Strategies for Success: Outsourcing Deal and Negotiation Processes | Mayer Brown
Companies seeking to outsource—or re-source—business functions are strongly incentivized to act quickly, in order to realize savings and other benefits. However, maximizing those benefits requires effective planning and clever negotiating with suppliers, and companies that resist the temptation to take shortcuts will set themselves up for success in the long run. In this episode, partners Joe Pennell and Brad Peterson, along with host Julian Dibbell, provide insight into optimizing the outsourcing deal process, both in planning and execution.
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Julian Dibbell
Welcome to Tech Talks. Our topic today is “Strategies for Success: Outsourcing Deal and Negotiation Processes.” I’m your host, Julian Dibbell. I am a senior associate in Mayor Brown’s Technology Transactions practice. I’m joined today by Joe Pennell and Brad Peterson. Joe and Brad are both located in Mayer Brown’s Chicago office. Brad leads Mayer Brown’s global Technology Transactions and Outsourcing practices and focuses on helping clients reduce costs, improve operations, innovate, and increase revenue through services and license agreements with technology providers. Joe is also in the firm’s Technology Transactions and Outsourcing practices, and he has deep experience in digital transformation and outsourced services transactions. Joe and Brad, welcome back to the podcast.
I want to start by framing the challenge that companies face in going into an outsourcing deal negotiation. Companies seeking to outsource or resource business functions are strongly motivated to move as quickly as possible. There are a couple of reasons for that.
First of all, they want to accelerate the associated costs, savings, and benefits that they’re going to get from the outsourcing. At the same time, moving faster in negotiation can reduce transaction costs and reduce the risk of changes along the way that require significant rework. On the other hand, the underlying business functions that are being outsource tend to be complex, important to numerous stakeholders with limited experience in outsourcing. And the deal process tends to involve bidders who have different goals than the company and who have sales teams who are, frankly, adept at seeking process control and business value. So all of that militates against moving quickly and agilely. So you’ve got these kind of potentially conflicting imperatives, you know, move fast, but manage complexity. In light of those, what can companies do to maximize their chances for a successful outsourcing deal?
Brad Peterson
In a word, planning. Breaking that down a bit, planning is building the right team, getting the facts, aligning internally on what deal the company wants, and then making a clear plan to get from concept to contract. And that planning sets the stage for getting the deal done quickly and well.
Julian Dibbell
So Brad, planning, that makes sense, but what do you say to clients who don’t want to plan, they just want to get started?
Brad Peterson
You know, I get that. I say two things. First, I say you will get to a contract faster with a good plan. That’s because you can spot the problems in planning and avoid them instead of having rework in execution. It’s just cheaper to correct mistakes during planning than during execution.
Second, you’re going to get a better contract with a good plan. In planning, you’re going to be able to focus on defining your objectives using the right data and the right team. In execution, you’ll be moving fast and you’ll have expert supplier marketing teams that are driving you toward their objectives.
Julian Dibbell
Okay, well that’s pretty persuasive. Let’s then break down the planning phase. Joe, what comes first?
Joe Pennell
Well, I think the first key step is to align on what your goals are in this transaction. So why is the company doing this deal? What are the objectives in doing the deal? And what’s the relative priority? And that may be a more complicated question and task than you think. Different parts of the company may have different views of why the deal should be done or whether it should be done at all. And they may have different views on key value drivers and risks and what the key deal terms are. So, for example, cost savings may be a primary goal, but that needs to be balanced with other goals like transformation, quality of the services, treatment of affected employees, and access to scarce skills. So trying to get clarity on what these different priorities are upfront are going to inform the development of, you know, a request for a proposal from the various suppliers and ultimately the proposed contract documents.
So that’s step one. Step two is, you know, building the deal team. Once you know the company’s objectives, that will allow you to build a deal team that can define the specific needs. Ideally, you’d have a balanced deal team that’s got people from technical, operational, sourcing, business, finance, governance, subject matter expert in legal roles.
Brad Peterson
For those legal roles, I just can’t emphasize enough the value of an inside lawyer who can make decisions on contract issues and involve other members of the law department and other outside counsel if necessary. Those other lawyers bring skills in areas like tax, employment, real estate, data privacy, data security, dispute resolution mechanisms, flow through provisions and other compliance functions.
Beyond those folks, we also see great value and involvement from corporate leadership. The corporate leaders can make sure the deal is advancing the company’s strategies. That it’s maximizing savings by consolidating enterprise volumes. That it’s efficiently allocating work between internal and external suppliers and avoiding gaps and overlaps with the company’s outsourcing deals. Equally, having business unit leaders involved always helps deals to perform well operationally. The business unit leaders who are involved in a deal will make it work better for the business unit and be better prepared to transition to using the resulting supplier.
Julian Dibbell
Okay, so define the goals, build the team, we’ve done that. Are we ready to go to market yet?
Joe Pennell
Not quite yet. So you’re ready to start gathering the data you need to get a great contract. So we recommend that as part of the planning phase, a company carefully perform its own operational and financial diligence of the in-scope functions that will be outsourced before you go out and seek a solution from potential suppliers. This due diligence can include documenting what the in-scope functions are, documenting in-scope business processes, what the service levels are, personnel who perform these services today, assets, licenses, and third-party contracts that are being used. This can feel like a daunting process, especially for people who have a day job, obviously. So it can be really valuable to involve some type of a sourcing advisor or consultant in this type of a process. And the reason why we do this is that it allows the company to get better offers faster. So the bidders are going to be able to offer more commitment upfront if they have the data that they need to evaluate the opportunity with your company. So the more confident those bidders are in the facts about your current environment, they can reduce any type of a risk premium that they might feel compelled to bake into their solution. And maybe they can even give you better pricing upfront because they’re not going to be baking in some type of additional costs based on a perception that you’ve given them faulty or incomplete information.
So, and this kind of feeds into the negotiation process, but the better your information is about the current service delivery environment, you could be a lot more confident when you negotiate contract provisions. We hear all the time providers saying, you know, what service levels do you achieve in-house today? And a lot of times clients kind of give up, you know, neither here nor there answer to that. But if you’ve got an answer to that question, it allows you to demand greater commitment from the supplier.
Julian Dibbell
Yes, that totally makes sense. I mean the more facts at hand, the better equipped you are to make decisions. So you’re going to get the facts together, you’ve built the team, you’ve aligned on goals. What is next in the planning phase for the company’s team?
Brad Peterson
At this point, we recommend that the company pull together all those facts and goals into some sort of a document that it can present to the market, a request for proposal, a request for information, a request for solution. It’s true that the company may only be ready to ask for solutions to a problem from a business perspective, not make a specific ask. But most of our clients seem ready to describe a preferred deal structure and preferred deal concepts well enough to include contract templates. And those contract templates might be a master service agreement, an MSA, statements of work, SOWs, pricing schedules, service level agreements, SLAs.
On the legal side, we can help as lawyers make the SOW pricing, SLA, and MSA documents clear in an RFP by asking the questions that the bidders will ask in providing contract grade language to include, and with contract-grade language, suppliers know what deal the company actually wants and they know what they would need to say yes to if they were going to move forward with the company’s preferred deal.
Julian Dibbell
So that sounds like a lot of work, frankly.
Brad Peterson
Indeed.
Julian Dibbell
Why not just pick a partner based on capabilities and culture? You know they can do the job, you like the fit, and then have the partner produce the documents.
Brad Peterson
You know, it’s a great question. It comes down again to getting a better deal faster. You get a better deal because the critical contract issues are negotiated while you have competition and thus more leverage. And it’s easier to find the best deal among your bidders because you can make an apples to apples comparison of each supplier’s markups of what you’ve sent out in your RFP to other suppliers’ markups.
You get a faster deal because the suppliers have the facts that they need to develop and price their solutions. Also, you avoid the rework and delay that occur when you identify a red flag issue after a down select and you believe you have a deal and it turns out you don’t have a deal. And you reduce the risk that the transition itself goes off schedule because the supplier discovers new facts that unwind its solution. So you might have a contract but you don’t really have a deal and thus you don’t really have savings.
The good news though is the planning process can reasonably be called complete when you’ve developed that clear ask to take to the market. It’s now time to move to the execution phase.
Julian Dibbell
Finally. Okay. So planning phase complete. Time to get from having an ask to having a contract. At this point, the complexity goes up because you’re not really in control the same way you were in the planning stage. Joe and Brad, for this stage, what do you see as the top message for our listeners?
Joe Pennell
I would say it’s control the process because process determines results. Across the negotiation table, externally, the party that controls the process can capture more of the value generated by the deal. As a result, the bidders are going to be fielding expert sales teams that can challenge the company’s control over the process. So really be thinking about having a well-led, well-advised, capable team with executive support in your company, because that can deliver tremendous value to you in maintaining that process control before the bidders can wrestle it away from you.
On your own side of the negotiation table, controlling the process means speaking with one voice. We talked about what these teams look like a few minutes ago. There’s a lot of stakeholders in these outsourcing deals and everyone’s got varying perspectives and knowledge, but for efficiency, you really need to set a team that can go forth in front of the bidders and speak with one voice and avoiding noise and confusion and different people saying different things because the bidders are going to seek out the lowest common denominator if you’re not speaking with one strong voice on these issues. So that requires a good deal of internal preparation and control over who speaks on each topic in advance of getting in front of the supplier.
Brad Peterson
For my part, I’d add adapt as needed. Ideally, the company sets an aggressive yet realistic negotiation schedule and ideally defines a clear negotiation process. Ideally, all teams comply with that process, and everybody manages to that schedule. The parties identify and resolve key issues first, allowing the showstoppers to narrow the field of bidders early instead of surprising the company at the end. Ideally, each party has a small, well prepared, high-performing negotiation team that can make decisions quickly. And the result of all that is that commitment and clarity increase at each stage of the negotiation and closed issues remain closed. And we then as lawyers make sure that the results of those negotiations are documented in real time. We limit the number and length of negotiation sessions to focus the team on what’s important. We work to make the process efficient and effective.
You know, that’s all great in the ideal, but of course, reality always intervenes. Sometimes a bidder with a good solution is unable to meet the company’s negotiation schedule. Or, sometimes the only major issue in a bidder’s markup is a vast array of small issues. Sometimes new information arrives too late in the process and causes one or both of the parties to backtrack and so forth. So, you need to be ready to adapt.
A good model is the agile software development approach that we’ve all heard so much about with sprints followed by team meetings to assess results and make new plans, both on substance and on process. With this, you also need to be ready to decide that you need to take a few steps back. Maybe you need to take a step back to the planning phase and rethink the goals, to add new team members or gather more facts or do a replanning. Of course, having this flexibility makes speaking with one voice and controlling the process even more important.
Julian Dibbell
Brad, I guess what I’m hearing you saying is that this is a project and it needs to be managed effectively and efficiently. You need to keep control to reduce noise and stay on track, but you also need to adapt to new information as it comes up. What more is there to the process beyond project management towards signing a contract?
Joe Pennell
I think one thing that’s really important to keep in mind is that you’re building a long-term relationship here. In success and outsourcing, unlike other types of transactions where maybe it’s a one-time purchase of a good or service or an M&A deal where you buy a business and you close and it’s yours and good luck with it. Success and outsourcing depends on that long-term good working relationship between the parties. The negotiation is really your first chance for the people involved to form an effective working relationship by solving, admittedly, a complex set of contract problems together. And the people involved in that process should be looking to build trust by demonstrating that they want a win-win deal for both parties and respecting what the other party has to say and being transparent throughout the process and being upfront. If the process is competitive, the company could be coaching the bidders on how to offer more value and make a win more likely instead of using competition just as a threat that’s being held over their head the entire time.
There’s great value in having supplier and customer representatives in the room who will be the people who are responsible for managing the relationship going forward. Obviously, an effective and efficient contracting process where people feel like they’re building towards something, building towards a successful moment is a great environment for building trust and relationships. It’s kind of a launch pad to a successful outsourcing deal.
Julian Dibbell
Yes, well that certainly makes sense. But of course the goal is to get to signature. What does that look like?
Brad Peterson
Well, getting to signature involves probably three elements. First, it’s finishing what needs to get finished. And outsourcing is always an incomplete contract. There’s a preliminary transition plan, but not a detailed transition plan. There may be transformation elements that you want to work on later. However, during negotiations, we really advise against leaving issues to be resolved after signing that you could more efficiently and effectively resolve by the negotiation team before signing. Realize that after signing, the governance team will likely lack the leverage, the decision rights, the knowledge, and the contracting skills that the negotiation team had. And both parties, as soon as you get to a signature, will lose focus on resolving contract terms because they’ll prioritize transition and the deal teams will move on to other projects.
Now from the company side, that’s dangerous because it favors the supplier. The open issues generally relate to whether the supplier is making a firm commitment to deliver the needed services at acceptable performance and compliance levels with the right technology for a reasonably firm price. So even if it is too early to reach agreement on particular issues, we always recommend getting as far as you can and at least having a process and parameters for reaching agreement.
So that’s first. Second, there’s an internal decision process on both sides. And our advice here is identify early what’s going to be needed to get from a closed contract to a signature. And then just make sure in the planning phase that you know what that is, and you get that done in the contracting phase so that you don’t get turned down for approval and need to do rework.
Finally, and this is important particularly from the lawyer’s side, get to a clean, clear execution draft of the contract. For lawyers, that means reviewing every word for gaps, ambiguities, conflicts, clear errors. We found in resolving disputes that, yes, formatting and cross-references do matter. Leftover deal comments do matter. So a similar review, of course, should be conducted by the rest of the deal team. And at that point, you’re ready for signature.
Julian Dibbell
Wow, so we made it. We’re at the end. We signed the contract. Let me see if I can summarize the key points you’ve shared today, Brad and Joe. Success in outsourcing negotiations, as in other projects, requires effective planning and efficient execution, right? In the planning stage, as a company, to focus on aligning internally on your goals, building a capable deal team with all the right people, collecting relevant data, sending a clear request for proposal. That’s the ask.
In the execution stage, you want to control the process, speak with one voice, adapt as needed, build your long-term relationships, and then complete the contract as well as possible before signing.
Did I get that right?
Brad Peterson
Yes.
Joe Pennell
Yes, you got it.
Julian Dibbell
Great. Well, thank you, Brad and Joe. Great insights today. We appreciate you joining us on the podcast, as always. Listeners, if you would like to learn more about this topic, we encourage you to read Brad and Joe’s article, Optimizing Outsourcing Deal and Negotiation Processes, which is featured in our book, Lessons Learned from Major Transactions. You can find that on our website. If you have any additional questions about today’s episode or an idea for an episode you’d like to hear about anything related to technology and IP transactions and the law, please email us at techtransactions@mayerbrown.com.
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