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How to negotiate a collaborative outsourcing deal

Stephanie Overby | April 28, 2014
You say you want more from your IT outsourcing service provider, yet you fall back on the same old negotiating tactics. To find out how to develop a more collaborative relationship with service providers, CIO.com talked Kate Vitasek, who wrote the book on the subject.

Vitasek: I think a better question is, 'Why not?' Business people have three basic ways to think about value. Most think about value exchange as the result of a competitive bid process and settling on a market price where they give the supplier one dollar for a unit of service.

In some cases, companies focus on value extraction by using their power and leverage to get the same unit of service for 80 cents. In both cases, they are losing sight of the potential to create real value. A better approach should be to ask, 'How can we work together where I optimize my one dollar to drive efficiencies, effectiveness, market share, and cost reduction, and create 50 cents in additional value we didn't have before?'

In today's era of constrained economic and financial resources, it's more important than ever to find the right business partners — compatible partners you can trust and create value with for the long haul. This is especially important for highly strategic relationships.

Unfortunately — and all too often — individuals have incentives to simply get the deal done, get the best deal for their companies, and then move on. Take, for example, the procurement metrics of purchase price variance. It motivates buyers into thinking about short-term value extraction rather than longer-term value creation that may likely generate a much higher ROI for both the buyer and the supplier.

Many companies have created a culture of short-term opportunism and don't view that as a bad thing. This mindset can and does create negotiation norms that foster destructive behaviors and actually destroy value rather than promoting value creation through mutual self-interest.

While contract law has evolved over time, the basic negotiation approach has stayed pretty much the same over the years. People enter contracts at an arm's length to pursue material ends, and the more powerful party pushes risk rather than focusing on working together to mitigate risks. The sad thing is they should be realizing that the risks don't go away, and that it would be far better to work collaboratively and transparently to mitigate risks through a contract that promotes mutual advantage.

CIO.com: What are your top three tips for negotiating a more collaborative outsourcing agreement?

Vitasek: First, adopt a 'what's in it for we' mindset based on trust, transparency and compatibility.

Next, recognize that creating a collaborative outsourcing agreement is a process that takes work and commitment, especially if you a seeking an innovative strategic partnership. You'll need to abide by six fundamental social norms that we outline in the Getting to We book. These are reciprocity, autonomy, honesty, loyalty, equity and integrity.

Third, if you are not familiar with how to craft a highly collaborative outsourcing agreement, seek advice. Our goal at UT is the teach people the methodology and we hope that one day all large companies have at least one certified deal architect on staff that understands the art and science of creating a highly collaborative outsourcing agreement.

 

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