IT Outsourcing Contract Negotiation Playbook: An Introduction

IT Outsourcing

IT outsourcing contracts are not naturally a zero sum game. Although the prospect of failure is very real, most of the time matching the right customer and offer is a win-win for buyer and seller alike. However, more often than not it plays out as a win-WIN scenario — with one side getting just a bit more of the pie than they deserve given their investment. Most of the time my job is to put the “capital W” in the buyer’s hands, but I’ve had a go at supplier strategy as well.

The real wins and losses are not determined in the top-line numbers that bubble up to executive summaries, but exist in the asterisks and fine print buried inside the master services agreement, order form, and service level agreement. My goal is to share tidbits from each side’s contractual playbook to show how innocent-looking terms can shift the balance in an outsourcing relationship and what you can do to either eliminate the imbalance or mitigate it through a compromise if the other side digs in.
The concept of capturing the “capital W” applies across a broad cross-section of outsourced services from bandwidth to data center to managed services and CDN.

The baseline caveats apply to your entire contract interactions:

  1. I’m not a lawyer and nothing I ever share should be construed as legal advice. If you are signing contracts without legal review, you will get in trouble, no matter how experienced you are.
  2. Context matters – Applying a specific term in isolation without incorporating context can hurt more than it helps. For example, in bandwidth, shorter contracts were client-favoring, but applying that same principle to data centers left buyers with a nasty surprise in 2006-2008.
  3. There are finitely many ways to get it right. For example, there are 3 typical measurements of latency that are both legitimate and completely unlike each other in structure and thresholds. If yours isn’t mentioned, it doesn’t mean that it’s wrong.
  4. There are infinitely many ways to get it wrong – For example, we’ve seen dozens of creative ways suppliers give lip service to uptime or low latency and do not provide a substantive guarantee at all. So even if you incorporate each piece of advice I give, your contract can still have time bombs just waiting to go off if your contract lacks a proper review from a specialist who can sniff out an end-around approach that undermines real commitment from the supplier.

The bottom line: You don’t get what you deserve. You get the IT outsourcing contract you negotiate. You can have company size, brand strength, growth pattern, cash flow, and everything else on your side, but if you miss the other party’s trick plays, they will still get the “capital WIN” while you settle for “lower-case win”. Conversely, a good knowledge of the IT outsourcing playbook – or good advice – can get even a startup into a better deal than a Fortune 50 company.

Alex Veytsel is a Principal Analyst at RampRate where he is the lead architect of business and financial analysis models. Alex can be reached at alex.veytsel@ramprate.com

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One Response to “IT Outsourcing Contract Negotiation Playbook: An Introduction”

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