Subscribe / Unsubscribe Enewsletters | Login | Register

Pencil Banner

IT outsourcing: 7 tips for peace, profit and productivity

Stephanie Overby | June 28, 2010
Dr. Oliver Williamson and Kate Vitasek offer seven of their suggestions on outsourcing

4. Make end-of-life arrangements early

Outsourcing partnerships can't last forever, so it's constructive to plan for the end early on. With "feasible foresight," Williamson wrote in the Journal of Supply Chain Management in April 2008, an outsourcing customer can mitigate the effects of a defection from its services provider.

"It is important to recognize that business relationships may need to change due to changes in the market, and for this reason, contracts need a well thought out exit management plan," says Vitasek. "Practitioners should clearly identify the costs associated with terminating a contract [and] create safeguards in the contract that are fair and equitable in terms of keeping either party whole in the event that a contract needs to be terminated prematurely."

5. Create a shared vision statement

If you can identify strategic points of alignment with your outsourcer, you will minimize additional transaction costs over the life of an IT services deal. Vitasek advises creating a shared vision statement to guide the relationship. She also recommends developing pricing models that reward service providers for achieving joint goals.

6. Play nice (but not too nice)

Sure, you can strong arm your supplier at the negotiating table--or be strong-armed--but either style of contracting will come back to bite you. Organizations that use what Williamson calls "one-sided muscular contracting" to gain advantage over an outsourcer will see only short-term gains, says Vitasek.

"[They] will ultimately face higher market costs and transaction costs from switching or transitioning suppliers, or from suppliers being forced to use conventional negotiations to put in myopic and costly contractual provisions and behaviors that simply drive up hidden costs." Williamson also warned against "idealistic benign contracting," which assumes that most people will do what they say--and some will do more--most of the time.

The Nobel laureate recommends a middle ground of "credible contracting," which he describes as more "hardhearted wise" than its extreme alternatives. Credible contracting is "also flexible enough to acknowledge that complex contracts, by their very nature, are incomplete and thus require cooperative adaptation," Vitasek says.

7. Always leave money on the table

Most outsourcing customers and suppliers assume that leaving money on the table is, at best, wasteful, and at worst, foolish. Not so, says Williamson. Hard bargaining negotiations to get to the lowest possible price actually cost both the customer and the provider in the long run.

"Successive ploys and counterploys of this kind could plainly jeopardize the joint gains from a simpler and more assuredly constructive contractual relationship," wrote Williamson. "Always leaving money on the table can thus be interpreted as a signal of constructive intent to work cooperatively," thereby mitigating "concerns over relentlessly calculative strategic behavior."

Of course, he also notes the effectiveness of this tactic varies based on the level of trust among those involved. 

 

Previous Page  1  2 

Sign up for Computerworld eNewsletters.