I have been working on a large contract for a few months now, and as ever, the Lawyers got involved. Every Lawyer seems to have a canny knack of making everything more complicated than it appeared to be without them. This then requires a second Lawyer to explain what the first one has just done and seems to extend the time taken to discuss the issues beyond that originally allowed. In the meantime, the fundamental business realities seem to get lost in a blizzard of “hereintofors”, “whereases” and “subject tos”. In order to help myself and my potential (now signed up) Customer to get the discussions back onto safer ground, I devised Palmer’s Pyramid – the guide to outsourcing contract trade offs.
I have often used the Project Manager’s “Eternal Triangle” as one of the constant reference points in the IT world of work.
Figure 1 – The Project Manager’s Eternal TriangleThis triangle demonstrates that there are trade offs to be made when carrying out any IT project. For example, if you want the project by a particular date, then you may have to compromise on either the functionality (or the degree of testing carried out), or else you may end up paying top dollar for lots of overtime and weekend working. There are many combinations, but what is certain is that you will never get a project to be delivered on time, in full and on the cheap. These trade offs exist regardless of whether a project is delivered in house or by a 3rd party systems integrator.
This model worked up to a point in an outsourcing deal whilst we discussed the Customer requirements, devised the statement of work, and considered the pricing schedules. All the usual issues about (for example) 4 hour Laptop fix times being an absolute necessity for all locations were ironed out when the Customer realised that this would be impractical for certain Key Executives who made a call to the HelpDesk on the way to an airport for a 6 hour flight; and that last on-site server in the back end of beyond with only a local address database on it probably did not need the same service level as the ERP servers in the North American data centre. However, it broke down as a useful tool as we moved into the realm of Representations & Warranties; Liabilities; Indemnities and HR obligations.
The Customer Lawyer was pressing for very strong T’s&C’s, and as this was a competitive bid, he kept using the fact that the other bidders were agreeing to his suggestions as a matter of course – so why wouldn’t I ? The Customer Representative was becoming more and more uncomfortable, and began to question whether having blind agreement to onerous T’s&C’s was really “a good thing”. In lawyerless conversations over a few cups of coffee, I developed some thinking and tested it on the Customer Representative. What emerged was Palmer’s Pyramid.
Figure 2 – Palmer’s Pyramid
This clearly has the project managers eternal triangle in it’s DNA, but considers outsourcing contracts specifically. Solutions are used rather than quality and time. This is because in outsourcing there are various aspects of the services being delivered to be considered, namely fitness for purpose, timeliness and consistency through time. Price is used instead of cost because whilst it is the same as cost for the Customer, for the Service Provider there is also the margin element to be considered. Risk is used because outsourcing focuses on outcomes, and these outcomes can have a knock on effect into the host business. There is also risk of remediation for the Service Provider if these outcomes are not satisfactory.
We came up with a table of trade off’s
Figure 3 – Trade Offs arising from Palmer’s Pyramid
The surprising thing about this was that the perception of the trade offs was not always in conflict between the Customer and the Provider. The various combinations of Pricing/Solution and Risk resulted in different emphases, but not fundamentally different views. For example, a stronger solution requires a higher price (Service Provider view) – a Customer also accepts the correlation between a higher price and a stronger solution, but requires an improved return on investment (however this is measured internally) to justify paying more. Even the Risk / Price trade off was not too surprising. Both views agree that increased risk results in adverse consequences being more likely to occur. Both Service Provider and Customer need to retain more cash to pay for their share of these consequences – the Customer through a lower price; the Service Provider through a higher margin.
Introducing the impact of the T’s&C’s was interesting. The Customer views are generally obvious – stronger T’s& C’s are seen as a form of insurance – they can impact the solution through retaining control, and can mitigate the impact of risk by increasing the amount of redress. However, the Service Provider view is important. T’s&C’s that are perceived as too strong drive defensive behaviours. Strong T’s&C’s can provide opportunities for the Service Provider to abdicate responsibility by relying on the Customer to “sign off” on everything – this will also slow down responsiveness and leave the Customer wondering whether they have really outsourced at all. Strong T’s&C’s are also not free – the increased likelihood of redress payments (either through cost of remedial actions or penalty payments) means that this gets priced into the deal and the Customer just gets his own money back at a later date. This was the point that my Customer had reached intuitively but could not explicitly articulate.
In the end, my Customer Representative and I used this to control the Legal Eagles and retain the focus on the business fundamentals – did the proposed solution meet the Customer’s needs ? ; Was the solution Fit for Purpose or was it over engineered ? ; what were the sources of risk – for them and for us – and was at a reasonable level – and who should bear it ? If I as the Service Provider was to bear it, how would I price it, and at what cost ? In the end, the Customer Representative discounted our competition’s willingness to agree to everything now believing that whilst they might agree to a contract with onerous T’s&C’s now, if there was a problem in the future then they would not stick to them, but would try to find a way to wriggle out instead of looking for a solution to the problem itself.
So, my recommendations are:
For Customers : Which would you rather have – the contracted level of service performance or the redress ? Don’t push your Service Provider too far on T’s&C’s – you might just get what you wish for.
For Service providers: What risks are you actually taking on? Are you still an IT Service Provider or are you becoming a general insurer by accepting business and market risks previously taken by the Customer ?
Conclusion: Striking a balance became the common objective. An open dialogue around risks (source ; mitigation ; remedies ; valuations) is the route to doing so – and not being shy about agreeing where it should lie. Ignoring risk is the only sure fire way of it crystallising out into an issue – then you’ll have to talk about it.
