The cost and quality benefits provided by outsourcing remain attractive to CIOs despite the global financial crisis. In-house lawyers need to understand sophisticated outsourcing strategies and how to lead a procurement process that will deliver what their organisation needs.

Define your sourcing strategy

The cost efficiencies and potential to "transfer" risk presented by outsourcing present obvious business benefits, but the key focus should always be the strategic business objectives of an organisation. Businesses must ensure that outsourcing does not remove their ability to adapt to internal changes in direction, maintain or create competitive advantage or respond proactively to changes in the market.

This may mean avoiding bundling all of their technology capability requirements together or selecting an outsourcer solely on price. Rather, organisations should focus on matching requirements with the expertise of service providers.

Planning the lifecycle of an outsourcing process - from approach to market through to disengagement - is a key driver for success. In-house counsel clients often tell us that they hear of an outsourcing transaction only when the business has commenced the process and effectively selected a vendor. Lawyers can help to avoid the loss of strategic value that this approach causes by guiding procurement strategies, defining requirements and developing the "go to market" process.

Know your requirements

The process of defining a sourcing strategy includes what is generally the most challenging task in outsourcing: identifying an organisation's requirements. The transfer of focus from cost drivers to increasing specialised technology, service and management capability facilitates identification of organisational deficiencies and thus requirements.

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Often where capabilities are lacking so is an organisation's ability to analyse these deficiencies meaningfully and apply them against what a sophisticated outsourcing market can supply. Self-assessment of an organisation's internal capability using a "make or buy" approach may identify requirements, but often has bias against change which fails to provide the basis for a successful outsourcing strategy. An experienced legal team can act objectively, watching for early signs of this type of dysfunction.

An organisation that is unable to explain to the market what it wants will compromise the outsourcer's ability to provide a tailored solution. Where problems are identified, in-house counsel provide a vital role in steering the process to the early use of specialist advisers, facilitating translation of business outcomes into a meaningful statement of requirement and selection of an appropriate sourcing strategy.

Experts in this area can then match the requirements with an understanding of which outsourcers have strong capabilities in the area of the organisation's needs.

For example, one of our clients favoured selecting its incumbent system integrator (in our first meeting we were asked whether they could notify the integrator that they had won!). However their outsourcing project was a very different project from previous work. Teaming with their in-house lawyers we reviewed their procurement strategy. After designing and completing a new approach we found that internal stakeholders chose an entirely different supplier.

Know supplier's capabilities

Understanding the different offerings available in the outsourcing market (from tier-1 outsourcers with sophisticated transformation capability to service providers more suited to providing a desktop support function) is essential to forming an effective strategy. Businesses that recognise this complexity can continue to take advantage of the potential cost savings provided by both offshore and nearshore outsourcing, but do so by selecting a provider with a right match of capabilities against requirements.

Organisations new to outsourcing often lack an understanding of the market, and thus, the strengths and weaknesses of the various service providers. Can you differentiate between service providers that are strongest in hardware, transformation or "run"/operating?

In two transactions last year we saw customers procuring with very different levels of sophistication. One had down-selected a shortlist of providers that could clearly meet the customer's requirements. The other had a shortlist of providers each with very different strengths, pricing and ability to accept legal risk. Having such stark choices signalled that the customer had not decided clearly what it wanted from a service provider.

In these transactions the service providers were continually assessing the customer's procurement process to determine whether to continue to devote business development resources in pursuit, whether to concede on legal risk and where to allocate their senior people. Going to market in a sophisticated manner generates sophisticated responses. Lack of organisational clarity results in varied responses that are difficult to assess and compare.

The outsourcing agreement

Outsourcing (particularly select sourcing) involves the establishment of a relationship (rather than a simple purchase of services). The outsourcing agreement defines the terms of the relationship between a customer and outsourcer, and the way it is managed will have a significant impact on the success or failure of an outsourcing.

Organisations need to be reasonable in what they require in a contract - knowledge of market contracting standards is essential to effective contracting. Often substantive legal debate has a flow-through impact on pricing, so lawyers need to know what they need and avoid asking for what isn't required.

Often customers put positions that seek to retain valuable intellectual property rights that is the core of the outsourcer's business. We have witnessed negotiations become protracted and tense because of the lack of understanding of what the organisation needed. Flexible partner style agreements that recognise the need to share risk and reward performance are more likely to result in an effective outsourcing relationship than rigid, one-sided agreements.

Conclusion

The challenges of outsourcing are increasing as the market matures and customers become more sophisticated in their strategies. In-house lawyers have an invaluable role to play early in the procurement process to ensure that their organisation is one of the more sophisticated players.

They ensure the organisation understands its requirements, match these against potential suppliers and maintain competitive tension to enable the negotiation of commercial and legal relationships that will sustain.

The author, Middletons partner Cameron Abbott, would like to thank Middletons' Solicitor David Ryan for his assistance in preparing this article.