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Summit 2017
William Maurer
To the Point: Driving Outsourcing Deal Success With the Right Pricing Models, Relevant Behavior Drivers and Risk Analysis for MSE
Midsize Enterprise Summit Fall
17 – 19 September 2017 / San Antonio, TX
1 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Promise▪ Pathetic Contract Behavior Drivers — "We had
no behavior drivers cost us 20% to 35% and deal success"
▪ Weak Term and Termination Article — "We couldn't terminate, cost us two years, and hundreds of thousands of dollars"
▪ Omitted Disentanglement Article — "We ended up terminating but had to pay all termination costs, which will be over $1.1M. Now we have to find a new vendor"
▪ Innovation Promised, Disastrous — "We see new market solutions saving competitors 40% to 55%"
▪ Risk Consideration Overridden — "Our deal is not working well, we can't terminate, losing ground to our competitors every month"
2 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Key Issues
1. What are midsize enterprises concluding as the most successful
pricing models and behavior drivers used for their unique
requirements in today's outsourcing market?
2. How do midsize enterprises successfully implement the best pricing
models, and behavior drivers for their deals?
3 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Key Issues
1. What are midsize enterprises concluding as the most successful
pricing models and behavior drivers used for their unique
requirements in today's outsourcing market?
2. How do midsize enterprises successfully implement the best pricing
models, and behavior drivers for their deals?
4 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
It All Begins With the Unchanged Pace of Change
Market Forces
• New Technology
• Laws (Regulations)
• Provider Landscape
• Competition
• Economics
Enterprise Forces
• Mergers & Acquisitions
• Divestitures
• Shareholder Value
• Innovation
• Business Value
So where do these changes impact your Enterprise ?
Organization?
Processes?
Supplier?
Clients?
Focus?
… literally everywhere !!!
Sourcing?
5 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Marketplace Most Common Pricing Models
Data Center Per
Mainframe MIPS
Server Physical/Virtual
Storage GB/TB/PB
Disaster Recovery M/A Fixed
Cloud Per
Hosting Server, Instance
IaaS GB Memory/Server/Cores
STaaS GB/TB/PB
PaaS GB Memory/Server/Cores
Workplace Mgmt. Per
Service Desk User per Month
End User User per Month
Mobility Device
Voice Premise Device or User
Source: 2017 Gartner — Multiple DCO/IUS and Workplace Management Magic Quadrant Client References Plus 500+ Contract Reviews (2015-2017)
6 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Contract Element Behavior Drivers
Master Service Agreement
MSAGuiding
Principles
GP
Services
Sv
Personnel
Pn
Assets andThird-Party Contracts
AT
Attachment
ATTRetained
Authorities
RA
Fees andPayment
Terms
FP
Record Keeping andAudit Rights
RR
Representation,Warranties and
Covenant
RW
RelationshipIntegration and
Governance
RI
StrategicObjectiveStatement
SO
IndependentAdvisorCharter
IC
CommunicationPlan
CP
TransitionTransformation
TTTerm and
Termination
Te
Disentangle-ment
Da
Limitations ofLiability
LL
Proprietary Rights
PR
DemandManagement
Plan
DM
Human CapitalManagement
Plan
HC
KeyPersonnel
KP
ContractManagement
CM
ProcessOwnership
Plan
POSecurity and
Confidentiality
SC
LegalCompliance
LC
Indemnification
Id
Insurance
Is
ExitPlan
EP
InnovationPlan
IP
MeasurementCharter
MC
SOW, SLA,OLA, Price and
BHD
SP
RiskAnalysis
Framework
RFDispute
Resolution
DR
Use ofSubcontractors
US
Miscellaneous
Mc
Equipment
EqDefinitions
De
Licensing
Li
Acceptance
Ac
Behavior Driver
RelationshipManagement
Intellectual Property
Security,Data Protection
Risk
7 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Key Issues
1. What are midsize enterprises concluding as the most successful
pricing models and behavior drivers used for their unique
requirements in today's outsourcing market?
2. How do midsize enterprises successfully implement the best pricing
models, and behavior drivers for their deals?
8 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Roadmap
Assess The RiskContract MSA
w/BHD Articles
Know What You
Can Negotiate
Success
Contract
W/BHDs
1
Failure
RFP Process
No Pricing Model
Contract
No BHDs
Weak/No
Negotiation
Plan/Contract
Renegotiation
Process
RFP Process
Pricing Model
9 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Most Common Pricing Model Examples
Price Model (Most Common
to Least Common)Flexibility Transparency Predictability Client Risk Provider Risk
Unit/Use Most Common
Fixed Price
T&M
Incentive
Shared Risk-Reward
Gain Sharing
Cost+
Open Book Least Common
Acceptable (Both) ExcellentPoor
10 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Pricing Model Usage Begins
With RFP Process
CloudServices
Pricing Model
1
3
Pricing ModelPricing Model
11 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Key Contract Elements — Traditional Deals
Master Service Agreement
MSA
GuidingPrinciples
GP
Services
Sv
Personnel
Pn
Assets andThird-Party Contracts
AT
Attachment
ATTRetained
Authorities
RA
Fees andPayment
Terms
FP
RecordKeeping andAudit Rights
RR
Representation,Warranties and
Covenant
RW
RelationshipIntegration and
Governance
RI
StrategicObjectiveStatement
SO
IndependentAdvisorCharter
IC
CommunicationPlan
CP
TransitionTransformation
TT
Term andTermination
Te
Disentangle-ment
Da
Limitations ofLiability
LL
Proprietary Rights
PR
DemandManagement
Plan
DM
Human CapitalManagement
Plan
HC
KeyPersonnel
KP
ContractManagement
CM
ProcessOwnership
Plan
POSecurity and
Confidentiality
SC
LegalCompliance
LC
Indemnification
Id
Insurance
Is
ExitPlan
EP
InnovationPlan
IP
MeasurementCharter
MC
SOW, SLA,OLA, Price and
BHD
SP
RiskAnalysis
Framework
RFDispute
Resolution
DR
Use ofSubcontractors
US
Miscellaneous
Mc
Equipment
EqDefinitions
De
Licensing
Li
Acceptance
Ac
12 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Behavior Drivers Must Work Together —Single Missing Part Causes Problems
InsuranceRisk
Analysis
Framework
Security andConfidentiality
Linking these items together allows you to drive provider behavior to meet or exceed all performance requirements
Legal
Compliance
13 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Behavior Drivers Must Work Together —Single Missing Part Causes Problems
Exit Plan
SOW, SLA, Price
Term and
Termination
InnovationPlan
DisentanglementMeasurement
Charter
Linking these items together allows you to drive provider behavior to meet or exceed all performance requirements
14 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Key Contract Elements — Cloud-Based Deals
Master
Service
Agreement
MSAServices
Sv2
Retained
Authorities
RA5
Fees and
Payment Terms
FP6
Record Keeping
and Audit Rights
RR7
Representations
and Warranties
RW8
Term and
Termination
Te9 10
Limitations of
Liability
LL11
Security and
Confidentiality
SC13
Legal
Compliance
´LC14
Indemnification
Id15
Insurance
IsMiscellaneous
Mc19
Dispute
Resolution
DR17
Use of
Subcontractors
US
16
18
Exit
Plan
EPK
SOW, SLA,
OLA, Price, BHD
SPN
Risk
Framework
RFO
Attachment
ATT
Definitions
De
Licensing
Li
Acceptance
Ac20 21 22
Dis –
entanglement
Da10
Transition
Transformation
TTE
Critical Articles
Important Articles
Nice to Have Articles
15 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Cloud-Based Terms — What to Do, Difficulty Negotiating
▪ Memorialize URL Links Not to Diminish:
– Incorporate any URL text into contract.
– Negotiate "not to diminish" rights for all terms with benefits for improvements.
▪ Subcontractors Should Abide by Contract Terms:
– Read Force Majeure language carefully.
– Exclude supplier/subcontractor failures from FM events.
▪ Extend Termination Notice If the Cloud Provider Wants to Terminate You:
– Require at least six months' notice if the cloud provider wants to terminate you, as thirty days will not be
enough to find and move to another supplier.
▪ Termination Clauses Should Be Explicit About Data Return/Access at No Fee:
– Ensure data is returned in a certain period with no obligation of written request, returned at no charge
– Specify file format, mode of delivery, API.
– Ensure data is not deleted for 60 days or until you approve, and right to test the data extraction process.
16 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
▪ Security and Data Protection Is Typically Very Weak:
– Detail data security/privacy requirements in an attachment and refer to the exhibit in the protection clause.
– Include annual requirement to certify to cloud security standards
– Require regular vulnerability testing. If customers are not allowed to do testing, then they should get results
– Classify security, service loss and data loss incidents according to severity, with differing response and
notification requirements according to the level of severity. Require root-cause analysis/mitigation reports
– Test data extraction at least annually and Immediate notification of breach or third-party requests
▪ SLA Exclusions:
– Ensure at least 72 hours' notice is given of planned downtime.
– Limit amount of planned/acceptable downtime per month.
– Ensure planned downtime not taken cannot be carried forward to subsequent months.
– Remove short periods of downtime from exclusions.
▪ Ensure SLA Penalties Are Robust and Include Termination Rights:
– Negotiate to terminate the agreement if the SLAs are missed any three months in any 12.
– Ensure up to100% credit in any month if the SLA is missed by enough margin.
17 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Evaluate the Risks in More Detail —Mid-Sized Financial Services Company
Medium
Exposure
Business Risk
Bu
sin
ess V
alu
e
Too Much Risk Today
Low High
Conduct Risk Scorecard Assessment
Decision EstablishesRequirements
for Technical andProcess Controls
Always Allowed
Low
High
Do Not Allow
Using the contract risk scorecard, determine position on benefit-versus-risk model
18 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Conduct Risk Scorecard Assessment
Decision EstablishesRequirements
for Technical andProcess Controls
Medium
Exposure
Business Risk
Bu
sin
ess V
alu
e
Too Much Risk Today
Low High
Always Allowed
Low
High
Do Not Allow
Evaluate the Risks in More Detail —Mid-Sized Financial Services Company - Before
Using the contract risk scorecard, determine position on benefit-versus-risk model
GeneralPoor
SolutionPoor
Client-SpecificPoor
Data/SecurityAdequate
PerformancePoor
Risk Score - 74
19 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Conduct Risk Scorecard Assessment
Decision EstablishesRequirements
for Technical andProcess Controls
Medium
Exposure
Business Risk
Bu
sin
ess V
alu
e
Too Much Risk Today
Low High
Always Allowed
Low
High
Do Not Allow
Using the contract risk scorecard, determine position on benefit-versus-risk model
Evaluate the Risks in More Detail —Mid-Sized Financial Services Company - After
PerformanceExcellent
GeneralExcellent
ClientExcellent
SolutionExcellent
Data/SecurityExcellent
Risk Score - 26
20 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Action Plan for Sourcing Executives —Mid-Sized Financial Services CompanyMonday Morning:
▪ Document your/key stakeholder — issues, corrective action possibilities and distribute to enterprise
▪ Collect deal risk data, begin risk review process
▪ Review deals for pricing models, contract behavior drivers, risk mitigation items
▪ Initiate funding process for risk mitigation, correcting bad deals, managing processes
Next 90 Days:
▪ Confirm all deals that can be renegotiated, begin renegotiation process
▪ Develop corrective action plan
▪ Submit corrective action plan to key stakeholders/decision makers
▪ Ensure funding to mitigate risks, fix bad deals, manage process
Next 12 Months:
▪ Develop best-practice contract structure/content and virtual repository, add all contracts
▪ Track all deals including performance results, risk mitigation, contract modifications
▪ Communicate all results to key stakeholders, seek feedback
▪ Populate all faciliteis
21 © 2017 Gartner, Inc. and/or its affiliates. All rights reserved.
Recommended Gartner Research
Outsourcing Contract Research Index — Contracts Articles
and Attachments
William Maurer and Others (G00299263)
Toolkit: Compare Your Cloud IaaS Contract Terms With
Commonly Negotiated Terms
Daniel Barros and Others (G00299027)
Key Actions That Will Maximize Your Chances of Success When
Negotiating Public Cloud IaaS Contracts
Daniel Barros, David Groombridge and William Maurer (G00321279)
For more information, stop by Gartner Research Zone.
