Outsourcing Negotiations: How to Shorten the Timeframe for Negotiations and Mitigate the Risks Associated with the Outsourcing of Information Technology Services
By Gordon & Glickson LLC
Since managing the legal aspects of the outsourcing of information technology services has been a core component of Gordon & Glickson's practice for over 20 years, we have developed a methodology for negotiating information technology outsourcing agreements that has proved extremely successful for a wide range of clients. Many consider this methodology to constitute a “best practice” in establishing an efficient negotiation process, either in a single vendor or multiple vendor competition setting, while simultaneously limiting the risks to which a customer is exposed in the “Outsourcing Agreement”.
THE METHODOLOGY
The key to avoiding lengthy negotiations is to create a structured timeline and procedure for conducting negotiations that may not be deviated from by either party. Following the guidelines set forth below will help you shorten the length of negotiations, enhance your leverage, and negotiate better business terms for the outsourcing transaction.
• Prepare a detailed and well thought out “Request For Proposals” describing your technical requirements;
• Prepare a complete and comprehensive “Model Agreement”, including exhibits, to distribute to vendors prior to negotiations;
• Require all vendors to respond to the Model Agreement in a structured “Issue Paper” format to reflect the actual language changes to the Model Agreement requested by the vendor;
• Limit the time for negotiations by number of days, and hours per day; and
• Stick to the established procedures.
If the best outcome is to be achieved, your legal counsel must be involved in the process from the beginning, even with the Request for Proposals and exhibits, because the description of services should be in wording that can be used verbatim as the Statement of Work exhibit to the Outsourcing Agreement. The Model Agreement should contain all of the documents that you will need to complete the outsourcing transaction, including the terms and conditions, the Statement of Work and the format, if not the specific pricing provisions, of the Pricing Schedule. We also recommend that the Model Agreement start from a reasonable middle-of-the-road position to encourage shortened negotiations and a positive negotiation experience for all of the parties.
As part of the establishment of the negotiation procedures, you should develop a schedule for the negotiations, including the total number of days of negotiation that each vendor will be allocated, the number of rounds of negotiations that will be conducted, the number of days in each round of negotiations, and the specific hours during those days when you will negotiate with the vendors. Each vendor should be treated equally. If you can, scheduling negotiations with respective vendors consecutively will allow you to use the same negotiation team for all vendors (this will result in a significant saving in time and costs, as well as gains in knowledge management).
With respect to the Issue Papers, the exact language changes that each vendor wishes to make to a particular paragraph or provision of the Model Agreement, and the reason for the requested change, should be described in that document. Using this process will be beneficial in both a single vendor and a multiple vendor setting. In a single vendor situation, the vendor will be motivated to minimize its changes by the nature of the process (it will not want to look like it is requesting an excessive number of changes). In a competitive bid situation, the Issues Paper process will motivate each vendor to minimize its requested changes in order to remain competitive with the other vendors.
Enforcing the foregoing guidelines strictly will prevent vendors from transforming the negotiations into a typical prolonged outsourcing negotiation and will allow you to control the process to the advantage of all. Many of our clients have concluded that, if the foregoing methodology is used, entering into an outsourcing arrangement is neither as risky nor as time consuming as anticipated. A more detailed treatment of this subject can be found in an article entitled, How We Learned to Love Outsourcing Negotiations .
An edited version of this article appeared in The Technology Executives Club Review (February 10, 2003) , an online publication.
Gordon & Glickson LLC, an internationally recognized law firm based in Chicago , has focused exclusively on providing legal and strategic consulting services to the technology marketplace for over twenty-five years. The firm provides corporate, commercial, litigation and finance counsel for its entrepreneurial technology clients, and serves worldwide as strategic and technology counsel for both private and public sector clients. For more information please contact Philip P. McGuigan at 312.321.7659 or at ppmcguigan@ggtech.com.
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