Over ten years ago, when the first IT outsourcing mega deals were negotiated, clients tended to accept a vendor’s proposed contractual agreements with relatively few changes. Full-scope outsourcing was so new, it wasn’t clear how these agreements should differ from other types of contracts. As the market matured and deals began to fail, clients became more sophisticated. They expected more and began engaging outsourcing advisors and legal counsel. Negotiations became longer and more grueling as service providers reacted to this new approach. Terms changed, but deals kept failing or under-performing relative to expectations. In the past several years, another shift has occurred. More business executives talk about wanting a win-win agreement with their provider. They realize that outsourcing is more than words in a contract; it is a long-term relationship on which their overall success will be dependent.
Win-win is perhaps an overused term without a clear meaning. It doesn’t mean getting everything your side wanted only because the other side begrudgingly acquiesced. A win-win agreement is one that is reasonably balanced, with each party feeling like they got a good deal in terms that matter to them. Both parties must see the opportunity to accrue tangible value from the agreement.
The process of reaching agreement, though contentious at times, should develop trust and respect between the parties, not suspicion. Negotiations build the framework for resolving issues and disputes in the future. A skeptical counterpart is far less likely to be receptive to your positions on issues that will arise long after the deal is signed.
A win-win agreement is one that is reasonably balanced, with each party feeling like they got a good deal in terms that matter to them.
Relationships are about people, not documents, and the participants in the negotiation process will be observed by the service provider. They will develop an impression of what you will be like to work with in the ensuing years. At the end of negotiations, you and your team should be perceived as focused and firm, but at the same time, reasonable and trustworthy.
When asked how vendors react to client behavior during negotiations, Alan Barnes, SVP and Group Counsel, Affiliated Computer Services (ACS) said, “I think the single most important thing for a client, their outside counsel and advisors to be sensitive to is that a vendor is in the business to make a fair and reasonable profit. Insisting upon unreasonable, overbearing contract positions will backfire on the client in the long run. A vendor put in this position will manage the contract to the letter and be less inclined to be creative in problem solving.”
The following practices will help you achieve not only a good agreement on paper, but also a good working relationship with the vendor that will pay dividends throughout the life of the agreement.
Think Beyond the Transaction
Don’t make the mistake of treating negotiating and signing the contract as the end goal. Consider negotiations as a tool that will deliver not only the contractual terms you must have, but also the beginnings of the working relationship you will need. Include the managers from both parties who will be responsible for day-to-day operations in the negotiation so they can begin to establish a rapport. Your overall objective should be to get what you need without putting the vendor in a hole they will be trying to dig out of once the agreement term begins.
Prepare
This may seem obvious, but some clients still plan to start negotiations by going line by line through an entire agreement drafted by the vendor. A better approach is to work with legal counsel to map out key terms, initial positions, and acceptable end points prior to sitting down with the vendor. “Preparation is one of the keys to any effective negotiation because it helps the client to frame its goals for the outsourcing transaction and to create a structure for achieving those goals,”says Chris Ford, Partner, Alston & Bird, Washington, D.C. “Failure of the client to identify its goals and prepare a strategy for achieving them can lead to a disjointed series of discussions that lack direction and a cohesive purpose. As a result, the client may end up with a deal that not only fails to meet its strategic objectives, but also does not work well operationally,” he adds. To avoid unfocused discussions and a less than functional pact, be sure to identify your operational, financial, governance and contractual requirements in advance.
Look to the Future
Think beyond the current state when coming up with your operational and contractual requirements. Many deals have failed or underperformed because they were not flexible enough to handle change. Review your company’s strategies and consider what situations are likely (even remotely) to occur and determine what provisions you would need in the agreement to protect your interests. For example: What would you like to be able to do if you acquired or divested a company? What would be your obligations if your business experienced an extended slump? Brainstorm these situations with your team and map out the ideal and minimum contractual requirements. Stacey Smotherman, Senior Counsel, Fulbright and Jaworski cautions, “It is impossible to anticipate every possible change, especially in a long-term agreement. Establishing parameters on the scope of possible changes and implementing a stringent change control process can help the parties implement expected and unforeseen changes. The client, however, needs to be cognizant of the fact that each change control request can turn into a mini negotiation that can drain the client’s and service provider’s resources and take the focus away from the management and performance of the services.”
Prioritize with Stakeholders
Gain agreement from executive stakeholders on the priority of the key provisions you identify. If there is no clear set of stakeholders, create one. Ensure the final decision-making process is clear and understood by all stakeholders to avoid last minute changes or requests. Once priorities are set, be sure to level your entire negotiating team. You can’t afford conflicting messages being sent to the vendor by team members who are unprepared or have separate agendas.
