UK: Dancing With The Devil

"This article first appeared in the Spring 2006 edition of Outsource Magazine."

2005 distinguished itself as a year in which outsourcing customers and suppliers took faltering steps towards each other but failed, for one reason or another, to consummate their relationships.

In July, Dixons pulled out of negotiations with LogicaCMG citing a failure by the parties to reach agreement on contract terms and in November, after 12 months of solid negotiations, asset manager F&C abandoned a £60 million deal to outsource its IT platform and client administration to Mellon Financial Services.

Despite contrary and populist views, contractual intransigence (or just plain stubbornness) is rarely the prime cause of deal failure especially when business imperatives and executive support for the deal (on both sides) is high. In fact, the phrase "a failure to agree contract terms" is often used as a catch-all to describe a rather more fundamental problem with the transaction. Personal experience dictates that generally real intransigence decreases inversely in proportion with the pressure applied to the lawyers to conclude the deal. What "sticking to your guns" can cause however is delay, and this can often act to amplify or even aggravate other differences.

In any outsourcing negotiation, it is critical to get the timescales right. All too often there is a gross misunderstanding or simple failure to understand that putting deals together requires time, or that a deadline is set by reference to an arbitrary business event which is in reality, simply unattainable (of course, there are "real" deadlines, but these too can be unattainable if the timescales allocated to the deal are too ambitious). The net effect of a failure to plot timescales and deadlines adequately is (at the very least) broken deadlines on a continual basis and the party seeking to impose them losing credibility with their negotiating opponent.

Price and currency are also fertile areas for breakdowns. The most obvious instance of this is where the supplier has got the pricing wrong, for example, due to a misapprehension perpetuated by the customer. There are more subtle demonstrators including suppliers lowbidding their prices in order to get through a tender process and then subsequently adding unreasonable extras on award of tender or in an international context, suppliers misunderstanding the currency requirements of a deal. During a major Eastern-European financial services outsourcing which recently closed, the customer had shortlisted two suppliers and had agreed signature terms with them both. Unfortunately, one of the suppliers realised that they had failed to include the cost of currency conversion for hardware and software purchases from US Dollar to the relevant Eastern-European currency, which made their final pricing too high, and conclusively ended their chances of winning the project.

It is fundamental to an outsourcing relationship (as indeed any other critical business relationship) for all parties to deal with each other openly and honestly. Most, if not all, deal breakdowns have a "trust and confidence" issue at their core. Although it is rare to find a situation where one party has blatantly lied to another, it is far more common for half-truths to be replayed by one side to another or for a series of misapprehensions to be perpetuated. Unfortunately, the adversarial style of most negotiations can act to exacerbate this problem.

A failure to timely convey the truth is far more likely to lead to downstream failure in the negotiations than divulging the relevant facts (however unpleasant they may be) at the earliest opportunity. The effect of "leaving stones unturned" is likely to be highly damaging if the issue is discovered in due diligence pre-transition. Several years ago an IT vendor and its worldwide travel agent customer were attempting to reach an agreement in relation to the outsourcing (amongst other things) of the travel agent's IT helpdesk. The customer had represented to the supplier that the helpdesk was efficient and had a very low "unresolved issue" rate. The supplier had taken this on trust and priced up the helpdesk outsourcing according to this information. The deal got as far as pre-transition due diligence: one of the supplier's representatives wisely visited the helpdesk call centre and chatted to the operatives. All went well until the supplier noticed an open desk drawer stuffed full of unresolved call tickets. It turned out that most of the service metrics handed over to the supplier were "aspirational" rather than "actual".

The knock-on effect of this "surprise" was considerable. All of the customer's help desk operatives were due to transfer over to the supplier under TUPE (the Transfer of Undertakings (Protection of Employment) Regulations). Their transfer had to be deferred whilst the supplier re-priced the deal. Staff became unsettled and attrition rates increased exponentially until there was very little of the original employee base left. Meanwhile the IT director had to face his board of Directors to explain the delay in getting the deal done. A colleague saw what was left of the deal through to signature.

Ultimately the message is one of common sense. Suppliers and customers must enter into an outsourcing relationship with their eyes open and be prepared to disclose everything and anything material to the deal – warts and all. Only in an atmosphere of complete trust and confidence can the deal negotiations succeed. Indeed if the foundations of trust and confidence are established early, most if not all other differences and problems will be resolved to the satisfaction of both parties.

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