How to get out of Outsourcing

Over the past couple of years we've seen the phenomenal growth of Outsourcing as businesses focus on their core competencies in an attempt to ride out the economic slowdown. We've also seen the emergence of the mega-Outsourcing deal - multi-million dollar and involving passing on a significant part of the customer's IT delivery capability. The recent early termination of the Bank of Scotland deal with IBM has challenged the wisdom of such deals.

Mega-Outsourcing deals make the balance sheet look good and are received positively by the shareholders as they show the business is taking action and has shifted some of its assets. But whether such deals pass the test of time has yet to be seen. As the economy recovers, organisations will want to be fleet of foot and may find themselves entrenched in a quagmire of contact clauses and restrictions.

The Bank of Scotland deal was struck in 2000 and at a cost of £700 million, it was predicted cost savings would be £150 million over the course of the 10-year deal. In 2001, the bank announced its merger with the Halifax Building Society to form Halifax Bank of Scotland (HBOS) and then in 2002 the deal was cancelled, alongside a Halifax Outsourcing deal with Xansa. The reason for the cancellation was that requirements had changed following a strategic review of IT needs and HBOS assured the market that this would not affect the 3-year, £690 million cost savings plan it had promised shareholders.

IBM attempted to counter the termination with a managed services insourcing deal but HBOS stood firm as it gave 12 months notice. It will be a busy time for both companies over the next year as they attempt to unpick the contract. The success of the transfer of services back in house will depend on the exit clauses in the agreement.

Exit clauses are rarely given the attention they deserve in the negotiation process - the customer is keen to Outsource and the vendor is keen to book the revenue; it's all part of the honeymoon period before the going gets tough once the contract starts in earnest.

A well-defined Outsourcing agreement will provide as much flexibility as can be allowed within the commercial and resourcing constraints of the deal. Just think of it as a transition in reverse and consider staff, hardware and software (including licences), intellectual property and real estate. Then there are the financial aspects - many Outsourcing contracts amortise costs over the duration of the contract and so aside from a termination penalty these costs will all be brought up front.

If the termination is because of the vendor failing to deliver the service, the customer has all of the negotiating collateral. This isn't the case with IBM and HBOS - here the customer simply changed its mind and therefore places itself largely at the behest of Big Blue.

Outsourcing is a good idea, it just needs careful consideration. While no one can predict the future, a well-written contract should consider all eventualities, especially the merger and acquisition scenario that seems to be the driving force at HBOS.

It's more than likely that coverage of this deal will disappear into the sunset, which is a shame as the lessons learnt here would be useful to many others who should have looked before they leapt.

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