Outsource Magazine Issue 33 - (Page 111)

THE BACK END THE DEAl DoCTor Paul Morrison, Alsbridge Paul Morrison is Partner and Head of BPO and Shared Services Practice at Alsbridge. He has over 16 years’ consulting and sourcing advisory experience and is a former director of the NOA. Please take a seat and try to be brave: the Deal Doctor will see you shortly… Grossly Inflated “Most of our outsourcing contracts have indexation clauses to increase service charges each year. What is best practice in this area?” Indexation, inflation and COLA (‘Cost of Living Adjustment’) clauses are standard fare in all types outsourcing contracts. The logic is simple – you contract for a service, but each year the underlying costs of the service go up for your supplier, so they should be entitled to pass that cost on to you. An inflation clause in the contract is a simple way of automatically incrementing the charge, to reflect a local Consumer Price Index or similar point of reference. However time may be up for inflation clauses, and the main reason is the market. The past five years have seen a lot of change: more competition, more buyer sophistication, technology change and pressure on supplier margins. As a result, any outsourcing deal a few years ago that allowed for automatic annual price increases to their (say) Indian resourcing costs would be paying significantly more than a buyer going to the market today. This applies to labour-intensive outsourcing such as BPO, even more to ITO and above all to infrastructure outsourcing where price falls have been particularly dramatic. It remains eminently reasonable for the risk of future cost changes to be shared between client and supplier (unless the client wants a risk premium for this baked in to the price from day one). But going forward indexation clauses will need to be more circumscribed – potentially capped, and subject to some sort of verification or benchmark. Buyers of outsourcing should not accept a simple automatic link between the price of their service and a general economic index. Recent experience has shown this is to be too crude. Til Death Us Do Part? “We are committed to our outsourcing supplier, but how do we stay up to date with the market without damaging our relationship?” A key mistake in this situation is to treat an outsourcing relationship as a kind of marriage (and by implication, market testing as ‘infidelity’). Whilst there are similarities – it’s a long-term commitment, between consenting grown-ups, and you ‘have to work at it’ to make it last – the metaphor breaks down catastrophically on many levels. How many marriages do you know are for a fixed period of five years? How many involve the payment of large sums of money from one party to the other? And which marriages have service level agreements? Some free-thinking readers of Outsource may beg to differ. But the main point is that outsourcing is a service and is asymmetrical: it is not a marriage of equals. The parties have different roles and different goals. The client is looking for a supplier to provide the required service, to be demonstrably competitive, and to help find new value; the supplier is looking for reasonable margin, adequate input from the client, and prospects for new business in the longer term. In this context, it is not just desirable but important for buyers of outsourcing to retain a certain promiscuity: they should keep their eyes on the market, test periodically whether there are better partners out there, and in extremis make the leap (or even move from monogamy to multisourcing). All the while your suppliers should absolutely expect your respect, management time and integrity. But find the right balance between commitment and challenge, and the chances are it will make sense to stay with your incumbent over the long term. If you’d like to submit a query for the Deal Doctor, please email Paul at paul.morrison@alsbridge.eu www.outsourcemagazine.co.uk ●● ●●●● 111 http://www.outsourcemagazine.co.uk

Table of Contents for the Digital Edition of Outsource Magazine Issue 33

Keeping in Touch
Shaji Farooq
Manoeuvre the Maze of Cloud Confusion
E-Invoicing: Where Now and Where Next?
Rick Simmonds
Only Strong Leadership and Governance Can Deliver High Performance
A Healthy Development
Getting to We: Time for a New Negotiating Paradigm
NOA Round-Up
To Outsource or Not to Outsource
Big Data Hits HR
John Willmott
Show Us The Money!
GBS: a Game-Changer for Finance
Neil Pratley
Go East
The Talent Challenge
Head-to-Head
Top Ten
NelsonHall Round-Up
Online Round-Up
The Deal Doctor
Inside Source
The Last Word

Outsource Magazine Issue 33