Outsourcing - Breaking Up Can Be Hard To Do



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Breaking Up Can Be Hard To Do

fist coming down on a keyboard The Application Service Provider (ASP) model, the millenium's version of the old service bureau delivery system, is one of the fastest growing areas of outsourcing. Buyers like its ease of use and its simple, cost effective pricing. However, the legal issues are complex and, if ignored, can make using an ASP an expensive process if the relationship falls apart, according to David Pace, a partner in the Dallas law firm of Arter Hadden.

Transition is a key issue in an ASP outsourcing contract. Buyers don't own any part of the process since the ASP provides the software licensing rights. What happens if the relationship degenerates and the buyer wants out at the end of the contract? Pace says the question buyers must ask themselves when they write an outsourcing contract is: How difficult will it be to migrate to another ASP?

One solution might be to have buyers ask their outsourcers if they can keep their applications license in-house. This tack requires the buyer to purchase the license, an extra cost. But that makes moving the work to another provider much easier if things don't work out.

Another issue of concern is customization. Pace says the outsourcing contract must clearly state that all configuration files belong to the customer. Troubles can arise if the provider tells the customer that configurations specific to its operation are now the proprietary code of the outsourcer. If the buyer decides to switch providers at the end of the contract, moving to another ASP without the customized files means the buyer is back to square one.

Who Owns What?

The same caveat applies to application interfaces. For example, a customer might use an ASP for its SAP applications. But it has in-house systems which it wants to use with SAP. The ASP has to write an interface so the SAP application will share data with the in-house system. Make sure the contract says this interface belongs to the buyer, not the supplier.

Buyers need to always ask, "Who owns what?" when negotiating an ASP contract. "Be careful," says Pace. "Otherwise, you will find yourself wedded to this ASP because you will have to spend a lot of money reinventing the wheel if you leave," adds the attorney.

Pace says every outsourcing contract must clearly spell out the exact responsibilities the outsourcer is assuming. For example, who is responsible for the telecommunications network? Don't assume it's the ASP. If the outsourcer's responsibility stops at the buyer's front door, the network headaches did not go away. If a buyer originally decided to outsource because it wanted the ASP to handle everything, the contract must insure this happens.

Buyers must also make sure their ASPs have adequate disaster recover capability. Lighting does strike. Is your data safe somewhere else? Security is another issue. Buyers must feel comfortable sending vital information to a third party. Is security on their end tight enough?

The Outsourcing Exchange

Finally, there are the costs. ASPs are an attractive outsourcing alternative because companies can use Tier 1 applications and simply pay as they go. But Pace says no company should enter into an outsourcing relationship without hiring consultants and lawyers to ensure its rights are protected in this binding legal document. Pace says he spends two-thirds of time negotiating contracts and one-third of his time litigating them.

Pace says he has seen some companies spend six figures working through all the technical and legal issues before signing an outsourcing contract. Spending this much cash defeats the economical spirit of using an ASP, points out Pace.

Companies considering outsourcing to an ASP have to find a way to acquire the professional advice they need in a more cost effective manner. One way is to have the buyer perform some of the tasks internally. Or, the buyer can hire a consultant with a specialty in the area being outsourced.

A third option is The Outsourcing Exchange, a sister organization to this journal. The Outsourcing-Center designed the Exchange to streamline the procurement process, reduces costs, and build outsourcing relationships that achieve maximum success. The goal is to produce a win-win contract for buyers and suppliers.

Here's how it works. A buyer registers for a particular Exchange, which represents the process it wants to outsource. After registration, the buyer receives an Exchange package. The packet includes all the tools and techniques a buyer needs to submit and conduct a bid through the Exchange, negotiate the contract price, and award the work to the chosen supplier. The package features online videos to help buyers hone their bidding techniques.

Customizing The Bid Document

Buyers customize their Bid Document using templates. The Center built this document based on industry best practices from prior outsourcing relationships. The document allows Exchange users to benefit from the legal and consulting expertise of the Exchange's experts without having to pay the expensive fees of on site professionals.

The Bid Document components include:

Service Description. Buyers describe the scope and the boundaries of the services the supplier is expected to deliver.
Service Levels. Buyers describe the service levels at which the supplier is expected to perform.
Contract. This is a balanced document that is flexible enough to withstand the inevitable technological changes that will occur in the marketplace during the length of the contract.
Pricing Structure. This includes costs, incentives and penalties.
Alignment. This ensures both parties work to achieve the buyer's objectives.

The buyer then places the customized Bid Document on line for bids. Buyers can select qualified vendors from The Exchange's supplier database and invite the chosen few to respond. The Exchange package includes worksheets that help buyers evaluate suppliers' bids and understand negotiation strategies.

Basic Exchange Servers Free To Buyers

Buyers then narrow the field to three or three bidders. They ask these suppliers to resubmit their bids reflecting the negotiations that have taken place. Then the buyer selects a winner.

This service is free to the buyers as long as they use the standard templates. There is a fee if they want additional customized legal work. Suppliers have to pay a fee to register with The Exchange. The successful supplier also has to pay a success fee when a buyer accepts its bid.

Lessons from the Outsourcing Primer:

Who owns what? Buyers must protect all customized files and integration links so if they change ASPs at the end of a contract period, they don't have to reinvent the wheel.
Is there enough security? And, does the ASP have adequate disaster recovery systems?
The Outsourcing Exchange is a cost-effective way for buyers to negotiate an outsourcing relationship. The Exchange documents address the requisite legal issues.

Publish Date: July 2000

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