By Lauren Gibbons Paul
Network World, 8/3/98

As Ash Patel and his network outsourcer celebrate their fifth year together, Patel has some advice for his colleagues who are considering taking the plunge: Make sure your prospective partner is flexible enough to adapt to changing business and technical requirements before you make a long-term commitment.

"The agreement will need to change," says Patel, manager of information technology services for Aramark Uniform. A subsidiary of managed services giant Aramark Corp. in Burbank, Calif., Aramark Uniform for the past five years has outsourced its WAN to Digital's services group. Digital and its services group were acquired by Compaq earlier this year. The first contract between Aramark Uniform and Digital ran from 1993 to 1996; the second covered 1997; and the third extends until 2001.

Most comprehensive network outsourcing contracts last at least three to five years and are worth big bucks - tens of millions per year or more, in many cases. With the lightning-fast pace of change in business and technology, the parties can't expect to spell out every eventuality in the four corners of the contract. That makes the job of managing the relationship all the more difficult. Consider this your guide to forming a harmonious union with an outsourcer that ensures your needs will still be met as the relationship evolves.

The ties that bind

Despite the length of the average network outsourcing contract, companies often return to the bargaining table with their providers long before the formal renegotiation period begins - some even on a yearly basis. "We do an annual renegotiation of terms based on business need," says Nigel Bufton, vice president of business development and marketing for Compaq in Houston.

Bufton notes that a client is not entitled to cancel a contract just for convenience sake. "The vendor has to protect its investment. But we recognize that the chances of the same technology being used years down the road are very slim," he says.

Indeed, both parties benefit when you forge a relationship with your outsourcer that will stand the test of time. There's a lot at stake in the outsourcing arrangement, and it's notoriously difficult and costly to walk away from a contract before the term expires (see story). A high percentage of large companies are unhappy with their outsourcing providers but hang in there because the penalties of early cancellation are too high, says Marc Liebman, vice president at the Dallas consulting firm Everest Group.

Everest divides the life cycle of a network outsourcing arrangement into four phases: preoutsourcing, procurement, management and the exit or renewal phase. Not surprisingly, outsourcing relationships usually fail at the management stage.

"The core reason most companies are unhappy is they can't measure the contribution the outsourcer is making to their business objectives," Liebman says. This results in resentment on both sides, and then things break down. But those failures are typically due to poor planning at the procurement stage. "The agreement was not properly scoped from Day One. Despite SLAs, most contracts simply don't have meaningful consequences in them," he says.

Escaping the blame game

In 1993, Aramark had a point-to-point VAX-based DECnet WAN composed of Digital AlphaServers, routers and switches distributed across 80 U.S. sites. Today, the company is migrating to an AT&T frame relay network with Cisco hardware and plans to implement SAP America's R/3 enterprise resource planning package over the next few years. The uniform supplier also has gained nine sites via corporate acquisitions.

Patel says Digital [now Compaq] was more than willing to roll with his company's evolving business and technical requirements over the years. Even when Aramark Uniform planned the network upgrade, he says it never made sense to look for another outsourcer.

"We pride ourselves on business flexibility," Compaq's Bufton says. "We go in with the understanding that in a year's time everything is going to change."

Aramark Uniform's first three-year contract with Digital lacked SLAs and other milestones. "We didn't even think about SLAs. My boss didn't see a need for them," Patel says.

There was little cause for concern about SLAs because Aramark's management was clearly happy with Digital's performance. Under the outsourcing arrangement, the uniform manufacturer's network uptime leapt from 85% to more than 99%.

However, the arrangement wasn't perfect. Under the first contract, Patel retained responsibility for managing all the hardware, software and telecom vendors associated with the network. When things went awry, he was the one who had to sort out finger-pointing among vendors.

When the 1997 contract went into effect, Digital assumed responsibility for managing all the network vendors, right down to the local phone company. "[Compaq] handles all the vendors. That's not my problem. I went through that before, and it took all my time," Patel says.

Patel recently realized his firm's move to a centralized IT infrastructure would require him to build accountability into the contract via SLAs.

"The whole company will be running on a few machines. That means the network has to be up more, and we'll rely on it more," Patel says. "We decided to put in SLAs to make sure they would meet our needs going forward." For example, if one of the sites goes off the frame relay network, Compaq Services personnel must respond within 10 minutes or put some of Compaq's fees at risk.

Attitude check

"The clients start to feel they're being taken advantage of. They can see prices coming down, but they can't take advantage of the carrier price wars because they're locked in to a long-term deal," Gonchar says.

He advises IT managers to stipulate in writing that telecom pricing vary according to predefined market activity. A sample contract clause might say: "If market rates for coast-to-coast T-3 links drop by more than 10%, we have the right to renegotiate the deal, or we have the right to drop our hourly rates by 5%." "You want to be sure you've got a reasonable and fair deal," Gonchar says. He recommends that companies include in their contracts the right to conduct annual price and performance benchmarking and renegotiate prices annually based on the results.

A change in personnel - either on the vendor or the buyer side - is the other big reason relationships sour, says George Logemann, director of outsourcing consulting at The Yankee Group, a market research company in Boston. "The new manager comes onto the job with an agenda that is not consistent with the spirit of the contract," he says. In other cases, tension stems from garden-variety personality conflicts between parties.

Mark Hilden, chief information officer at insurance conglomerate Ace USA in Atlanta, has been burned one time too many by a change of personnel during an outsourcing contract. He has learned the hard way not to become dependent on any one person from the outsourcing provider, no matter how gifted or dedicated.

A few years ago, for example, his company was due to upgrade the database management software on a major production server. The night before the upgrade was set to begin, the outsourcing contact had a family emergency and had to leave.

The window of opportunity to perform the upgrade was tight - only a few hours - and the chance wouldn't come again for several months. The outsourcer assured Hilden that a replacement employee had experience performing that particular conversion, so Hilden gave the project a green light.

Needless to say, disaster ensued. "Not only did the replacement screw up the conversion itself, he also made things much worse for us by not following the basic precautionary steps that anyone who had done this before would have taken," Hilden says. For example, the replacement forgot to check the backup tapes to see if they were valid before he started the conversion. Once the conversion failed, the replacement had nothing to go back to.

"We lost months of work, and our ability to produce certain critical management reports was lost for almost eight months," Hilden says.

To protect his company from similar snafus, Hilden made sure IBM Global Services' outsourcing unit was backed by solid, documented procedures before he signed his latest contract with the service provider.

As you evaluate potential outsourcers, ask to see a procedures guide. If the company doesn't have one, this tells you that the firm doesn't place much emphasis on institutional knowledge and procedures, says Hilden, adding that he wouldn't do business with such a vendor. If there is a procedures guide, assess it by examining major areas such as initial configuration or network segment restoration.

The only way an outsourcing customer can hope to achieve consistency across time zones and locations is if the vendor adheres to clearly defined procedures, Hilden says. "The worst thing you can have is something unexpected."

Apart from turnover, friction may result if your outsourcer doesn't offer you a single point of contact to manage the contract, says The Yankee Group's Logemann. While Hilden has learned not to get too attached to any one individual, he relies on a single point of contact and insists on creating a rapport with that person. But, he notes, "you have to have those strong procedures and policies to fall back on. The next person has to be able to step in and not miss a beat."

Just as turnover on the outsourcer's side can cause problems, your own staff changes also can upset the delicate balance of outsourcer/client relations. Oftentimes, the internal project manager will be promoted or quit and the replacement walks in with the attitude that the vendor is making too much money off the outsourcing agreement. This attitude is deadly, Logemann says.

"I want someone running the vendor deal whose cup is half full, not half empty, so he won't always be looking for a fight," he says.

Customers must expect the vendor to make a reasonable profit on the services it provides. "Some people apparently feel it is OK to squeeze more than the last nickel out of a supplier. But that's just what you don't want," Logemann says. "When vendors are squeezed, they have no choice but to reduce the quality or staffing levels of the delivery personnel."

If quality declines or something that threatens service delivery looms on the horizon, it's time to renegotiate - no matter where you are in the formal contract.

And if you intend to dump your current outsourcer and sign with a new vendor, you'd better start looking around well in advance of the contract's formal end date - about six to eight months before, according to Logemann. If you're going to invite several vendors to bid, "It takes 36 weeks from [a request for proposal] to contract signing - and that's at breakneck speed," he says.

The Yankee Group also defines a change in ownership of the outsourcing vendor as a gray area in which many client companies might wish to renegotiate.

But Aramark Uniform's Patel isn't worried about the recent sale of Digital to Compaq.

"It's a great buy for both sides. For customers like us, it's one-stop shopping since we buy Compaq servers and PCs," he says. Time will tell if his optimism is well-founded, but at least he's Logemann's half-full kind of guy. After all, flexibility has to run both ways.