But after the lawyers go home and the business is transitioned to the operational teams, a lack of attention settles in. The result is that many of these hard-won gains are lost.

For example, I was working on an amendment to an ASP deal recently. An additional license fee was stated in the amendment – even though the license was an enterprise license covering all affiliates! While I could assert that the attempt to collect the fee was opportunistic behavior on the part of the vendor, it is far more likely that inattention to the details of the contract, and the reliance on “standard business rules” is what caused the fee to be charged.

In another instance, with a different client, the supplier charged for services that were clearly stated as their responsibility as part of the contract baseline. That vendor, a larger one, then attempted to say that the contract did not intend for those services to be included – even though the contract language was plainly there!

In both instances, the amounts in question were well within the hundreds of thousands of dollars – and discovering the potential overpayment cost about 1% of the potential charge. These are areas where transactional attorneys can add significant value – businesses should be less reluctant to engage them in such matters. These complex services deals are anything but “set-and-forget” deals!

The answer clearly depends on the perspective of the person asking the question.   But with some basic assumptions, one can, I believe, come up with an analytical perspective that makes some sense.

Let me begin by making some basic assumptions (assumptions that many will disagree with, but I believe are reasonable and defensible).   First, the political right identifies primarily with shareholder and ownership rights – in the US often tied closely to private property rights.   As such, that which is good for the “owners” – which include diverse shareholders – is viewed as good for the country and the economy.

The left takes a somewhat different approach, looking at what is good for stakeholders.   These stakeholders include the communities, employees and environments of the companies – as well as the shareholders.   Depending on the gradation of left, ownership rights can be equally to slightly more important than stakeholder rights – or substantially subservient to the rights of the other stakeholders.

Analyzing outsourcing in this manner, one can easily see how one group – the outsourcing companies, the C-level large company executives and the major shareholder groups would be aligned to support a pro-outsourcing position.   After all, it is good for the bottom lines of these companies, good for the shareholders and good from the economic perspective of these players.

The other group, including labor unions, many community governments, local service providers and local businesses, aligns against outsourcing.   Why?   Because it adversely affects their micro-economies – either directly or indirectly.

Because there are so many pundit talking about outsourcing – and since Mr. Obama is making it a political issue, this is a debate that will likely last through the election.   Understanding the underlying perspective will, therefore, be useful in any policy analysis.   Hopefully, this short post will help explain the seemingly opposite positions.

The link can be found here.

While this approach is good for legal fee generation, it does not facilitate dealmaking, nor does it engender trust in the upcoming relationship.  All too often, clauses are simply swapped wholesale – a process that can go on for several cycles until the parties develop a compromise.

With that compromise, both parties walk away partially bloodied and partially triumphant.  Lawyers, when they compare notes, talk about the great limitation of liability provision they got with X supplier or Y customer.  They retain defenses against the potential malpractice suit – “I recommended X, but the client settled for Y.”  But oftentimes, little actual thought is put into these.

It is, perhaps, time to take a more nuanced approach to risk allocation.  Instead of walking in with extreme positions (whether or not identified as “reasonable”), the parties should commit to developing commercially reasonable risk allocation profiles prior to negotiation – instead of just reacting to extreme langauge.  There are a million ways to accomplish this goal, but doing so would reduce the transactions cost involved in significant outsourcing and services deals.

 

What makes these companies great?  Top quality products, for sure, but there is something else beyond the quality of their products that comes into play.  It’s a sense of fit-and-finish to their products, I think, that takes them to the next level.

Apple is legendary for this.  An Apple product simply works well – it is consistent, has a great look-and-feel, and allows the underlying product to become an appliance that fosters creativity.  It is truly amazing how their products are engineered to allow the customer to better enjoy the media that runs through them.

Southwest is also legendary for producing a product, in this case air travel, that is a cut above the other carriers – at least for me.  Because I’m not a “Platinum Level Frequent Traveler,” I don’t often get to enjoy the higher-end service that used to be offered by the domestic carriers.  However, what I don’t enjo” is the feeling of being a second-class citizen on their aircraft, crammed into seats that are too tightly packed, treated rudely by gate staff and in-plane staff, etc.  On Southwest, I’ve never had that feeling – and sitting here at the airport in Las Vegas – I still don’t.  Southwest has always been a class act – and in these days of troubled times, their class is shining through.

Toyota has been dominating car quality and popularity statistics for years.  Why?  I think, honestly, it is because their products – from the lowly Yaris to the Lexus LS – feel like they’ve actually had someone look at the product after design was complete and smooth out the rough edges.  U.S. designed vehicles have rarely had that feeling, with options either bolted, or vast areas of plastic switch covers which remind you that the options aren’t there.  Remember the old Chevy Bel Air from the 60’s?  It was like an Impala, but instead of three light taillight clusters (two running/stop, one reverse),  it had two light clusters.  Get behind a Bel Air and you knew that the driver opted for the “cheapo” version.

What are the commonalities?  In my mind, Apple and Toyota spend that extra time post-engineering their solutions – making sure that the pieces fit together as a coherent whole.  Southwest and Toyota avoid blatant class distinctions – while still maintaining some stratification.  Apple and Southwest excel in focusing on the user experience – clearly evaluating their products and cultures from their customer’s perspective.

What does this have to do with outsourcing?  Each company outsources large percentages of its activities – Apple products are made in China, Southwest’s jets are maintained in Latin America and Toyota offshores to the US to build a large percentage of its products.  It is clear that outsourced production can, if guided correctly, produce quality results.  The trick is that guidance – and it is the standard that we must all strive for.

Once companies begin to build that level of quality into their operations, be them insourced or outsourced, the true value of outsourcing – which is bringing the best and brightest minds to work on business problems – will begin to be seen.  Until then, we may continue to feel like the companies we deal with treat us like second-class citizens or worse.

 

More interesting was the presentation given by Malcolm Frank, the chief strategy officer of Cognizant, which asserted that the days of “Offshore-R-Us” is over, and that “[s]ubject matter expertise is really important to [customers]. In retail, you want a company with point-of-sale experience. In pharmaceuticals, you want a company that has experience with clinical trials.”

If this assertion is true, the door may open for boutique organizations that can develop specific expertise.  However, the counterpoint is that it will become more difficult for new companies to enter the offshoring market and existing companies to grow into new, unrelated, lines of business.

On the other hand, the article points out that market saturation for Indian outsourcing is 10% in the U.S. and only 1% in Europe.  If these markets can be encouraged to grow, there may be room for new entrants.

For more on the article, click this link.

These regulations have also had another, less positive (in my mind) effect.  They have made most public companies in the US extraordinarily risk averse.  Sure, avoiding unnecessary risk should be a cornerstone of most corporate decision-making, however what began as an avoidance of <b>unnecessary</b> risk has seemed to evolve into an aversion to any kind of risk at all.

Domestically, this factor has increased the entrepreneurial gulf between private and public companies.  Free from much of the compliance regulation that public companies tolerate, private companies can take advantage of opportunities that are all-but-foreclosed from the public company marketplace.  As a result, innovation is lagging, investment is declining, and companies are forced to increase profitability by scaling back on the expense side rather than scaling up on the investment side.

In short, many public companies are now, for all intents and purposes, run by their accountants and lawyers – neither profession known as a dynamic center for growth or innovation.

This approach has, no doubt, been good for portions of my profession (law) and for the CFO class (and their minions).  However, I think we must begin to ask whether or not we’ve regulated ourselves into a hole where innovation and creativity is simply too risky for public companies to chance.  Furthermore, with recent revelations about the mortgage industry, and recent apparent abuse of the oil commodities sector, it isn’t clear to me that the regulations are accomplishing their goal which, in my mind, is simply making it more difficult for the cheaters to cheat.

Asian countries, with their history of free markets, and, no doubt, with their history of heinous labor practices, are relatively free to innovate.  Even in a controlled economy, like China’s, it seems as if innovation is prized and encouraged, at least to a certain extent and in certain places.  Yet the U.S. has a unique competitive advantage – diversity – in its workforce, in its customer base and in its creative minds.  If it makes it here, it has a good chance of making it anywhere.

I’m not suggesting that we scuttle regulations and encourage a laissez-faire approach to regulation, but instead am suggesting that we revise our regulatory scheme to reward innovation at least as much as we reward accountability.   Until we do that, and begin to benefit from the innovation marketplace, I fear that we will continue to loose ground to those countries who prize and reward innovation.

While I agree with Mr. Santos at a macro level, I also think that the article fails to explore methods for retaining, or even increasing, customer leverage by using LOI’s. Furthermore, Mr. Santos offers suggestions, such as build in enough time and educate stakeholders, as solutions to a problem that is far more complex.

Why do outsourcing deals bog down? Several reasons, but primary to them is the complexity brought to the dealmaking process by the outside consultants and lawyers who feed on such complexity. Instead of focusing on the line of demarcation and necessary business terms, outsourcing negotiations get bogged down in counting every server and turning over every leaf? This is also one of the main reasons that outsourcing deals are obsolete when signed.

A more nuanced approach to outsourcing looks to the inputs and outputs – the lines of demarkation – and builds a structure that allows for the analysis of business issues as they arise. Does that lead to some ambiguities occasionally? Certainly, but at the same time, it creates a deal that can robustly handle the ebbs and flows of business.

But that is an aside. The real question is what to do when the deal bogs down. At that point, particularly if there are proposed staff reduction, the deal is probably well-known throughout the company (very few pledges of secrecy actually work). The “good people” are looking for new jobs. The HR department is beginning to study retention bonuses, etc. A delay at this point will jeopardize the company, as the replacement services are really needed.

In this instance, an LOI makes sense. There are usually enough steps in a transition that an LOI can actually help keep projects on their timeline. But there are pitfalls, too, with leverage and “hunger” being only two of them. Those risks fall to both parties, and both parties should undertake efforts to mitigate them.

So how does one balance the equities? There are several approaches. First, it is important to make sure that the supplier has some “skin” remaining in the game with regard to loss-of-contract risk. An LOI should never be fully compensatory – a significant portion of the costs should be part of the initial contract payment, but only if a contract is ultimately signed. This approach insures that the vendor stays “interested” throughout the dealmaking process.

Second, segment the work so that generally useful portions are front-loaded, and insure that the customer has the ability to use that work or subcontract it elsewhere. No doubt, vendors will complain that this leaves their IP at risk, but that can be addressed contractually. The important piece here is that the customer should try to get something of value from the relationship – even if the deal fails. This also creates benefits for a client who changes approaches or vendors mid-stream.

Third, keep the “person-out-of-the-room” involved. Someone who can pull the plug on the entire project if it is going awry. Until the final contract is signed, the deal maintains a large amount of uncertainty.

Fourth, limit the LOI’s scope, duration and dollar value severely. While this creates some additional administrative overhead, it also keeps the parties interested in moving the deal forward – and reminds everyone that the deal is not yet done. This approach is particularly useful as quarter- and year-end periods approach, as the threat of not being able to book the initial revenue tends to light a fire under many supplier deal teams.

Finally, consider a multi-vendor procurement. Let each of the vendors work with you for a while before making final award. They will see some revenue, the customer will gain lots of insights into the operations of their prospective outsourcers, and leverage will be maintained through the competitive bidding process.

While I agree with Mr. Santos that, in an ideal world, those doing outsourcing deals would not resort to LOIs, I have seen very few “ideal world” scenarios. I would even venture that LOIs, done correctly, can create leverage for the customer that can be beneficial as deals get near closing. Instead of being a tool of the vendor – to be avoided at all costs by the customer – an LOI should be viewed as a tool that, when used appropriately, can offer many benefits.

 

I got to the Apple Store about 20 minutes early and waited around.  Anyone who has visited a “Genius Bar” at an Apple Store would understand my experience – smart agents working with customers to solve their problems.  Few mentions of “policy” or “we can’t do that.”  It was about 1:25 when my name was called, 10 minutes after the appointed time.  The agent looked at my computer, attempted to boot it (it failed), listened to my suggestion to re-seat the drive (also to no avail), then quickly checked and found out that my computer could be repaired in a couple of hours.

 

Guess what.  Three hours later, my MacBook was up and running (with a new hard drive).  Now, the fun part – restoring my data.  I had purchased a Time Capsule for just this kind of scenario, but still my palms were sweating.  Would it work?  But now, about four hours later, my MacBook is up and running, my drive is restored fully and I’m typing this article.  Kudo’s to Apple.

 

What does this have to do with outsourcing?  After all, Apple’s support was 100% in-house.  Clearly, they train and they care.  That being said, there are many things that any outsourcing customer or vendor can learn from my experience. 

• A vendor who provides outsourced customer service can set a higher bar for their agents.  This should be viewed as a necessity, not an expense to recover.  “Black belt” agents will draw customers.
• A customer who empowers their agents to solve customer’s problems (as opposed to pushing customers away) will engender customer loyalty.
• A well-designed quality product – one that is thought through from the customer’s perspective, needs to be at the base of it all.
• Make the basic service good – and offer a premium service for those who need it.  Not “luxury” service – but instead a little bit of preferential care for a little bit of extra money.  But no separate entrances, no red carpets, no classism.

Quality customer care is about one thing – caring.  It does not matter where the agents are or how much they are paid.  It does, however, matter how much they are trained to care.  Apple has learned this – it is time for the rest of the customer care industry to learn it, too.

No doubt, these are all significant factors in the market.  However, I think that the Indian IT market may be selling a product that it’s US consumers are beginning look away from.  Why?  Several reasons.

First, even two years ago, when the market was chugging along just fine, companies were beginning to be concerned about the value proposition promised by outsourcing.  Actual costs ran above budgets, management expenses were higher than expected and, worse yet, internal customer satisfaction plummeted.  Aside from those simply focused on “this year’s budget,” outsourcing, even two years ago, was becoming a less attractive proposition.

Second, the deals represented a snapshot-in-time approach to the outsourcing – the infrastructure was, for all intents and purposes, frozen at the time of the deal.  Changes, which in prior years would be done internally and “for free,” were now subject to a change request and discreet cost.  Now, no one really believes that internal changes were “free,” but the costs were, in fact, buried in and under layers of bureaucracy.  No one really saw them.  Now, every change is accompanied by a cost, a budget change and requires financial review.

I am going to boldly suggest that this approach did little but empower the accounting and finance department in many corporations, not just permitting them, but almost requiring them, to micro-manage every little aspect of IT infrastructure.  IT management (and IT workers) generally dislike being managed by either finance or legal departments.  Instead, I believe that they long for the day that they simply had a budget to manage and annually had to go and ask forgiveness when it was exceeded.

Finally, IT outsourcers made the mistake of underpricing during bids, expecting to make their margin through the change process.  No doubt, it was viewed as necessary to earn the business in a price-sensitive segment.  This approach, however, also created a very unpleasant business dynamic which I call “change order hell.”  In change order hell, every picayune change requires a form, several layers of approval and a payment.  They failed to recognize that American managers, particularly in IT, tend not to want to get nickeled and dimed to death – and would much prefer a simple price for services.

So, what is the answer?

First, IT outsourcers must begin to view their services as “products,” creating an identity for them that distinguishes them from their competitors and offers something extra to their consumers.  Right now, nothing distinguishes one IT outsourcer from another, not even price or reputation.

Second, they must focus on being easy-to-manage.  What does that mean?  Getting one step ahead of your customer – by anticipating their needs.  Being proactive about problem solving.  Not pointing fingers.  Not charging for every little thing.  In short, making the outsourcing process easier and better than insourcing.

Third, like their American customers, they will have to tighten their belts a bit – maybe loose a little money.  But they can, perhaps, do it a bit better than we do by not squandering their talent through massive, knee-jerk layoffs.  Instead, they should take the time to invest in their talent – so that when the market turns, they will be better off than we are.

Finally, stop looking at the election as causing a sea change.  It is unlikely that any of the candidates will do much about the offshoring issue in the main.  Instead, it is far more likely – and historically supported – that a change that bolsters the American economy will come from a large infrastructure investment – the kind of investment that creates jobs in the local, not the global, economy. 

No doubt, this is a difficult time for both American companies and their service providers.  It is a time that will, however, end.  Examining the faults in this market, however, is not all that helpful – they are pretty obvious.  Examining the mistakes that were made when business was good, however, can really shed some light on how to improve.