Preparing for the Worst: Contracting with the Most Difficult Service Providers
Stan Lepeak, Managing Director, Global Research
EquaTerra recently released the results of the 2010 global Legal Pulse survey. In it EquaTerra polled more than 40 of the top third-party North American and European law firms that support and advise buyers on outsourcing efforts. The Legal Pulse is similar to EquaTerra’s long-standing global service provider/advisor Pulse in that it examines trends and futures in the global outsourcing market, but it is more focused on specific topics and themes – including contract complexity, deal terms and conditions and negotiating contentiousness – that are best addressed by legal counsel supporting outsourcing deals.
The last blog covering this study examined outsourcing contract complexity (e.g., service levels, contract structure, pricing models, use of global sourcing, etc.). Here we will explore which classes of outsourcing service providers are the most difficult to deal with when it comes to contract negotiations. While ease or difficulty in contract negotiations is not necessarily indicative of the quality of service a provider will ultimately deliver, it is a directional indicator of partner compatibility, a key dimension of any outsourcing relationship. Minimally, outsourcing buyers must understand in advance the degree to which different classes of providers are less (or more) difficult to contract with and account for these differences as required in terms of skills, resources and support brought to the negotiation table as well as time allocated to the negotiation process.
Third-party legal counsel queried in the Legal Pulse survey were asked whether there is a material difference (e.g., duration, complexity, contentiousness, etc.) in negotiating a client’s outsourcing contract among three classes of outsourcing service providers:
- Traditional global service providers (e.g., Accenture, HP, IBM)
- Offshore or India-based service providers (e.g., Infosys, TCS, Wipro)
- Other service providers (e.g., single country, Pan-European)
Respondents identified a substantial difference between the traditional global service providers and the other groups (see figure below). There is consensus among counsel in the Americas and Europe on negotiation differences by service provider class. Numerous respondents noted negative differences between the level of risk aversion expressed by traditional global service providers and other providers during negotiations. They also identified a more generally confrontational and, in some cases, detached (i.e., from the intent and spirit of the outsourcing deal in question) style among traditional global service providers. Traditional global providers were more often characterized as rigid, didactic and occasionally bombastic than other classes of service providers, though it was noted that India-based providers were becoming more “western” in terms of negotiation style and tactics.
A few providers were commonly cited as the most difficult to negotiate with (those whose names we shall not speak) but respondent confidentiality limits exposure of those named. On the plus side, however, some respondents pointed out that the difficulty in negotiating with each class of service provider is materially easier if the client is in a strategic new industry or country for the service provider, or if the deal is of a substantial total contract value.
Being difficult to negotiate with is not necessarily a bad thing for an outsourcing service provider. A provider that plays a patsy to unrealistic buyer demands does not serve either side well in the context of the overall outsourcing effort. On the other hand, viewing an outsourcing contract negotiation process as a battle won by the last lawyer standing is equally unlikely to contribute favorably to a positive and collaborative long-standing buyer and provider relationship, a key factor to outsourcing success.
For further information from EquaTerra about contracting with outsourcing service providers, visit the Contract Negotiation page in our web library.
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Service Provider’s ought to take a thoughtful and pragmatic approach to contracting. The process of negotiation can provide a benefit to both Clients and Service Providers by uncovering areas of misunderstanding that might otherwise lead to disputes down the road. Flexibility and the ability to propose compromise are necessary to meet aggressive negotiation schedules.
I think it is high time that the negotiating partners on either side bring their architects to the table. Many a times the service providers have the architect but the consumer side does not have any architects who have read and understood the finer points of outsourcing.