CIOs warned against long outsourcing contracts

SOS

Lafford said organisations also need to consider a "plan for transition and termination" of an outsourcing agreement, which could have the potential to occur at short notice.

"What if the vendor goes bust? What if there is an acquisition?"

Organisations have usually assumed that if the vendor was healthy the day they signed, and if the deal was profitable for both parties, there need not be concern about the vendor failing.

"Those assumptions have been blown away in this landscape," Lafford said.

"All of a sudden at the end of last year, things start happening. We didn't see Satyam coming. We didn't see BearingPoint or Nortel coming. And yes, the Americans in the room will say it's Chapter 11. In Australia we say you're bankrupt, that the business failed."

The problem in many organisations, Lafford said, was that once the deal was signed, nobody was assigned the job of 'managing' the deal over the life of the contract.

Lafford recommended ongoing due diligence and not to assume the contract "will manage itself."

He also recommended using multiple sources when checking on the health of outsourcing suppliers.

"The lessons [from Satyam] would be, don't just rely on the annual reports," he said. "Look at whether or not they are winning new deals and announcing them in the press, look at service disruptions and look at new investments.

"I would start getting worried if you can't get time with their executives any more or if their best people are being pulled away from customer facing roles to win new deals or fix things in the back end."

Caveats

Lafford said organisations "can get away" with longer deals, as long as they include benchmarking and flexibility clauses in the contract.

"That way, if there are huge sparks or drop-offs in the workload, you aren't penalised in the contract," he said.

But he maintained a shorter deal has better outcomes.

"I have spoken to legal teams that specialise in outsourcing agreements, and they confirm that all the deals done in the last few months were for three to five year terms with extensions," he said.

"For the last three years, I've never spoken to any organisation that was satisfied with a ten year deal they'd signed."