Outsourcing Contract Complexity

Stan Lepeak, Global Research Director, KPMG LLP Advisory
Marc Stark, Director, KPMG LLP Advisory

KPMG released the results of the 2012 edition of the global Legal Pulse survey earlier this year. This was the third annual edition of the Legal Pulse, one in the family of recurring Pulse research studies. These Pulse surveys provide insights into trends and projections in end-user organizations’ usage of global business services (GBS) with the Legal Pulse focusing specifically on outsourcing. The learnings are gleaned from third-party counsel at some of the world’s top law firms that support buyer outsourcing efforts. I recently discussed the findings from this year’s research with Stephanie Overby, an independent journalist covering the IT marketplace with an expertise in outsourcing trends. Below are some excerpts from that conversation.

Overby: Are any of the findings from this year’s Legal Pulse survey particularly surprising to you? For example, around complexity, contentiousness, and differences among suppliers in negotiating?

Lepeak: Not really surprising as this is the third year we’ve done this, and findings are similar year over year, but while perhaps not necessarily surprising, some of the more interesting findings are that contract complexity is not decreasing and contract standardization is not increasing, despite buyers becoming more mature and experienced with their outsourcing. This indicates that as buyers gain more experience they often continue to “push the envelope” with expanding outsourcing efforts, in terms of scope, complexity of work outsourced, number and diversity of service providers utilized, geographies scope and mix of service delivery models—BPO, ITO, shared services, captives, cloud, etc.  While the outsourcing market is maturing, it is not getting simpler, easier, or safer, etc.

Overby: Why are these attorneys reporting increased complexity in contracting? Shouldn’t contracting and negotiations be getting easier/more standardized? What does this tell us about changes in the ITO universe in particular?

Lepeak: (See above.) In addition to the reasons cited above, more interest in complex pricing, the inclusion and integration of cloud into outsourcing efforts, greater involvement of procurement organizations in negotiations earlier on, and the use of counsel, all drive complexity. Complexity is all right if addressed adequately, and is the nature of the game when doing large, complex—or a series of small complex—outsourcing deals, but problems arise when complexity is not adequately addressed, recognized, or accounted for up front and in the ongoing management of the outsourcing efforts.

Overby: Do attorneys responding have an interest in painting a picture of complexity and contentiousness (i.e., this is hard. you need us)?

Lepeak: Yes, definitively. But that being said, this group of respondents is typically involved in larger, more global and more complicated outsourcing, so interpretation of results needs to be viewed from that lens. If you were somehow able to look at all deals of all sizes in the market, the results would be different. For smaller, simpler/more straightforward, single-process outsourcing deals, contracting has gotten “easier” for more experienced buyers. It’s not necessarily that contracts are not complex (and big), but that buyers have experience with them and are more comfortable that they know what is in the contract, and that what should be in the contract is, in fact, in it.

Overby: You note that complexity and contentiousness are not necessarily bad things. Please explain.

Lepeak: Complexity comes with the territory for bigger, more global deals that can include more complex work, and for a buyer that may have many outsourcing, shared services, and cloud efforts running in parallel. They just have to deal with it. Contentiousness is also not necessarily bad if it leads to a better, more realistic and more equitable deal and contract being developed. If one side was to acquiesce in negotiating, or if contentious points were ignored or not resolved before the deal was signed, it would be worse. The key is that when all is said and done, both sides are satisfied with the deal, and any contentiousness was not so bad that their working relationship would be compromised going forward.

Overby: Overall, the legal counsel polled in this survey feel that traditional global and multinational service providers are more challenging and difficult to contract with than are India-based, regional, or function-specific service providers. Why? Are India-based, regional, and niche providers still more hungry for business/eager to get deals done?

Lepeak: Niche and hunger is part of it, but there are other reasons. One is the history of some of the traditional firms that came out of the more straightforward legacy ITO market in which you could contract more explicitly. This approach is harder when you get into more complex services. There also philosophical differences. Some of the legacy firms just have more and more aggressive lawyers and are all right with that. And there are also situational variances and exceptions across all classes. As some respondents noted, legacy firms negotiate harder but remain professional and are less likely to come back later with requested changes, or that some Indian firms were easier to deal with but would come back later with requested changes or would not negotiate as solid a contract as is possible. So some of it is style, and some of it is substance.

Overby: Can a provider that’s more agreeable in negotiations actually be a bad thing for the customer (i.e., they will agree to terms they can’t profitably/reasonably deliver)?

Lepeak: Absolutely. (See above points.) Ultimately, you want the best deal and contract, and one that has no holes, meets both sides’ needs, and reflects the spirit of the effort. Sometimes it’s harder and more contentious to get to that point.

For more from KPMG on this topic, visit the KPMG Shared Services and Outsourcing Institute.

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