the outsourcing contracting process.
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