Before you wriggle out of an expensive outsourcing deal

July 2, 2009

By now, you would have read about Accenture scrapping its ten-year old deal with BC Hydro?

Or, JP Morgan wriggling out of the $5 billion IBM contract?

In the latter case, the financial services company took seven years before throwing in the gauntlet. The delay, if you ask us, is not surprising. Divorces are always costly affairs.

Therefore, although JPMorgan has said that it ended up paying no termination fees to IBM, these facts are difficult to verify. In Accenture’s much-publicized divorce case, that too must have cost the outsourcer a bundle, the reasons cited are cost overruns and gross inefficiencies. To cut these losses, Accenture eventually decided to cut loose from BC Hydro.

Fact is that a divorce is like a toothache. You just want the problem fixed as quickly and painlessly as possible. You want lasting relief and you don’t want to dime on doing it. But that’s next to impossible.

Therefore, the best thing is to act sensible and not jump into the pond unthinkingly. A recent Forrester research indicates that an unprecedented numbers of UK and US companies have begun to review their deals with Indian vendors without weighing all the necessary pros and cons.

Indeed, where there is so much at stake in these partnerships, its wise to have a detailed exit clause built into the deal, much like the pre-nuptial agreement that celebrities enter into to protect their wealth and reputation, before uttering the words “I do.”

Before you server the ties:

The first rule, according to Forrester, is to realize that disengaging from such relationships should be considered a last resort.

Second, it is important to determine the level of dependency on the vendor and the impact of service disruption. And, third and last the cost of invoking an exit clause in your outsource contract.

Examine and mitigate risk. To codify this process, Forrester advises developing a provider vulnerability and risk matrix. It is crucial to know why the relationship failed, so that mistakes can be avoided before engaging a new partner.

It is perhaps to avoid costly mistakes that triggered on by the economic insecurity; clients have begun to demand performance-linked contracting and multi-supplier sourcing. The motivation is obvious. They do not want to put their eggs in one basket and risk losing it all, one fine day!


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