IT Outsourcing – Ten Risk Issues the Irish Perspective

January 1, 2006

Outsourcing, and IT outsourcing in particular, involves a certain amount of risk. Given that contracting is inherent in almost all use of IT, the management of risk is a key part of the job description of any IT manager. In this task they have available in the Irish market a fair smattering of professional service providers, including lawyers. IT consultants and lawyers do fulfil a key function in IT contracting and especially in the more complex projects, such as outsourcing. 

This article looks at ten-risk related issues in IT outsourcing, with reference to experience in the Irish market. Risk means both financial risk and broader project or business related risk. The perspective is largely that of the customer, although both customer and supplier have certain shared interests. 

1. Get your ducks in a row
IT outsourcing requires pre-planning and plenty of it. It also requires the ability to recognise that the planning was incorrect, or not correct enough, and change the plan, sometimes numerous times. What will generally not change are the principles and understanding underlying the planning. The gap between recognising the problem and scoping the solution, not to mention, implementing that solution, can be large. A customer who has not carried out their internal assessment of requirements and does not have a realistic view of the benefits to be gained from IT outsourcing and risks involved will invariably be disappointed with the supplier. A naive customer is a risk the supplier can live without. 

2. Buy-in the help
IT outsourcing is one area where consultants and lawyers can earn their corn. In particular, project and contract structuring is a key area of external input in the Irish market. Most customers have not done any, or enough, contracting to be adequately skilled and prepared to deal with the large specialist service providers. A common failing is for the customer to leave contract matters too late in the negotiation cycle, at which point they find the pendulum of leverage has swung in favour of the supplier. The large IT suppliers have certain contracting norms, generally not overly generous to the customer, to get movement on which takes a concerted effort early in the negotiation process and preferably prior to or at the pricing stage. 

3. Don’t slam the door on the way out
It goes against the grain for most customers, but the unpleasant area of contract exiting is one of the key project and contract issues to address in planning and negotiation. While parties are not inclined to spend as much effort planning the get-out as the get-in, where possible the project get-in should be structured with a reverse gear at least as an optional extra. As a minimum, exit terms should be set out at contract level, with a draft exit plan attached as a schedule or built in to a planning process, which includes the key areas of regular plan review and update. At the date of contract exiting, whether due to term expiry or early termination, the contract exit provisions and exit plan are the crucial contract documents, with poor provisions and planning potentially catastrophic for the customer. The leverage lies with the supplier at this stage, with the customer having really only the contract to rely on, together with (possibly) a certain amount of supplier goodwill. 

4. Consider the unlikely
A little lateral thinking at project planning and contract negotiation stage goes a long way. Project documents should be stress tested as much as possible. There is a tendency once a corporate or executive “go” decision has been made, to implement that decision without question. External advisors cannot tell a company or public body how to run its business, but can serve a useful function by pointing out common pitfalls and market view of certain suppliers. This may be viewed as negative thinking or wheel-spinning by the client, but is a key function of the professional advisor. Examples include the vexed issue of known possible supplier HR difficulties, or the disaster recovery position of its data centre, both of which may require contract contingency planning. 

5. Guard the family jewels
Company or public body trade secrets and sensitive information require special attention. There is a tendency to regard suppliers as infallible, but recent examples of public disclosure of company information demonstrates the potentially serious adverse effects. In addition, unless the adverse effect is financial and can be clearly quantified, it can be difficult to base recovery against the supplier. Customers are naturally reluctant to litigate in IT matters and especially if the claim turns on confidential matters. The supplier will demand proof of financial loss, even where a claim is indemnity, as opposed to litigation, based. Despite the customer preference for sprinkling indemnities throughout agreements, recovery is often more difficult than the customer contemplated, as suppliers tend to resist anything but the clearest claim and then draw out the matter. 

6. Relationship not money
Of course, customers seek value for money, and under the public procurement regime are bound to do so. However, this should not be the sole factor determining choice of supplier. Relationship, cultural fit and geographical proximity are also important factors in sustaining a long-term successful relationship. For example, for a customer to move from an in-house to an outsourced solution is a large enough cultural change, without throwing into the mix a large component of offshoring. Off-shoring, in particular, should best be treated with some caution, with customers new to the area best increasing the scope in stages. Given the significant scope for cost-reduction, staging is generally possible although the lure of large instant cost savings may prove irresistible. Also, what is frequently not accurately estimated in customer cost modelling is the cost of offshore supplier management. 

7. Cut your cloth to suit your measure
Customers when faced with the broad array of capabilities offered by a large supplier can be inclined to lose focus on the key requirements. Frequently, in order to procure a wide range of IT services, the depth of within-scope service procurement is shallow, typically meaning service levels are sacrificed to scope of service delivery. There is an argument for staged growth of the outsourcing over time, although, again, the lure of an instant fix can prove irresistible. If possible, staged delivery, preferably based on customer decision making, can be a useful way to keep the supplier focussed on delivery. 

8. Structure the deal
Deal structuring is notoriously difficult, especially in larger procurements. There is a tendency to get lost in the complexities, with deal structure suffering. Structures, such as staging outsourcing by functional areas, can be regarded as theoretically attractive, but practically unattainable, especially where projects involve transfer of infrastructure from customer to supplier. Thankfully, Irish deals tend not to be so large that some of the more innovative structuring is not possible. One area where deal structure weakness is commonly seen is in multi-national outsourcing. The parent, typically the largest op-co, tends to put in place a deal which suits its requirements, which is then rolled out as the per-country model contract framework to be concluded by the local subsidiaries of customer and supplier. Frequently, these models are unsuitable for local requirements or conditions, despite legal localisation of the documents. Typically, the local agreement is not stand-alone, but an extraction from the master agreement, which refers back for most of its main terms. Significant problems can be experienced by the local customer and supplier in delivering and managing a contract and delivery model which does not meet local requirements. Also, customer subsidiary sale can be made more complex than need be the case. 

9. Structure the schedules
A key feature of a successful deal is flexibility of service delivery model. This is greatly assisted by clear structuring of the contract structures, especially in relation to service specification and relationship management. In particular, if the service components can be broken out into discrete components under the aegis of a master service specification then, so long as the pricing model is similarly flexible, the process of delivery model change and evolution under the contract management process is given a fighting chance of success. Frequently, this type of floating model is not utilised, generally through a combination of customer demand for best-pricing and supplier offer of all-in-pricing, both of which tend towards a single solution statement. 

10. Walk don’t run
Once the customer “go” decision is made, the time allocated to contract and schedule negotiation and conclusion is often inadequate. In terms of putting the deal together, adequate time is required. From the suppliers’ perspective, negotiation is not revenue producing, so there is a natural tendency towards pushing for early deal conclusion and then worry about the details. Customers are also in a hurry to begin service receipt. An extreme, but not unheard of, example of this is post-contract signing specification of project implementation, planning and service level requirements, essentially the bones of the deal. A reasonable period is necessary to structure and conclude what is often a long-term and complex arrangement. To borrow a phrase, the deal is a moment on the lips, but a lifetime on the hips and, as such, requires adequate planning. 

Pearse Ryan is a Partner at Arthur Cox in Dublin. He specialises in information technology and technology related intellectual property law. Pearse’s practice areas include IT supply and procurement, outsourcing, computer fraud, IT related PFI/PPP and IT related disputes.