Thursday, March 13, 2014

A Closer Look at Outsourcing Contracts: Common Challenges and Proposed Solutions

Software engagements can often be met with many challenges and problems. These challenges can arise during outsourcing, advanced technology and services, application deployment and maintenance, software development, business services, IT disputes, cloud computing and more. In this article I would like to share some of the typical challenges surrounding outsourcing contracts and make a case for learning from these challenges so that they can be avoided in the future.

Taking the Initiative on Provisions to Solve Outsourcing Contract Problems
Outsourcing suppliers frequently face issues that can cause significant damage but are not grave enough to virtue using contractual preparations, which are typically confined to termination of the contract or even in some cases customer claims the damage.

The traditional contractual preparations fail to take into account how reliant a business is on their contractors. Simply ending an association could be incapacitating – the businesses require an alternative way of addressing glitches.

Taking the initiative on provision also known as “Proactive Preparations” is one possible solution for this challenge in an organization. This solution drives a framework in habitation that establishes a comprehensive assortment of events or conditions that could cause problems, and provides a structure for managing the risks involved in business by using various tools other than contractual remedies such as termination or damages. It also identifies that problems can occur that are not the fault of both the parties, and that these problems still have to be resolved.

Not only are traditional remedy arrangements of small practical use in many situations, they also lean towards to be reactive rather than proactive – the client has to wait until it can establish that there has been a contractor default before it is able to trigger what groundwork are available within the agreement or the contract.

By difference, proactive preparations are designed to avoid key business and also prevent service risks from becoming realities. The preparations are designed to focus the parties' minds on good contract and risk management before things go horribly wrong.

Such issues can likely affect the client's business or the outsourcing relationship between supplier and client - a corruption scandal affecting a key sub-contractor; an important profit warning; a large scale severance program. Each party consequently gains benefit from an intensified level of attentiveness and preemptive or proactive management by both client and service provider.

Proactive Preparation is “Good Governance”
Contracts, however, sometimes pay lip service to governance and contain little more than a list of governance bodies, terms of reference and meeting schedules. Everybody agrees that robust and strong contract management, which is generally known as Service Level Agreement or governance, is censoriously vital to the successful delivery of the outsourced services and to the health of an outsourcing service association. It is all too common for the parties, over time, to if the essentials of good contract governance are disregarded, the unavoidable result is that poor performance goes unaddressed and real business risks, perhaps unrelated to outsourcing service provider performance, are not anticipated and managed.  With all good proactive preparations mechanism, the parties will have a pre-agreed process for keeping an eye on the issues that substance furthermost to the business.

How does the “Proactive Preparation” Work in an Organization?
We can define the proactive preparations in such a way so that the external risks can be controlled by both parties before they become problems for the organization. At the same time, we can also have a structure that addresses minor loopholes, predominantly where it is convenient to overlook a circumstance which can ultimately impact on the association or relationship in a significant way if it is not addressed.

How to Organize Proactive Remedies
To be useful, proactive preparations must be tailored to the customer's business - they should be industry and context specific. Proactive preparations are usually drafted collectively as a schedule to the contract or can be built into the contract governance or like the performance management system / regime.  To ensure the regime leftovers relevant to the client's business, at that point there should be a mechanism for review and updating on a regular basis.

The contract should set out the following:

Elicit Events
Thinking about which risk procedures to pay attention to, clients often ask: In addition to service breaches, what events would significantly impact on our business? For example, consider negative media that impacts reputation.

Risk Levels
We must set the proactive remedy in proportion to the level of risk the trigger event exposes the customer. The preparations to address particular risks when they are still at a relatively low level may be as simple as enhanced monitoring or an investigatory report, perhaps at the customer's cost. If those risks escalate, however, the risk level may increase to the next level. The contract should identify the circumstances that will constitute the different risk levels for the purposes of the regime.

Preparation Points
The preparations that apply in a proactive preparations regime should be tailored so that they are effective to address the risks that are identified by the parties. They may include:
  • The supplier provides requirements as a detailed information and/or plans about the trigger event
  • Allow client to choose an independent third party consultant to audit the supplier's business in relation to the event if they wish
  • The initialization of an additional benefit scheme in lieu of named members of the supplier's workforce to incentivize swift resolution of the situation
  • High level risks related to service delivery that have not been addressed and the necessary termination or step-in rights for the customer.

Proactive preparations can help the customers and the suppliers focus on risk management as part of the contract governance regime and allow them to address the general concern that contracts focus on mechanistic and legalistic preparations. They are tools which supplement traditional contractual preparations rather than replacing them and can be useful in highlighting issues that could impact on a customer's business beyond service breaches.

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Dhanraj Dadhich is Technical Architect at Prolifics. He has 14+ years of experience in design and development of applications and has designed various Banking, Security, Social Media, Mortgage and Payment Gateway applications. With Prolifics, he is promoting the use of technology, and of specific products, to help enterprise management and IT communities meet their business needs. He specializes in selecting, defining and enforcing a consistent, uniform set of products, vendors, methodologies and standards throughout the IT organization. His current role has given him the opportunity to develop creative ideas to realize significant cost and head count savings whilst still maintaining good service levels to build on this experience.