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The 10 Essentials to Developing a Successful Outsourcing Agreement PDF Print E-mail
Written by Kate Vitasek   
Jan 16, 2012 at 10:38 PM

Are you dissatisfied with your outsource arrangement? Is the "partnership" with your supplier or service provider is more like a foundering ship? If so then it is time for a change in the way your outsourcing contracts are negotiated and managed.

But this raises another vital question: How do you create a collaborative, flexible and innovative relationship that works effectively for the long-term? Achieving this kind of win-win partnership is especially paramount in the IT space, where security, intellectual property and fast-changing technology advances can be barriers to establishing true partnerships.

In 1968 the legal scholar Ian R. Macneil observed that most contracts are ill-equipped to address the reality of business needs in his book, Contracts: Instruments for Social Cooperation.[1] He argued that contracts are rooted in the classical approach to contract law, and thus crafted to address transactions and legal protections such as pricing and price changes, service levels, limitation of liability, indemnification and liquidated damages.

Not much has changed in 44 years-until now. University of Tennessee researchers teamed with the International Association for Contract and Commercial Management to write The Vested Outsourcing Manual: A Guide for Creating Successful Business and Outsourcing Agreements. I believe the Manual will drive the change needed to take modern outsourcing to the next level.

It features 10 elements that provide practitioners (and lawyers!) with a clear path to effective outsourcing agreements:

Element 1: Business Model Map

This first step is to understand and document an outsourcing business model. It is essential to document how well the parties are aligned to each other's goals.


Element 2: Shared Vision and Statement of Intent

With the business model understood and mapped, the parties then work together on a joint vision that will guide them for the duration of their Vested relationship. The joint vision will form the basis of a Statement of Intent drafted by the outsourcing teams.

Element 3: Statement of Objectives/Workload Allocation

This element lays the foundation for the parties in the Vested partnership to do what they do best. Together the parties develop a Statement of Objectives (SOO), which is very different from the standard SOW. The SOO describes intended results, not tasks. Based on the SOO, a service provider will draft a performance work statement that defines in more detail the workscope and the expected results.


Element 4: Top-Level Desired Outcomes

Desired Outcomes are the centerpiece of the agreement because without mutually defined Desired Outcomes in place, a Vested agreement cannot go forward. Outcomes are expressed in terms of a limited set of high-level metrics.


Element 5: Performance Management

A sound agreement defines how the Vested parties will manage overall performance. The metrics and the associated process for managing performance will help align performance and strategy.

Element 6: Pricing Model and Incentives

The approach of many procurement professionals to outsourcing is stuck on one thing: getting the lowest possible service and labor pricing. The strategic bet-and paradigm shift-of Vested Outsourcing is that the service provider's profitably is directly tied to meeting the mutually agreed Desired Outcomes.  The more successful the service provider, the more money it makes.


Element 7: Relationship Management

A relationship management structure creates joint policies that emphasize the importance of building collaborative working relationships, attitudes and behaviors. The overarching principle is for the parties to manage the business-rather than the buyer managing the service provider.


Element 8: Transformation Management

This is a new relationship model-personnel and company ecosystems are changing. The parties are doing things differently and probably not operating in familiar comfort zones. Managing this transformation, including transitioning from old to new-along with change management once the new agreement is up and running-is often difficult and complex to implement. Preserve as much continuity as possible among personnel and teams as the transition progresses into day-to-day implementation and operation. The focus here is on end-to-end business metrics, mutual accountability and the creation of a culture that rewards innovation, agility and continuous improvement.

Element 9: Exit Management

Sometimes the best plan simply does not work out or is trumped by unexpected events. Business happens, and companies should have a plan when assumptions change. An exit management strategy provides a template to handle future unknowns.

Element 10: Special Concerns and External Requirements

The final element recognizes there are often special requirements and regulatory protocols. For instance, in supplier and supply chain relationships involving information technology and intellectual property, security concerns may necessitate special governance provisions outside the normal manufacturer-supplier relationship.


In sum, the 10 Elements will guide you to a collaborative, long-term win-win Vested partnership.

Kate Vitasek is a faculty member at the University of Tennessee's Center for Executive Education and is author of the popular book Vested Outsourcing: Five Rules That Will Transform Outsourcing. She teamed with Jacqui Crawford, Jeanette Nyden and Katherine Kawamoto to write The Vested Outsourcing Manual. Both books are published by Palgrave Macmillan on June 21st.

[1] Ian R Macneil, Contracts: Instruments for Social Cooperation (Hackensack, NJ: F. B. Rothman, 1968).

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