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1. Joseph Orlando TorchLIte Group Outsourcing Outline Page 1 of 22 Outstanding Outsourcing From the start, outsourcing initiatives can be plagued with heartache and regret. All too often, these initiatives are vendor led and the vendor drives the agreement and transition plans. Customers/Users are least likely to be familiar and experienced in ways to avoid the potential landmines surrounding outsourcing. The following hopes to outline what industry experts suggest would assist in reducing the complications in typical outsourcing deals. Landmine #1: Inadequate Knowledge Transfer Remedies for Landmine #1 (1) In the service providers approach to transition, a key tactic is adequate transfer of knowledge. This facilitates both the training of the providers employees to take over the buyers outsourced functions, as well as identifying process steps that need to be changed to create new efficiencies. The first step is to document how the buyer organization does business, identifying each protocol and procedure (rules of engagement). Unfortunately, the situation most providers find at transition is that the way business is supposed to be done is extremely different from the way things actually are done. This is especially true in large organizations and in situations where an employee has been performing a task or function for many years. A best practice for providers is to insert a validation step in this documentation process, testing the prescribed rules of engagement against the actual operations and informal procedures that have built up over time. The providers employees can then be trained on the way business is actually conducted. This validation practice is especially useful in transforming and streamlining the business process to be outsourced. As the validation flushes out individual intricacies and non-prescribed methods of performing a function, it opens the door to demonstrate how a process can be shifted to a more precise and high-performance-driven process. Failure to due this well will doom the initiative to fail before it starts. Efficiencies will not be realized and costs not managed to the ROI expected from the start. 2. Joseph Orlando TorchLIte Group Outsourcing Outline Page 2 of 22 Landmine #2: Inadequate Measurement of Service Level Performance Remedy for Landmine #2 A best practice approach to transition is to first establish a baseline of the buyers current performance level. This is the basis for the providers reports that it is not only meeting contractual service level specifications but that overall performance metrics within the process are better or as good as they were when the buyer had control of the process. The fact that service level performance has not gone backwards must be demonstrated for the credibility and protection of the buyers decision-makers who said, outsourcing is the way to go. If a baseline analysis has not been done by the buyer (or if there are baseline metrics, the provider should verify them), the service provider must demonstrate the importance of this procedure, acknowledging that it will add to costs. This set of metrics is as important as the contractual service level specifications. Landmine #3: Lack of Response Scenario Planning Remedy for Landmine #3 The best practice approach is to assume that early on there will be some challenges and do some scenario planning for how to handle those events. The planning is similar to a disaster recovery plan it exists just in case a disaster occurs. A Scenario Response Plan should include the following components: . If extra resources are required for additional effort, where do we go to mobilize those resources? Who is in charge of communication and updating the organization as to the event? . If the buyer organizations user community resists an action, it is the committed executive in the buyer organization who will on a frequent basis need to communicate why this decision was made and reinforce the organizations commitment to it? . Who is responsible for feeding back to the buyer organization the providers recognition of pressure building and what the provider is doing about it? Landmine #4: Lack of Executive Sponsorship and Staying the Course Remedies for Landmine #4 (1) Success is sustained by calling up anew the vision of the goal. This can be accomplished only by a committed executive who is not in the fray of the day-to-day relationship with the service provider. In an outsourced accounting process, for example, the committed executive should be a Chief Accounting Officer or Chief Financial Officer, rather than the accounting department manager. This executive must stress that the buyer organization is committed to the outsourcing initiative and that it is the responsibility of all people in the organization to make it work. 3. Joseph Orlando TorchLIte Group Outsourcing Outline Page 3 of 22 (2) Much like the effect of a two-year old childs temper tantrum, the natural temptation in dealing with the noise of negative feedback and dissatisfaction is to abort the course too early. The noise is driven by an inadequate Scenario Response Plan. The key to avoiding the Landmine of changing the plan is to put in place a mechanism that encourages staying the course. The best practice approach is to structure weekly performance and transition reviews throughout the entire first year of the relationship. Attendees should include the buyers highest-level sponsor of the outsourcing (CEO, CIO, CFO, for example). This is the individual who has the capability of making strategic decisions for the buyer organization. The person who was originally responsible for making the outsourcing decision must stay involved and intimately familiar with where the parties are in the cycle, why things are happening the way they are and what happens next. Also attending the meetings should be the people who are responsible for the tactical execution (the day-to-day client liaison, for example). Landmine #5: Lack of Flexibility Remedy for Landmine #5 A best practice approach to avoiding this landmine is to build in a formal review and tightening phase around the contractual service level commitments, to occur 180 days from the effective date. If recalibration is needed, changes to the contractual commitments then can be refined upon mutual agreement. Every contract has provisions to manage scope changes and change orders, but they are typically styled around very substantial changes in the business environment, as opposed to fine-tuning. Understanding this best practices approach, the following outlines the elements for constructing the performance based agreement for outsourcing. Outsourcing Checklist This checklist is designed to be useful in developing a cllients acquisition objectives and subsequent contractual documents. Although checklists are effective aids in negotiating and drafting an optimum user-oriented agreement, the substance of each provision is the key to proper user protection. An agreement drafted with weak provisions covering all of the checklist subjects would provide little protection to the user. Alternatively, an agreement drafted with strong pro-user versions of less than all of the checklist points could offer excellent protection. This is a most generic checklist that will address the needs of any outsourced service, not simply call centre or food services or HR. The construct of an agreement will be based on the following elements. The essence to be captured should certainly be performance based in all cases. 4. Joseph Orlando TorchLIte Group Outsourcing Outline Page 4 of 22 One cautionary note, the writer of this is not expert in the EU legal and regulatory aspects and thus those are not necessarily reflected herein. Constructing the Agreement Identification of Parties: a. Legal name and address (including division). b. State of incorporation, if any. c. Short reference name of party used in agreement. Definition of Terms Used in Agreement: a. Parenthetical definitions used throughout agreement. b. Special definition or glossary section. Description of Services to Be Provided: a. Specify services to be provided in detail (do not use open-ended description or indicate that exact services will be mutually agreed upon at a later date). Include: 1. Frequency of each service, including user and vendor time deadlines. 2. Quality or type of service, including any relevant standards, processing procedures and environmental controls, specifications, and tolerances. 3. Special modifications or conversions of standard services or programs. 4. Type of equipment, software and communications network to be used, if relevant to user, including minimum required hardware and software, and availability of UPS. 5. Type of input and output to be supplied, including media, print quality, format, delivery and timing. 6. Degree of systems support to be supplied by vendor (with specific person-hours or objective/completion standards). 7. Operations manuals and other documentation to be supplied to user. 8. Ownership of all data, input and output, storage media, and similar user-supplied or user- based data and materials. 9. Disaster services. 10. Terminal response times, rerun and turnaround times (with specific indication of priority to be provided to reruns due to vendor and/or user error). 11. Procedures for requesting sample and special reports, including response time. 12. Security and safeguards to be provided, including limitations on access to terminals, data and programs, and destruction of excess paper and carbon paper. 13. Provision of computer accounting logs to user. 14. Vendor personnel assigned to account a. Specify minimum qualifications of project coordinator assigned to user. b. Specify minimum qualifications of key systems, programming, communications and support personnel assigned to user. c Provide user with reasonable right to approve replacement vendor personnel who fail to meet minimum spec