A Z of Outsourcing

The A to Z of Outsourcing

Welcome to Alsbridges A to Z of Outsourcing.

Outsourcing has, for one reason or another, attracted ahuge amount of attention over the past few years. The basicidea is of course very simple - reap the benefits of having aspecialist do the job at a lower cost. However, setting upthe right deal can be complex and there is a bewilderingarray of jargon.

As a result, we at Alsbridge decided to write this little guideto help anyone involved in outsourcing understand what themain terminology actually means. It isnt intended to be anexhaustive manual on how to outsource but it should helpyou understand what the common terms and conceptsmean and what they are for. And if you dont know yourARCs from your Earnback, this booklet is definitely for you.

Weve tried to be as comprehensive as we can withoutending up with an encyclopedia, and we think wevecovered the main areas. However if theres anything youwould like to know which isnt included, or which isnt clearthen do give us a call, wed be delighted to hear from you.Happy reading!

Peter ScottAlsbridge plc

Alsbridge The A to Z of Outsourcing 1

Alsbridge plcWell, what did you expect us to start with? Alsbridge is the leading independentadvisor on outsourcing, shared services and benchmarking. As functionalexperts in IT, F&A, HR and Procurement, we help clients identify and implementthe right sourcing strategy with one simple focus Results.

We have won numerous awards over the years, most recently being rated #1Worlds Best Outsourcing Advisor by the IAOP (International Association ofOutsourcing Professionals) an achievement that we are proud of.

One other point - we are completely unique amongst the advisor community innot having financial relationships with outsourcing Suppliers in any shape orform - we dont do consulting work for them, we dont sell them research andwe dont audit them. So we are completely unbiased.

ARCs/RRCsThese acronyms stand for Additional Resource Cost and Reduced ResourceCost. If you ever have to say them (and surprisingly, you might), you would sayArks and Rooks (if you see what we mean, but most Suppliers will understand).Were not sure where this terminology came from but it seems to be fairlystandard in the outsourcing industry.

As the names imply (i.e. Additional Resource Cost etc, not Arks and Rooks)they refer to resources being added or taken away from a deal. There is animportant concept here - an important aspect of outsourcing deals that peoplesometimes overlook is that they are unlikely to stay the same over the contractterm. There will inevitably be some changes that will affect the resources thatthe Supplier deploys on the deal and hence the price to the client. One wayforward (not to be recommended, but it happens) is for the client to trustentirely to Change Control as regards any change in the cost. Better, however,to agree a table of charges (for whatever pricing unit is relevant) that will beapplied when resources need to be added or taken away and thats essentiallywhat ARCs and RRCs are.

However, in practice it may not be as straightforward as it sounds. For example,some Suppliers have been known to charge a higher amount for adding aresource than for taking it away, on the basis that when a resource is addedoverhead is added but when it is taken away the overhead isnt necessarilyremoved as well. As you can imagine, this could lead to all sorts of strangeanomalies if the deal is particularly dynamic, so beware..!

ARD (see TUPE)

AttritionHigh rates of Attrition of Supplier staff (i.e. staff turnover) are often cited as one ofthe main challenges in making outsourcing deals work. These rates will almostcertainly be higher than clients have experienced for their in house operationsand will often be 20% to 30% per annum or more. All the more reason to simplifyand codify processes to make it as easy as possible for the Supplier to train andreplace their staff as Attrition takes place (but see also Key Staff).

Audit AccessEvery company which is outsourcing needs to think carefully about the accessrights to the Suppliers delivery centre required for carrying out audits or otherchecks and reviews. For example, if you have outsourced Finance & Accountingyou will need to ensure access for your external and internal auditors. You maywish to ensure access to check compliance with company polices, companyprocedures, quality standards and legislative requirements. You may also want toensure that reported performance is backed up by evidence. Some companieswill want access to check that the Supplier is complying with their policiesregarding (for example) not using child labour. Finally, you may require the serviceto be benchmarked by a third party (see Benchmarking).

In general this wont be a problem - sticking points mainly arise if the Supplierbelieves the rights are going to be onerous and interfere with the service or ifthere is the possibility of one of their competitors gaining access to theirpremises - but you do need to identify all of your likely requirements and agreethem with the Supplier.

AVATWe have applied decades of accumulated experience on outsourcing and sharedservices to develop a diagnostic process which gets to the heart of the issue how to create and sustain value through sourcing. This is our starting marker,and it is call the Alsbridge Value Analysis Tool (AVAT).

Applied at any stage of the sourcing lifecycle, the AVAT process focuses on the10 key levers of value generation, and assesses where the client is. It identifiesstrengths, weaknesses and gaps, so together we can understand where best tofocus our effort.

The output of AVAT is a weighted analysis of the current status, which helps theteam to develop plans which will focus on the areas where most value can bedelivered.

The AVAT process delivers: An objective and holistic analysis of current status, enabling clients to focus onthe key issues

Rapid engagement of key stakeholders A foundation for maximising value through sourcing

We are completely unique amongst the advisor communityin not having financial relationships with outsourcingSuppliers in any shape or form


BAFOBAFO stands for Best And Final Offer, and is a regular feature of processes toselect a Supplier. It is generally used when there are a number of Suppliers stillin a process and the client wishes to Downselect to one. The Suppliers wouldbe requested to submit their BAFO, bearing in mind that the process is stillcompetitive, which gives them a chance to refine their bid in whatever way theysee fit and normally this includes reducing the price.

There are two points to note here. The first is that, if you do not intend to have aBAFO stage, you should say so in the RFP. This is because Suppliers willotherwise most likely put some padding in so that they can take it out at theBAFO stage. Secondly, once you have passed the BAFO stage you shouldntask for another one! A BAFO should be a BAFO

Bargaining PowerIt is important that a client assess their relative Bargaining Power at all stepsduring the procurement process. Obviously this is at its maximum when thedeal is still competitive and Suppliers are competing to get the deal. It isparticularly good when Suppliers know that the Downselect to one preferredSupplier is close and that concessions on certain issues may lead directly tobeing selected. (Of course, it is essential to document the key agreementswhich have influenced the choice of Supplier to make sure these are reflectedin the Contract later on).

Once the preferred Supplier has been chosen, the clients Bargaining Powergoes down significantly but one way to mitigate this is to have a visible Supplierin reserve. Suppliers know that negotiations do break down and there arenumerous examples of a client changing to the reserve Supplier, so it is a realincentive to be constructive.

BaselineThe Baseline is the actual cost and service before outsourcing. It is important tospend sufficient time establishing the baseline because if you dont, you wontknow whether outsourcing is delivering benefits or not and whether theSupplier is doing a good job or not. The Baseline is also the foundation of theBusiness Case.

Strangely enough, some companies dont put much effort into defining thebaseline, then they find they dont have much ammunition if disputes arise withthe Supplier later on about Service Levels and whether they are better or worsethan before. It is definitely advisable to nail the Baseline down!

BATNABATNA stands for Best Alternative To A Negotiated Agreement, a concept firstdefined by academics which often plays an important part in negotiating anoutsourcing contract, whether the parties realise it or not. A negotiating strategywill be strengthened if the BATNA concept is deployed.

It is important to note that a BATNA is not the so-called bottom line i.e. themost you will give or the minimum you are prepared to receive. It is actuallyyour insurance policy against not reaching a negotiated agreement in anacceptable timeframe. For example, if a client is negotiating an outsourcingdeal the BATNA might be to keep the work in house or to work with anotherSupplier. When you have a strong BATNA you have a more powerful positionbecause you have access to an attractive alternative that you could resort to ifan acceptable agreement is not achieved.

BenchmarkingBenchmarking is a common feature of outsourcing contracts. It is intended toassure the client that the deal remains competitive by conferring the right tocompare aspects of an outsourcing deal every so often against a specifiednorm. The outcome may then lead to certain adjustments in performanceand/or price. For example, there might be a comparison of cost or performanceagainst best practice in a particular industry. Although this seems reasonableand simple enough, in practice there will almost certainly be a lot of discussionand debate with the Supplier for two main reasons.

The first is the approach to the Benchmarking exercise and in particular the wayin which a true apples with apples comparison can be achieved. To be fair,this can be difficult, especially with business process Benchmarking, and if itisnt really possible then the exercise can raise more questions than it answers.The second is the consequence of the Benchmarking exercise i.e. to whatextent the process has teeth, in particular whether it will lead to automaticprice adjustments. Clearly, the sharper the teeth the more carefully the Supplierwill look at the benchmarking approach and methodology. In some cases, theapproach ends up being so constrained by the need for very specificcomparability as to be almost impracticable.

Alsbridge has a wide range of business process and IT benchmarks which wewould be happy to discuss with you.

Business CaseThe Business Case is a key part of any outsourcing initiative. However,although most companies prepare a Business Case to support the outsourcinginitiative at the outset, many dont follow through and revisit it postimplementation to see if the anticipated benefits have actually been achieved.

There are a number of key elements of any Business Case, including the Baseline,redundancy/severance costs, Transition costs, service delivery costs, Connectivityand third party costs such as Advisors (Alsbridge!) and Lawyers. If you set out theBaseline, and then compare that to the cost of the outsourcing deal, you will getan incremental cost profile which you can analyse in whatever way you wish. Inpractice, most companies focus on Payback.

A clear baseline is important dont take short cuts!


Clearly, the sharper the teeth the more carefully theSupplier will look at the benchmarking approachand methodology

It is important that a client assess their relative BargainingPower at all steps during the procurement process

The Alsbridge Business Case Benchmarking Tool is a nifty tool enabling clientsto benchmark the financials within their business case against othercomparable deals. Ask us about it.

Business Continuity PlanIt is essential for the Supplier to demonstrate that there is an effective BusinessContinuity Plan in place, should the worst happen. By the way, this is not thesame thing as a Disaster Recovery Plan (which is actually a subset of thebusiness continuity planning process).

It is obvious, but worth pointing out, that the plan should reflect what servicethe Supplier absolutely has to provide as a minimum if there should be anincident. Depending on the nature of the outsourcing deal, this may be a smallsubset of the normal service.

A Business Continuity Plan should be practical and cost effective (relative to thesize of your company). Clients and Suppliers will need to consider the servicesthe Supplier provides and the impact of these not being provided within giventimeframes, the impact of mass Supplier staff absence (e.g. due to swine flu,bird flu or man flu) and the impact of the delivery sites not being available oraccessible. It is also important to ensure that the plan and the associatedtoolkit should be readily available offsite.

Business Process Outsourcing (BPO)As the name implies, BPO means having a Supplier run at least part of abusiness process for a client. Depending on the process, this can be doneusing either the clients or the Suppliers systems.

There are many examples we could quote for process outsourcing, rangingfrom generic support processes (such as Finance, HR/Payroll and Procurement)to industry vertical processes (for example claims processing and mortgageprocessing in the financial sector) to call/client contact centres.

Change Control ProcedureIt was von Clausewicz who said that no plan survives an encounter with theenemy, and although its not quite within the spirit of outsourcing to describe theSupplier as the enemy the basic point is still valid - no matter what you do or howmuch time you spend during the contracting phase to define and to pin thingsdown, something will change that no one ever thought of. Change over the life ofany outsourcing deal is more or less guaranteed, be it scope, service, volumes,business acquisitions, disposals - the list is almost endless. As a result, everycontract needs a Change Control Procedure. This is normally common sense -usually the client notifies the Supplier of a change (or the other way round), theSupplier assesses and quantifies the impact of the change, and the two sidesdiscuss and (hopefully) agree.

It is important to note that this is a framework rather than an if this then thatset of rules for predefining the impact of a change. If rules are deemednecessary within a contract they will normally be within the pricing section.


Alsbridge is the only advisor whichdoes not take fees from outsourcingsuppliers: not for research,consultancy or audits

Finally, if major changes are expected but cannot be predefined it is worthsetting out and quantifying illustrative Scenarios in the contract, which will helpto set expectations as to what the impact of the change will be.

CharterThe Charter is a unique feature of the way Alsbridge works. We believepassionately that fair and sustainable deals are the best way to create value forall sides and the Charter sets out the necessary ground rules for the threeparties involved - the client, the Supplier and Advisors, including Lawyers.

It is worth noting why we developed this Charter. We did it because we wantedto codify the behaviours which we believe lead to sustainable deals and byimplication conversely those behaviours that are likely to lead to unsuccessfuldeals. These include unnecessarily onerous bidding processes, making dealstoo much of a commodity purchase, focusing too much on price and notrecognising that the Supplier needs to make a commercial return.

Cloud ComputingThe next big thing? Or a fancy term for what people have been doing for years?Whatever your point of view, its interesting to consider its impact onoutsourcing. Basically the Cloud is the internet and Cloud Computing meansleveraging the power of the internet so that it becomes irrelevant where / howsomething is physically carried out.

The simplest example is probably that of data centres. A traditional approach tooutsourcing data centres would be for a Supplier to take over and manage aclients existing facilities. Cloud Computing, at the other end of the scale,means that the service of data storage and access is provided without theclient knowing (or caring) where or how the data is stored.

Clearly this raises issues, for example regarding data protection andconfidentiality. But if the experts are to be believed Cloud Computing will have amajor impact on how outsourcing services are delivered. The results of ourindustry wide 2009 CloudSourcing survey can be requested free of charge if youare interested in learning more.

Alsbridge US CEO Ben Trowbridge has even written a book on the subjectEntitled Cloud Sourcing the Corporation his book provides a visionaryperspective on the evolving cloud services market and acts as a primer for IT andsourcing executives leading their corporations on the journey toward the cloud.

Train your team on cloud sourcing by ordering the book today atwww.cloudsourcing100.com.


Client - We will: Dedicate quality time, and takedecisions promptly

Be open and honest about thebaseline costs and services

Be realistic about future serviceimprovements and how they arecreated and delivered

Recognise the economics andexpect a fair rate for the services

Recognise the negotiatingprocess requires flexibility fromall parties

Suppliers - We will: Not promise what we will notcontract for

Be clear and complete about theservice and pricing

IInvolve delivery staff early and putthe solution before the deal

Ensure deal economics arealigned and sustainable

Recognise the negotiatingprocess needs give and take

Alsbridge & Lawyers - We will: Enable full, collaborative andnon-restricted interactionbetween all parties

Promote a fast, efficient andeffective process withoutexcessive tender documentation

Encourage the supplier toco-design the solution

Not waste the supplier's time Promote interest based notadversarial negotiations

Alsbridge Charter for fairand sustainable deals

based on partnership and trustin the contracting process

The Alsbridge Charter has changed the waysourcing relationships are built through our focuson collaboration, innovation and sustainability

No matter what you do or how much time you spendduring the contracting phase to define and to pin thingsdown, something will change that no one ever thought of

We developed the Alsbridge Charter to codify the behaviourswhich we believe lead to sustainable deals

ConfidentialityClients are becoming increasingly concerned about Confidentiality and its closerelative, Data Protection. Most outsourcing contracts contain provisions forConfidentiality and often Supplier staff must sign non disclosure agreements(NDAs) to ensure sensitive information is not disclosed to a third party.

Some clients take this further and negotiate agreements with Suppliers toprevent staff from working on deals for direct competitors within a certainperiod of time, to restrict physical access to a clients delivery centre area oreven (in extreme cases) to prevent competitors from having operations in thesame delivery centre.

Connectivity (Networks)This usually means the way in which the clients systems can be accessed inthe Suppliers delivery centre. These days, most Suppliers have strongcommunications networks and so Connectivity in itself is rarely an issue.However, there are still questions to resolve, such as where the connection willbe (clients end, Suppliers end or somewhere else), whether the connection willbe a leased line, VPN (virtual private network) or some other approach, whetherthe Supplier will be inside or outside the clients firewall, what the bandwidthand speed needs to be, what resilience and redundancy is required, security,service management

Networks are a specialised area, even within the IT world.

Continuous Improvement(Lean, Six Sigma...and even Lean Six Sigma)Many outsourcing deals have an element of Continuous Improvement, usuallydefined in terms of efficiency improvements and/or cost reduction over time.Depending on the deal, this can be anything from a vague intention for theparties to work together to identify improvements to a commitment built intothe Glide Path. If it is the latter, then the client needs to understand all of theassumptions that the Supplier is making as to how the improvements will beachieved and what the client might have to change or do, for example increasecompliance with processes. Sometimes clients are surprised at what isexpected of them because they forget that most worthwhile improvementsinvolve looking at processes end to end rather than just the part that theSupplier looks after.

All Suppliers have their own particular approaches to Continuous Improvement,such as Lean, and Six Sigma.

ContractAs there is a legal relationship between the Supplier and the client there has tobe a Contract, and every outsourcing deal has one (some better than others).The Contract usually consists of the Terms and Conditions (Ts and Cs) and theSchedules.The Ts and Cs are basically the underlying principles of the deal,which are unlikely to change (such as the Limit of Liability) and the Schedulescover the more transactional data that may well change, such as service Scopeor service levels.

There are differing schools of thought as to the role and purpose of theContract. For example, some clients want to spend huge amounts of time andeffort on drafting a Contract and go into every conceivable circumstance ingreat detail before it is signed and Transition commences. At the other end ofthe scale are those who see it as a necessary evil and are happy just todocument the bare minimum on signature with all the details left to be sortedout later.

You will also hear a lot of people say that, if the Contract ever has to beconsulted, then the deal has a major problem (which seems a rather sweepingstatement, given the length of time Contracts run for and the inevitable turnoverof staff on both sides over that timeframe).

By the way, it should be noted that, whereas some views on what the Contractshould contain are held as a matter of principle from the outset, others(particularly the minimalist approach) are sometimes retro fitted for convenienceonto the circumstances in which clients find themselves!

Of course, the fact that a Supplier has signed a Contract doesnt mean thatthey wont come back and ask to change something at a later date. Dontforget, in an outsourcing deal your partners problem is your problem too!

At Alsbridge, we believe that (to paraphrase Eisenhower), it is the process ofcontracting rather than the Contract which is important. As such, preparing aContract represents a very important step in the process of the client and theSupplier understanding each other and how the deal will work. This doesntmean that you need to go to the nth degree of detail but it does mean that youneed to treat it as more than a legal nicety. Contracting really is far tooimportant to be left to the Lawyers!

Contract BenchmarkingAlthough each deal is different there is a high degree of commonality betweenoutsourcing Contracts and as a result it is possible to obtain really valuableresults through benchmarking them.

Alsbridge has a Contract Benchmarking Tool based on our extensive databaseof outsourcing contracts and we use it on most client engagements. It tells


Dont forget, in an outsourcing deal your partners problemis your problem too! At Alsbridge, we believe that (toparaphrase Eisenhower), it is the process of contractingrather than the contract which is important

Make sure you have an expert on your side whounderstands what to ask for and how to get it in discussionswith the Supplier. It can be a costly exercise to resolveconnectivity issues retrospectively

clients where they stand on a wide range of criteria, including pricing, ExitProvisions, whether the Contract is client or Supplier favourable, and so on.

As prevention is better than cure it is best to get the right terms from the outsetand, based on this tool, we are also able to advise on current market normseither before or during Contract negotiations.

Let us know if youd like to find out more about our Contract Benchmarking Tool.

Contract ManagementAlong with Process Owners and the Retained Organisation, ContractManagement is probably one of the areas in outsourcing that quite often doesnot get sufficient attention and as a result the deal may suffer. The fact is that,depending on the size of the deal, contract management is often a full time jobif it is to be done well, and too often it is done on a part time basis alongsidemany other responsibilities.

The Contract Manager has a number of obvious and routine responsibilities,such as monitoring service and ensuring the client pays the right amount forthat service. However, good Contract Management is more about the spirit ofthe relationship rather than the letter of the Contract. A good Contract Managershould be aiming to achieve a partnership with the Supplier so that problemsand issues are solved jointly rather than adopting an us and them attitude andbeating them up whenever things go wrong. The Contract Manager should alsobe active within the client (along with the Process Owners) in ensuringcompliance and appropriate behaviours in dealing with the Supplier.

If done properly, this is easily a full time role for many deals.

Contract MappingThis is an innovative technique Alsbridge developed to enable a clientsrequirements to be accurately reflected in the contract. It was developedbecause the alternative usually paging through and marking up a Contracttemplate-risks missing important requirements, is usually not in a logical orderand above all is extremely boring!

Alsbridges Contract Mapping approach works like this. We have divided the keyareas of a Contract into thirteen headings, each of which corresponds to a keyoperational aspect, for example Where will the service be provided from? andWhat will the termination rights be? Under each heading are a range ofsubsidiary questions, which in turn branch off into others.

These questions ensure that the client thinks through each area very carefully,rather than just taking the provisions of a previous Contract, which may misssomething important.

Contract Mapping takes place in a workshop and a lawyer notes down therequirements as expressed by the client, which are then incorporated intothe contract. We use mind mapping software to support the whole exercise inorder to make it as visual as possible, which also helps understanding (andmakes the whole thing really quite interesting!)

Please let us know if you would like a demonstration of our innovative ContractMapping Tool.

Contract User GuideVirtually no Contract is written in a way that non-lawyers (i.e. most peopleactually involved in the day to day running of a deal) can easily understand.The order may not appear the most logical, it can be difficult to find things, andwhen you do find them you need to read the clause several times before youunderstand what its getting at. When you consider that the people running thedeal quite often had nothing to do with the drafting of the Contract its notsurprising that things dont work the way they were supposed to.

As a result, all Alsbridge advised outsourcing deals have a Contract User Guidewhich explains the practicalities of the Contract in simple, straightforwardlanguage and with as many diagrams as possible (its surprising how much of aContract can be turned into pictures!)

Controls (see also Data Protection)Concern over controls, and in particular losing control over the controls, isfairly common for clients entering into outsourcing deals, especially in areassuch as F&A. And it is important to note that the essence of outsourcing is thatthe client should recognise that they are buying a service from a Supplier, ratherthan buying a set of activities from a group of people who were previouslyemployed by them but are now employed by someone else.

The client will not be able to manage the Supplier staff as they previously didtheir own staff and nor should they, otherwise they will not get the full benefit ofthe expertise they are paying for.

Having said that, there are a number of ways in which internal control can bemaintained and indeed strengthened. At the simplest level, clients internal andexternal auditors will be able to gain full access to the Suppliers deliverylocations to carry out whatever testing or checking is deemed appropriate. Thisright of access is commonly written into the contract.

Secondly, clients will be able to define their internal control framework to theSupplier and have the Supplier implement them. Their level of compliancecould be built into the Service Level Agreement and could be tested by clientsinternal auditors.

Thirdly, there are certifications that the Supplier can provide which are sufficientto demonstrate SOX compliance (see Sarbanes Oxley).

Finally, it is worth noting that companies can almost always find a satisfactorysolution to this issue and outsourcing Suppliers are usually very accommodating.


All Alsbridge advised outsourcing deals have a ContractUser Guide which explains the practicalities of the contractin simple, straightforward language

There are certifications that the Supplier can provide whichare sufficient to demonstrate SOX compliance

Currency AdjustmentIn many deals the currency in which the Supplier incurs costs is not the sameas the currency in which the client would like to be billed. If the SuppliersDelivery Centre is in India, and the client wants to be billed in Euros, thenclearly over time there is going to be a foreign exchange risk for someone. Asa default, most Suppliers will want the client to take most if not all of the risk -that is to say, in our example they would be happy to bill in Euros but thatwould simply be Rupees converted into Euros at the billing date. And, if theSupplier does take the currency risk they will certainly build in a risk factor thatthe client will pay for, one way or another. So the clients choice is, do I take therisk myself (and have complete transparency and control), do I ask the Supplierto take it (and have certainty, but no transparency or control) or do we share it?

Data ProtectionData Protection is an increasingly important topic and it is vital to get it right atall times, especially when personal data is involved, such as salaries or creditdata. The consequences of non-compliance can be very serious, on thecompanys reputation as well as any legal sanctions that may be imposed.

From a UK perspective the Data Protection Act 1998 spells out the legalobligations and there is also EU legislation to consider. It is really important tothink through what data is going to be held and where it is going to be held, toensure compliance. Can UK personal data be held in India? Or in the USA?Well, it depends

And provisions have a habit of changing, not always to make life easier, so it isvital that companies obtain up to date legal advice.

DeadbandA Deadband is a term generally encountered with respect to Pricing models.It refers to the band either side of a point where the price doesnt change.For example, a client might agree with a Supplier that they will pay a certainamount for 1 million transactions, if the volume of transactions goes up or downby 5% the price wont change - and hence this is the deadband. Its purposeis to recognise the fact that a Supplier wont incur more cost if (in this example)volumes go up by 5% and wont be able to decrease their cost if volumes godown by 5%, so for this range the price stays the same.

Delivery Centre (Delivery Model)Choosing the right Delivery Centre strategy can be difficult. There are somany choices available now. Should you go onshore (i.e. own country-reassuring for lots of reasons but wheres the business case?), nearshore(usually Central/Eastern Europe - similar cultural background but how long willit remain lower cost?) or offshore (India/Philippines/China - certainly low costbut do they understand us and can we get the languages?)

It is increasingly common to have a two centre model, one of which is offshore(to get the low cost) and the other is near-shore (usually to deal with moresophisticated language requirements).


Alsbridge ranked #1 OutsourcingAdvisor in the World by IAOP

Suppliers occasionally resort to jargon to describe their approach, for exampleby using terms such as this shore or that shore. It all means much the samething - getting the right model to suit the circumstances.

Disaster RecoveryDisaster Recovery is an important aspect of Business Continuity Planning. Itmeans what it says how does a Supplier recover service delivery from adisaster, such as a flood, hurricane or a fire? Disaster Recovery needs to becompletely consistent with the requirements of the Business Continuity Plan.

It is essential to understand what Disaster Recovery plans the Supplier isproposing as standard within the Contract. For example, for a BPO deal is it acold facility (which is the usual option - this is an empty space that can be usedby a limited percentage of the Suppliers staff), a warm facility (the same spacekitted out with desktops etc) or a hot facility (highly unlikely a complete,staffed replication of the delivery centre offsite). And of course each of thesehas cost implications.

Dispute ResolutionDisputes (or at the very least, disagreements) are almost inevitable at somepoint, no matter how good the relationship between client and Supplier, so it isimportant to have a good Dispute Resolution and escalation process.

Normally there is an escalation route specified in the Contract, which works itsway up the Governance structure and then to the client and Supplier seniormanagement. If this should fail (and it is quite rare for things to get this far) it isessential to agree what the next step is, so as to avoid going to litigation which isthe least desirable way to resolve a dispute. There are normally two options - goto mediation (someone else tries to facilitate an agreement) or go to arbitration(someone else decides on the outcome and the parties then implement it).

DownselectThis refers to the process whereby the number of potential Suppliers in acompetitive process is reduced e.g. Supplier X and Supplier Y have beenDownselected, (quite how this is better than just saying selected is lost in themists of time).

Due DiligenceDue Diligence usually means the process by which the Supplier validates the datasupplied to them by the client, for example assets, number and capabilities of staff whatever is relevant. The client should normally insist that the Supplier carry outthe exercise to their (i.e. the Suppliers) complete satisfaction prior to contractsignature to avoid any possibility of unpleasant surprises later on. For example,the risk of the Supplier wanting to increase the price because they claim the datathey received was wrong in some respect.

Dont forget, in many outsourcing deals, because of the confidentiality involved,the Supplier has to work entirely on the basis of data supplied to them by theclient for quite a long way through the process. It is ultimately in everyonesinterests that the Supplier has the chance to validate the data and confirm thatthey will stand behind the deal.

EarnbackEarnback is a concept which is used in connection with Service Credit regimes.Basically the supplier can Earnback Service Credits incurred if they performat or above a defined level for a defined period of time.

The thinking here is that anyone can make a mistake and Suppliers should beencouraged to improve performance, not merely punished if they fall short.

Entire AgreementThe contract covering an outsourcing deal will generally be the EntireAgreement. This means that there is no other agreement between the partiesother than what is stated in the Contract. So no matter what the client and theSupplier promised to do in meetings or documented in notes or presentations,if its not in the Contract, its not agreed.

ExclusivitySuppliers will often ask for Exclusivity regarding the services they provide to aclient. For example, they might request Exclusivity over services in Scope in aparticular territory or region. However, in general clients shouldnt grantExclusivity unless they see a particular advantage in doing so or have traded it forsomething they would like more. The reason is that Exclusivity could limit aclients room for manoeuvre if things change in the future, for example if there is amajor acquisition and the client wishes to use another Supplier for some reason.

Exit AssistanceIt often comes as a surprise to those negotiating an outsourcing Contract forthe first time that at least as much time appears to be spent on discussing whathas to happen to get out of the deal as what benefits it will deliver. However thisis only good risk management and it is imperative not to get stuck in a deal youcannot get out of. As a result, a key feature of most deals is the Exit Assistanceschedule. This sets out the assistance that the Supplier must provide and therates they can charge to support the client in exiting the deal, either to bring thework back in house or to move to another Supplier.

This is usually documented quite comprehensively in a Contract Schedule.

Exit Provision (see Termination)


Some clients like the idea of Earnback, others hate it

Suppliers occasionally resort to jargon to describe theirapproach, for example by using terms such as this shore or that shore. It all means much the same thing - gettingthe right model to suit the circumstances

Research & Training Identify Need & Interest Investigate Options Stakeholder Assessment Risk Analysis Education Sessions Coach & Support

Feasibility Develop Strategic Options Define Solution Define Operating Models Define Commercial Models Confirm Potential Suppliers

Strategy Confirm Scope &Operating Model

Define Current State Confirm Commercial Model Business Case Transition Approach Stakeholder Assessment RFI

Design Processes & Service Levels Technology Organization Change Mgt & Communication

Build Facilities Technology Policies & Procedures

Service Agreement Service Management Charging Structure Change & Issue Management

Design Processes & Service Levels Systems Organization Change Mgt & Communications

Supplier Selection RFP Development Evaluation & Selection

Negotiate Contract Deal Parameters & BATNA Due Diligence Contact Award

InsourceTransition Operations Governance Knowledge Transfer Work-shadowing Service Management Technology Acceptance People Transfer RRTR Change Mgt & Communication

OutsourceTransition Operations Governance Knowledge Transfer Work- shadowing Service Management Technology Implementation People Transfer RRTR Change Mgt & Communication Facilities

Service Agreement Mgt Review Coach Deliver

Health Check Governance Services & Cost Risk

Governance Establish Structure Define Deliver

Contract Management Review Coach Deliver

Health Check Governance Services & Cost Risk

Governance Establish Structure Define Deliver

Phase 1 Evaluate Phase 2 Implement Phase 3 Evolve

Governance ProjectManagementProgramManagement

QualityAssurance

ChangeManagement

RiskManagement

Our Methodology FastSource


FastSourceFastSource is Alsbridges sourcing methodology and an overview is set out on theprevious page.

Its fairly self-explanatory, as good methodologies should be, and reflects ourbelief that any approach to sourcing needs to be flexible and pragmatic. One sizemost definitely does not fit all!

Contact us to find out more about how FastSource works in practice.

F&A Outsourcing (FAO)The scope of F&A Outsourcing (FAO) can include some or all of the following:accounts payable, accounts receivable (including collections), creditmanagement and reporting and accounting (including ledger maintenance,fixed asset accounting and the closing process).

In general Suppliers carry out FAO using the clients existing systems butprovide enabling technology where required such as scanning, workflow andproductivity tools.

There are many examples of FAO, probably well over 150 in Europe aloneand there are estimated to be over 50,000 Supplier FTEs working on FAOdeals worldwide.

Financial EngineeringAt its simplest, an outsourcing deal often involves a significant payment to aSupplier for Transition (sometimes offset by a payment from a Supplier for assets)followed by a net benefit as the lower cost delivery kicks in. This provides scopefor Financial Engineering whereby a Supplier can leverage its balance sheet tohelp the client. For example, the Supplier can smooth the Transition costs overthe lifetime of the deal, so as to avoid the large early outflow. The Supplier couldalso be flexible around the size and timing of payments for assets.

However, it is important to note that this essentially involves borrowing moneyfrom a Supplier rather than a bank and as a result the funding costs are likely to besignificantly higher. Nevertheless, if cash is an issue, then Financial Engineeringcan be an attractive proposition, but there is no such thing as a free lunch.

There are of course deals where the payment is the other way, for examplewhere a Supplier is buying a clients existing processing centre or IT assets,and again there is significant scope for Financial Engineering.

Force MajeureForce Majeure is a common concept in commercial contracts and outsourcingcontracts are no different. It basically means that if an extraordinary eventhappens, for which neither party is responsible and which prevents either orboth parties from fulfilling part or all of their obligations, then neither party hasliability for non-performance. This includes includes events such as wars,

strikes, acts of God e.g. earthquakes, floods, epidemics etc For example, ifthe Supplier cannot deliver the service because of flood (and all agreedBusiness Continuity and Disaster Plans have either worked or have beenprevented from working by the flood) then the client cannot sue the Supplier. Buton the other hand, they dont have to pay for the service they dont get either!

FTEFTE is a very common piece of outsourcing jargon and means Full TimeEquivalent. Two people working 50% of their time would be one FTE.

GainsharingMany outsourcing deals have a form of Gainshare. It simply means sharingdefined benefits between the client and the Supplier in an agreed way. This isusually a benefit which is over and above Continuous Improvement, as thelatter already should be built into the Contract, and is designed to encouragethe Supplier to identify improvements in excess of the Glidepath by ensuringthat they share in the benefits. There would be no incentive if that simplyresulted in lower revenue for the Supplier.

Gainsharing is one of those concepts that can either be very simple, in whichcase it may well be of little use, or it can be extremely complicated in whichcase no one can understand it. But the secret is to make it sensible andequitable so that it acts as an incentive for both parties.

GlidepathThe term Glidepath refers to the gradual reduction in cost to a client over theterm of a deal (so called because thats what it looks like if you draw a graph ofcost over time). The Glidepath will probably be underpinned by all sorts ofassumptions concerning the respective roles and responsibilities of the clientand the Supplier, for example increasing client compliance with processes oreven the implementation or upgrade of technology.

Sometimes Suppliers come up with Glidepaths that the client thinks may be tooaggressive, or the improvements anticipated just cant be understood. In suchcircumstances it is vital that the Glidepath isnt just accepted as a black box,because if the client doesnt see how it can be done the chances are that it cantbe done. Remember, there is no secret sauce in outsourcing!

GovernanceGovernance means the entire mechanism by which an outsourcing deal ismanaged and controlled. Sometimes it is taken to mean only the three tiers ofmeetings (usually day to day, monthly and six monthly) between the client andthe Supplier that take place to monitor performance, set strategy and sort outissues, but we believe this is too narrow a definition.

Governance should also include reporting mechanisms, including Service LevelAgreement reporting, formal and informal feedback between the client and theSupplier, the relationship between the Retained Organisation and the Supplier,and the relationship between the wider client stakeholder community. It is onlyby taking this wider view that the outsourcing deal can be managed effectivelyand governance should always be a key point of focus.


Remember, there is no secret sauce in outsourcing!

If cash is an issue, then Financial Engineering can bean attractive proposition, but there is no such thing as afree lunch

Heads of Terms (see Term Sheet)

HR Outsourcing (HRO)The scope of HR Outsourcing (HRO) can include some or (more rarely) all of thefollowing: payroll, payroll administration, recruitment, training and trainingadministration, HR administration and records maintenance, administration ofthe appraisal and development process, administration of remunerationreviews, benefits administration and helpdesks associated with all of these.The leading HRO Suppliers all provide systems platforms which includefeatures such as self service.

There are many examples of payroll outsourcing and many companies haveoutsourced elements of the other areas listed too, but there are far fewerexamples of comprehensive HRO with one Supplier.

Indemnities (also see Warranties: theyre not the samething, but can sometimes be confused)Outsourcing Contracts generally contain quite a few references to Indemnities.The basic idea is that, if something specific described in the Contract happens (i.e.a bad thing), then one party will compensate the other so an Indemnity is a formof compensation and is the term to describe a voluntary agreement betweenparties to compensate each other (as opposed to compensation legallyenforceable through other forms of legal redress, which is called damages).

A common example of an Indemnity is described under Personnel Provisions.If client staff do not or cannot transfer to an outsourcing Supplier (often becausethe work is transferring overseas), there is a risk that the staff may sue for unfairdismissal. In these circumstances the client will often agree to indemnify theSupplier against any costs that may fall on them through this action, for exampleif employees decide to pursue the Supplier as well as the client.

IndustrialisationIndustrialisation or automation is fairly self-explanatory - it basically refers totaking people out of the process and replacing them with technology of onekind or another. Clients would generally expect Suppliers to approach themwith opportunities to do this which can then be assessed and the fundingmechanism agreed.

Inflation AdjustmentEvery Supplier suffers cost inflation in their Delivery Centre over time thats afact of life. As a result, the Supplier default position is to include an InflationAdjustment mechanism in the Contract, whereby the base price is inflatedevery year based on agreed indices. So far so good. However, at the risk ofover generalising, most low cost delivery locations have higher inflation ratesthan the higher cost client locations. So will the client be worse off inflation-wise than they would have been if they hadnt outsourced? Other things beingequal (such as exchange rates, which probably wont be), clients run the risk ofthe cost increasing in real terms over the life of the deal.

So it is important for the client to think carefully about what they want toachieve as far as the Inflation Adjustment goes, and whether/how they want toshare this with the Supplier.

Its much the same as for the Currency Adjustment - if the Supplier takes thefull inflation risk and builds it into the price then they will also build in a riskfactor that the client will have to pay for, one way or another. So the clientschoice is, do I take the risk myself (and have complete transparency andcontrol), do I ask the Supplier to take it (and have certainty, but no transparencyor control) or do we share it? Its up to you to decide

InsourcingNot surprisingly, this is the reverse of outsourcing. It might occur at the end of adeal, partway through a deal which hasnt been a success or because businesscircumstances have changed and the deal is no longer viable for the client and/orthe Supplier, for example because business volumes have fallen dramatically.Insourcing is by no means unknown but it is still the exception rather than the rule.

Intellectual Property RightsPay attention at the back, this could be important! This booklet is not the placefor a comprehensive treatise on IPR in contracts people (mainly lawyers) buildcareers on this. However, it is important to keep in mind what the practicalimpacts can be, and there are a number to be aware of.

If you bring IP to a deal, for example a piece of software that you havedeveloped for a particular application, and the Supplier becomes familiar with itand uses it on your deal, you wouldnt want them to copy it and use it on theirother deals would you?

Or the Supplier might introduce their IP and would want to protect themselvesagainst you running off with it without paying for it. Then, during the deal, youand the Supplier might co-develop IP who will own that?

And, how do you make sure that you dont get locked into a Supplier if theydevelop IP that you rely on heavily but they wont give you (or anyone else) alicence to use it, if you should want to move elsewhere?

So there are practical implications after all! Its one of those areas where youmight wonder at the time whether its worth what seem to be interminablediscussions, but could turn out later on to be time well spent.

Intermediates (see Third Party Advisors)

InnovationBeyond cost, process or technological Innovation is one of the main reasonswhy companies outsource. This could be anything from process automationand simplification through to a new systems platform.

However, when deals underperform, lack of Innovation is often cited as acommon factor. There are a number of reasons for this, and one of the mostcommon is that the client expects Innovation to happen with little or no inputfrom their side. What then tends to happen is that the Supplier has no one toengage with, thinks the client isnt really interested and (perhaps not surprisingly)


Time spent on Intellectual Property might seeminterminable but could turn out later to be well spent

doesnt do much. There are ways of helping to ensure Innovation in a deal.Contact us to find out how.

InvoicingWhich client company or companies does the Supplier send their invoice to? Thissimple question sounds like a detail but actually it has wide implications. It alsotends to be one of those issues that people pay little attention to until late on inthe deal negotiation process, at which point it has the potential to cause delays.

The basic point is that the Supplier has to invoice the client. But how?One invoice from the Supplier to the client, that the client then rechargesinternally? Or, if the client has multiple entities, quite possibly in differentgeographies, does the Supplier invoice each one separately? This canprovide endless scope for debating the issue (tax, accounting, treasury,foreign exchange, legal implications) while the Supplier waits for an answer.In general Suppliers prefer to invoice centrally but really they dont care thatmuch, they just want to be sure they will get paid on time.

IT OutsourcingIT is by far the commonest function within a business to outsource and thesedays there are few companies that havent outsourced something, whether it bedesktop support, applications management, data centres, networks, orapplications development. IT outsourcing has been around for many years, hasa wide range of Suppliers and is probably closest to a commodity in manyaspects than most other types of outsourcing.

Joint VenturesJoint Ventures in outsourcing had their heyday about 10 years ago. Largecompanies looking at outsourcing felt that they should share somehow in thecapital value of their deal as well as gain revenue savings and other benefits.The argument ran, we are a big client and the Supplier can exploit our namerecognition, and experience gained in serving us, in selling similar outsourcingservices to others. So why should we give that away? How can we share in it?

There were a number of Joint Ventures, for example the Shell/Ernst & Young JVfor F&A outsourcing known as Tasco. However, as Joint Ventures are wont todo over time, most of them have disappeared and have been bought out byone party or the other. Experience shows that the basic problem is the age oldissue of managing a business when the two owners have differing priorities.Nevertheless, there is a Supplier which has been successful in operating JointVentures in specific circumstances.

JurisdictionEvery outsourcing deal has a Jurisdiction, i.e. the nationality of the legal systemgoverning the Contract. This is not just a legal technicality it can have asignificant impact on the provisions in the Contract. For example, under Englishlaw a contractual penalty has to be a genuine estimate of the damage suffered ifone party does not fulfil its obligations, whereas in other countries it may not.This is one of those areas where it is definitely best to take advice.


AlsbridgeTelling it like it is.No agenda. No cheerleading. Just Results.

Innovation, like so much in outsourcing, has to be focusedon and worked at by both sides, otherwise it wont happen

Key StaffThe Supplier will deploy Key Staff on a deal that the client will want to keep inplace for as long as required or as long as possible, so as to have the bestpossible chance of success and not be bothered by high staff Attrition. As aresult, the Contract will name these individuals and will state under whatconditions they can be moved off the account, for example if they leave theSuppliers employment, or with the clients prior agreement. (There is actuallyone standard form of Contract wording which very generously allows theSupplier to stand down key staff if they die, presumably because the Supplierwouldnt be able to charge for them).

Knowledge Process OutsourcingKnowledge Process Outsourcing (KPO) is BPOs precocious little brother (orsister). Whereas BPO is a term generally used to cover transactionaloutsourcing, KPO covers higher value added activities where knowledge-basedrather than transactional-based capability is the selling point (not that being in alow cost location doesnt help, of course). So typical examples of activitiesincluded under KPO would include market research, company analysis orclinical trials. And its a growing business.

Knowledge Cascade (see Transition)

KPIs (see Service Level Agreement)

Knowledge Transfer (see Transition)

Labour ArbitrageA fancy term for the main driver behind most offshoring and BPO thedifference in labour costs between the current location of operation and thenew location. Labour Arbitrage can and does take place between locations inthe same country, of course, as well as between countries.

LanguagesFor many outsourcing deals Suppliers need some form of Language capability,even if it is just basic English. However for some deals, especially those thatinvolve extensive contact with client staff, customers or Suppliers, clients will wantdeeper Language skills and may even want to define exactly what they need.

By the way, it is worth noting that a lot of the language skills on an outsourcingdeal delivered offshore are going to be provided by non-native speakers.This may come as a surprise to some clients, who have been used to recruitingforeign nationals in places like London or Brussels, but thats the way it is.

Having said this, outsourcing is a major opportunity for companies tore-evaluate exactly what they need and to make changes. For example, clientsmight take the view that only English need be spoken, where a range ofLanguages was used previously.

But on the other hand good Language skills can be important in (for example)cash collection, because it is essential to understand not only the words butalso the nuances.

It is also worth noting that more and more deals are seeking to de-skillLanguage capability by (for example) teaching staff a limited reading vocabularyand retaining a small pool of more skilled Language capability to use if required.

One final point - it is often surprising how Suppliers are able to overcomeseemingly difficult Language challenges with a little imagination.

LawyersLegal input is essential for the contracting process, be it external or in-house.Some clients have very experienced in-house lawyers who are able to dealwith the whole process themselves, but many do not and use externalLawyers for (at the very least) a review of the contract.

Alsbridges view is that Lawyers should be involved as early as possible in theprocess so as to avoid problems misunderstandings and backtracking later on.

At this point we could list all the Lawyers in the outsourcing arena we can thinkof, but of course we would then offend those we havent listed, so we arentgoing to do that. We can let you know who specialises in outsourcing work ifyou are interested.

Letter of IntentOn some deals the Supplier will ask the client to pay for specific work carried outbefore the full Contract is signed, for example work on Transition that has to bebrought forward due to time pressures.

In this case a document known as a Letter of Intent will cover the work i.e. thework is done at the rates in (or likely to be in ) the draft Contract because the intentis to agree a deal.

Otherwise, standalone work of the kind being undertaken could well be at different(higher) rates. It is also possible that a Supplier might ask a client to sign aLetter of Intent even if there is no specific work to cover, just to formalise theintention to agree a deal. This may have no real legal force but might give theSupplier comfort that the client is focused on reaching a conclusion.

LiabilityA key part of any outsourcing negotiation is to agree the Liability of the parties ifsomething should go wrong - the what if scenarios. By the way, this may allsound very negative but it is actually an essential part of both risk managementand deepening the clients understanding of the deal.

What happens if the Supplier doesnt file our tax returns on time and we incur afine? What happens if the Supplier doesnt pay our staff on time and they allwalk out? What happens if they dont pay our suppliers and they stopdelivering? What happens if the Supplier accidentally introduces a virus into oursystem and everything crashes?


It is worth noting that a lot of the language skills on anoutsourcing deal delivered offshore are going to be providedby non-native speakers. This may come as a surprise tosome clients

The fact is that all of this could happen (and more), and therefore we need toconsider it, but dont forget it could all happen now, when you still do all thework yourself!

For Suppliers, liability is one of the deal breaking parameters. They have theirrules and they have to stick to them - no matter how much they want the deal,if you push them outside these parameters they will walk away.

As with most aspects of outsourcing deals there are commonly accepted marketnorms and this is definitely an area where good advice can save a lot of time.

Lift and ShiftLift and Shift is the simplest approach to outsourcing. Sometimes (possiblyunkindly) referred to as your mess for less, it simply means that the Supplierwill replicate exactly what you do now but will do it cheaper, often in a low costlocation but possibly also through achieving economies of scale. They may alsothrow in some undefined process improvement over time too.

Theres nothing at all wrong with lift and shift - though some Suppliers can givethe impression its a little beneath them these days, but actually it all dependson what the client wants.

Material BreachMaterial Breach is effectively the nuclear button for both parties - if the otherside commits a Material Breach, its usually grounds for immediate Termination(plus lots of other nasties, such as the Supplier bearing the exit costs, if theyhave committed the Material Breach).

What actually constitutes Material Breach depends to a certain extent on whatjurisdiction governs the contract. In English law there is no definition as it isassumed both parties will know what it is when they see it and that a court willrecognise it as such. Nonetheless, it is common in a Contract to see certaincircumstances pre-defined as material breach, for example persistent failure tomeet agreed service levels, so that both parties know where they stand.

In other Jurisdictions, such as Continental Europe, there is often muchmore defined in law regarding Material Breach and local legal advice istherefore essential.

Migration (see Transition)

Most Favoured ClientOccasionally, a very large or important client will be able to negotiate a clausewith a Supplier so that they automatically get the best terms and service of any

client with that Supplier, at any time. Quite how the client is able to ensure thatthis is always the case is unclear, but at least they can say that their deal is thebest one they could have got. Apparently.

MultisourcingMultisourcing is a term to describe the use of a number of outsourcing Suppliers,rather than just one.The basic assumption underpinning multisourcing is that it isbetter to go best of breed, spread risk and have several Suppliers vying for yourbusiness rather than just having one large Supplier who may start off well butwhose performance may deteriorate.

The main challenge of Multisourcing is ensuring that the Suppliers work togetherto achieve a common service objective for the client, without the client having tospend a lot of time and effort on Contract Management. An increasinglycommon approach is to use Vendor Cooperation Agreements which set out theobligations and ground rules for how Suppliers will work together.

Negotiating StrategySome clients seem to forget (or it never occurs to them) that they arenegotiating a deal with people from the Supplier who negotiate for a living andwho want the best outcome for their company. Suppliers are mostly first classnegotiators and organise themselves to achieve a particular outcome clientsneed to do the same or face having a deal which doesnt work in their bestinterests. This certainly isnt to say that Suppliers are unfair or underhand in anyway, just that they are running a business.

This is really just Negotiating 101 but if you arent ready or dont recognise thetechniques you may miss out.

NearshoreTerm used to describe delivery location in Central/Eastern Europe for Europeanclients (or Central America for US clients).

OffshoreTerm used to describe India/Philippines/China (outside Europe, anyway) forEuropean clients.

OnshoreTerm used to describe delivery centre location in the clients own country.

Operating Level Agreement (see Service Level Agreement)

OutsourceabilityTerrible word which describes whether or not a particular activity can beoutsourced (as distinct from whether it should be outsourced). At Alsbridge wehave five rules which provide a framework for decision making, such aswhether the activity is rules based, whether it can be documented and whetherit involves business judgement or not. Call us to get the other two


For Suppliers, liability is one of the deal breaking parameters, ifyou push them outside their parameters they will walk away

Theres nothing wrong with lift and shift - though someSuppliers can give the impression its a little beneath themthese days If you arent ready or dont recognise the techniques for

successful negotiation you may miss out

PaybackNot solely an outsourcing term, this refers to one of the main (if not THE main)criteria that companies use to determine whether or not the Business Case foroutsourcing stacks up. Every company will set its own approach to Payback(e.g. including/excluding employee severance costs) and their own hurdle rates(e.g. it has to be better than 3 years). However, there are certain rules of thumbregarding Payback which are market norms.

(By the way, if you are looking for the way to calculate Payback, best to consulta business book or advisor!)

Payroll Outsourcing (see HR Outsourcing)

Personnel ProvisionsPeople and staff issues are a feature of almost every outsourcing deal in oneway or another, and it is an area where specialist help is usually required, forexample where Acquired Rights Directive (ARD) or Transfer of Undertakings(Protection of Employment) (TUPE) issues are concerned. Some key issues thatoften crop up are as follows:

Will staff transfer to the Supplier under TUPE or equivalent regulations(basically, do staff have the right to transfer to the Supplier on the sameterms and conditions)

What consultation process is required by law? What if the client staff sue the client for unfair dismissal? Who is responsible for any redundancy costs, for example after staff havetransferred and are then made redundant?

What if the Supplier staff sue the Supplier for unfair dismissal when theContract ends?

One point to bear in mind is that the Supplier will have carefully worked outtheir Business Case and they wont want unexpected transfers of staff from aclient paying higher salaries to upset it. As a result, client staff may have to bemade redundant rather than transfer. If this leads to claims against the client,the client will have to indemnify the Supplier against any cost or Liability.Likewise, when the Contract terminates, it is normal for the Supplier toindemnify the client against any claims.

Pricing (Charges)The pricing mechanism is one of the key commercial Schedules in a contract.

There are many different possibilities for the basis of the Pricing mechanism for example fixed price, capped FTE based, target cost, transaction based and different combinations are possible too. So which to choose? The key is tobe clear on the circumstances of the deal, what you are trying to achieve andwhat risks you are prepared to take. So for example a fixed price mechanismmight be suitable for a simple Lift and Shift but at the other end of the scale atarget cost mechanism with a built in Glidepath might be better for a deal wheretransformation is expected to be a feature.

And of course there may well be different pricing mechanisms for Transition asopposed to service delivery.

This can be a tricky area with possible unforeseen consequences if you get itwrong and Suppliers are experts in this field. Best to take specialist advice.

Procurement OutsourcingProcurement Outsourcing means having a Supplier procure goods and services(usually indirect i.e. not for resale) for their client. The services typically fall intotwo types:

category management / sourcing systems and technology support to the procurement process

The Business Case is predicated on two assumptions:

the Supplier can achieve better deals than the client, either through betterpractices, procurement nous or purchasing power

the process is more efficient and cost effective, either through the use oftechnology or lower cost staff

Procurement Outsourcing is less widespread than say F&A or IT outsourcingbut can still deliver good Business Cases.

Process OwnersProcess Owners should be a key feature of all outsourcing deals. The term refersto the role of managing an end to end process and is client side (although theSupplier may have a mirror role). Key features of the role include identifyingbusiness changes in the client and assessing the implications for the Supplier, aswell as driving and coordinating process improvements.

Qualification ProcessWhen Suppliers are asked to bid for a piece of work they need to decide whetherit makes business sense for them to spend time and money doing so, and this isknown as the Qualification Process. The criteria will include obvious parameterssuch as the size of the deal, whether there is an incumbent or anyone else withan inside track, the nature of the deal (e.g. Lift and Shift or Transformational),strength of existing relationships, and less obvious ones such as how busy theyare on other deals at the time. Clients are sometimes surprised when Suppliersdecide not to bid but they try to maximise their chances of winning over theirportfolio of opportunities and they cant go for everything.


Pricing can be a tricky area with possible unforeseenconsequences if you get it wrong Suppliers are experts inthis field

Most underperforming deals we come across do not haveProcess Owners! Be warned

ReferencesEvery potential client should take up References for their preferred Supplier butdont expect this to be particularly revealing as regards Supplier capabilities -no Supplier would knowingly provide a bad reference (would anybody?).However, in our experience, Reference calls or visits inevitably lead toknowledge sharing and this is always valuable.

An advisor like Alsbridge can often arrange off the record references (seeUser Groups).

RenegotiationRenegotiation is generally associated with a contract coming to the end of itsterm but in fact it can of course take place at any time, if both parties agree.As regards end of term Renegotiation, the key thing for the client is to keepoptions open. This means starting the renegotiation process in sufficient timeso that moving to another Supplier is possible and that the incumbent Supplierknows that it is a feasible option (a BATNA, in fact). In addition, it woulddefinitely be worth doing some market testing using Alsbridge, as we haveaccess to latest capabilities and costs.

Request for Information (RFI)A client would issue an RFI at the beginning of an outsourcing procurementprocess in order to understand and to assess the capabilities of the Suppliers inthe market. In many cases, advisors like Alsbridge avoid the need for clients toissue RFIs as they should already have much of the data available.

Some clients make the mistake of asking for cost data in an RFI; if this is given,it will be so caveated as to be fairly meaningless and possibly even misleading.

Request for Proposal (RFP)An RFP is a key step for an outsourcing deal because it sets the tone andapproach for virtually the whole of the procurement process which follows.There is a lot of information which needs to be in an RFP, far too much to list inthis document, but the key attributes should be as follows:

Ask what it is that you need to know, not every question you can think of Provide the information that the Suppliers need, not everything that you can findto give them

Try to keep it as short and concise as possible, no more than 40-50 pages forthe main document.

A long RFP is a lazy RFP and helps no one!

An RFP will also include other documents, such as a draft Contract or at thevery least Heads of Terms.

Some people think the RFP should set out the solution in detail so as to getabsolutely comparable bids from Suppliers. In our view, this is usually the wrongthing to do. For a start, it runs the risk of constraining the Suppliers in theirresponses so that the client does not get the full benefit of their experience.


Alsbridge is the only firm in theSunday Times FastTrack100 to alsoreceive an outstanding Three Starstatus in the Sunday Times BestCompanies to Work For list

We believe the RFP should set out the clients requirement of service, not thedesign of the solution. The lack of precise comparability for pricing purposesbetween bids is a small price to pay when set against the higher quality thatusually results (and can usually be adjusted for anyway).

Retained OrganisationThe Retained Organisation is really the key to success in many outsourcing deals.On the presumption that you wont have chosen an incompetent Supplier, andthat they wont set out to a bad job, the missing link in ensuring the success of thedeal is the clients Retained Organisation.

It isnt complicated or difficult to get the retained organisation design right but itssurprising how many companies dont. Some of the key features are as follows: Expect there to be exceptions, errors and mismatches to sort out -processes wont work perfectly, no matter how well designed

Accept that the Supplier will have to ask questions that you think they shouldknow the answer to

Actively manage processes only the client can really take an end to endview and putting Process Owners in place is key;

Make sure the rest of the business is absolutely clear on how to work withthe Supplier

Face up to the fact that your business will change and thus so will theservices required from the supplier.

The most common shortcoming is that clients take far too aggressive a view ofwhat can be outsourced and then get frustrated when they either cant get ridof the temps they recruit to shore up the deal or find backlogs building up attheir end.

The old saying is that experience cant be taught, it can only be learned andthis often applies to making Retained Organisations work.

RRCs (See ARCs)

Reverse Service Level Agreement (see Service LevelAgreement)

Sarbanes Oxley (SOX)SOX compliance is essential for many companies and although they can delegateresponsibility for the service outsourced they cant delegate accountability.Basically, if the Supplier gets it wrong on SOX compliance, its the clients CFOwho goes to jail not the Suppliers.

But fortunately there are a number of ways of ensuring that the Supplier iscompliant.These include the client sending in their own external or internalauditors or having the Supplier provide a certificate, known as a SAS 70 Type II,

which provides a reputable auditors opinion as to whether controls wereoperating effectively in the period under review.

It is worth noting that, although the situation might appear a little melodramatic,companies can always find a satisfactory solution to this issue and BPOproviders are very accommodating.

We have examples of most approaches to ensuring maintenance of internalcontrol but we mainly find that clients are satisfied with a SAS 70 Type II certificatefrom a Big Four auditor, together with access rights for their internal auditors.

And no CFO has (yet) gone to jail for an outsourcing Suppliers screwups

Scenario ModellingIt is obviously not possible to think of and allow for everything that couldhappen during the contract term, nor is it possible to agree if this then thatrules for all changes. However it is important to define significant Scenarios,such as the acquisition or sale of a major business, and work through with theSupplier what the impact on Pricing would be. These Scenarios are thenappended to the Contract and, whilst they dont have legal force, they setexpectations as to what the impact of major changes will be and help to flushout any misunderstandings or lack of alignment in expectations.

SchedulesThe Schedules to the Contract cover the more transactional data that may wellchange, such as service Scope or Service Levels.

The point of having schedules separate from the main body of the Contract ismainly for efficiency, as they can be updated and changed without having todraw up a new Contract every time. In general, the majority of the work ondrawing up a Contract takes place on the detail of the Schedules (and there isusually a lot of detail to go through). This often goes on in parallel to the workon the main body (also known as terms and conditions).

Scope (In/Out Analysis)Although it sounds obvious, a clear and comprehensive description of the Scopeis fundamental to the success of an outsourcing deal. However, getting it right isnot so obvious.

At its simplest, the Scope description lists the activities within a given processand whether they will be performed by the Supplier or the client. It is importantto supply sufficient detail to ensure avoidance of doubt on roles andresponsibilities and it is better to be explicit than implicit; for example, areasthat are often missed (and hence can create difficulties later on) are aroundissue resolution and error rectification and it is critical to decide early on who isgoing to be responsible (see also Retained Organisation).

Alsbridge has templates for scopes covering a wide range of outsourcing deals.


A long RFP is a lazy RFP and helps no one! Some peoplethink the RFP should set out the solution in detail so as toget absolutely comparable bids from Suppliers. In our view,this is usually the wrong thing to do

Alsbridge has templates for scopes covering a wide rangeof outsourcing deals

Selection ProcessThe best and most scientific way to select a Supplier from a shortlist is todefine a set of criteria and rate each Supplier against them. The criteria willcover areas such as Business Case, Transition capability, delivery capabilityand cultural fit and within each of these there will be numerous individual itemsto score. The criteria (or at least a summarised version) should also be set outin the RFP so that the Suppliers know what is expected of them. By the way, itis worth noting that it is difficult, if not impossible, to commoditise bids so thatthey are equally comparable, as some people might think . It is also often notdesirable because it can have the effect of stifling innovation and creativity. (seealso Request for Proposal)

Service CreditsService Credits are a discount the client gets when the service in a particulararea falls below a certain level. It is important from a legal perspective (certainlyunder English law) not to regard them as damages or as compensation whichreflects any loss suffered. In fact, in many deals the client will be able to receiveService Credits and also claim damages if things go badly wrong.

As you can imagine, Service Credits are usually a subject of much discussionduring Contract negotiations. In simple terms the client is seeking to ensure hewill have the Suppliers attention when things go wrong and the Supplier isseeking to minimise his exposure and opportunities to fail.

Service Credit regimes usually have some common features, such as amaximum percentage at risk per annum and per month.

Simplicity is key, however; some Service Credit regimes need the brainpower ofStephen Hawking to understand them.

In addition, in some cases the Supplier may have the right to Earnback theService Credit if their performance in subsequent months is at or above acertain level, The thinking here is that anyone can make a mistake andSuppliers should be encouraged, not punished.

It is also worth pointing out that Service Credits are a right to a discount, butthe client has no obligation to claim it. There are deals where the client couldclaim Service Credits but chooses not to because they feel it would beunhelpful to the relationship.

There is a school of thought which believes that Service Credits are unhelpfuland encourage the wrong behaviours i.e. blame and finger pointing rather thanpartnership for a common set of goals. In fact, some very mature deals, wherethere is a longstanding relationship between the client and the Supplier, do nothave Service Credit regimes because there is a high degree of trust on bothsides. However this is unusual and in general new deals have them.


Service Level Agreement (Operating Level Agreement,Reverse Service Level Agreement)Service Level Agreements (commonly abbreviated to SLAs) are a standard (notto say essential) feature of all outsourcing deals. At their simplest, they describethe service that the Supplier is supposed to provide and the level to which theyare supposed to provide it, as measured by a Key Performance Indicator (KPI).However, many are quite a lot more complex than this and also set out targetservice levels (i.e. what the service should be at a specific point in the future)and/or minimum service levels (the level below which the service shouldnt fallunder any circumstances).

It is very important to remember that the SLA is measuring services, notactivities. It is very tempting for clients to define services at too detailed a level,which means that the Supplier becomes nervous that they are going to micro-manage. However, this is usually because of lack of experience on the clientspart. On the other hand, left to their own devices Suppliers tend to undershootas regards level of detail in an SLA which can also lead to problems later on.The fact is that many SLAs start out too long and are shortened as the clientgains experience and confidence with the deal (but thats fine, its all part of alearning process).

Shortcomings in SLAs, and how to design the perfect SLA, are the subjects ofhundreds of articles. A key point to remember is that, whatever else you aretrying to do with an SLA, you are trying to measure a Suppliers performance sothat you know whether you are getting what you expected for the price you arepaying, just like you would any other Supplier. As a result, the SLA must identifyclearly those parts of the process that the Supplier is responsible for, even ifyou also want to measure end to end process performance (which is very likelya joint responsibility).

However, given that any process involves client inputs as well as Supplier service,it is important to define and measure these too. They are known as OperatingLevel Agreements (OLAs) or Reverse Service Level Agreements. In fact, theSupplier will most likely insist on it because, if they are underperforming in aparticular area they will want to check that it is not because of some shortfall inthe clients obligations.

It is normally the Suppliers responsibility to measure and report on SLAs andOLAs and most have a range of tools for doing this.

Service Providers (see Suppliers)

Sole SourceSole Source refers to a situation where one Supplier is selected as a preferredpartner for detailed solution design and Contract negotiation, without havingbeen through a full and formal RFP/bid process. However, there should havebeen an evaluation of Supplier capabilities and references.

It is very important to remember that the SLA is measuringservices, not activities


Supplier has subcontracted, because the client generally chooses a Supplierbecause of their delivery capability, as opposed to their Subcontractors.

This may also extend to the use of agency staff on a deal. The client willprobably want the Supplier to deliver most of the service, not the temp agencydown the road.

Suppliers (aka Service Providers/Vendors)The generic term for the organisation delivering the service. The simplest thingwould be to list all the Suppliers we can think of, but of course we would thenoffend those we havent listed, so we arent going to do that. In any case,Alsbridge can provide a list of the best Suppliers for any given situation.

These days, for any given process or set of processes (Tower), there are likelyto be several capable Suppliers, which was not necessarily the case five or sixyears ago. The market has grown very rapidly over the past few years and sohas the number of Suppliers.

There are a number of ways of categorising Suppliers, for example: Their range of service e.g. Those with a strong consulting capabilty versuspure play outsourcers

Their background and origin e.g. Indian Suppliers versus European/American Focus by outsourcing Tower, e.g. full range of ITO and BPO versus just BPO

To save a lot of time in deciding the Suppliers that are most likely to meet yourneeds, contact us.

TermThe Term or Contract Term is simply the length of time the contract is applicablefor. The clock usually starts when the contract is signed (occasionally fromcompletion of Transition). In general, contract Terms are getting shorter. Forexample, Finance & Accounting deals used to be for seven years, and some stillare, but five years is probably more common now.

It is quite common for contracts to state that the contract term is say sevenyears with a break point for the client at five (or that the term is five years butthe client can extend on the same terms for a further two).

Term SheetA Term Sheet is a document which sets out the principles (or terms) that theclient (or occasionally the Supplier) will require in the Contract, and it willprobably form part of the RFP. The advantage of a Term Sheet is that it shouldbe fairly easy to put together and is relatively easy to read. The downside is thatit probably wont go into all the detail (for example, carve outs for limits ofLiability) which can cause problems later on.

It is important to ensure that there is a structured process in place for SoleSource, otherwise the client may find that they either spend too long or driftinto a deal they dont really want. Ideally, the client should still issue an RFP andshould receive a formal bid document from the Supplier. However, the client willprovide the Supplier with as much support as they need in preparing their bid,which is of course quite different to a traditional procurement process.

The main advantage of a Sole Source process is that it allows the client muchcloser contact with the Supplier than would be the case under a competitiveprocess, where equal access has to be granted on the grounds of fairness, as aresult Sole Source is very suitable where there is a requirement for co-design ofcomplex solutions. Other things being equal, it is also more efficient and fasterthan the traditional process because no time is wasted on evaluating bids thatwill not be pursued.

The disadvantage of a Sole Source process is that it is more difficult to exertcompetitive pressure on the Supplier, but Alsbridge can provide the surrogatecompetition by advising the client on market norms.

Some companies could not use a Sole Source process even if they wanted to,because of their procurement rules. And it is anathema to many procurementfunctions. But in our experience, all in all a Sole Source process means a morerigorous examination of a Supplier, its capabilities and the solution than atraditional process and has a lot to recommend it.

Step InStep In is a concept commonly found in Contracts but which in practice israrely invoked. At its simplest, Step In means that if the Supplier is seriouslyunderperforming on all or part of the service the client can Step In to take itover. Obviously this is a process which cannot be invoked lightly as there aremany implications - for example, as there is by definition no service theSupplier cant charge - and as a result there will usually be specific tests to besatisfied. In addition, the Supplier

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