Addressing Complexity

Complexity is the first thing that we must change to facilitate the development of governable outsourcing deals. We have all been taught to believe, axiomatically, that “more information is better information.” Current outsourcing deals generally reflect this approach, drawing “every leaf on every tree” to describe the outsourced and retained services.

More information is not necessarily better information, however. Better information would not only clearly describe a process, but also provide a better analytical framework for describing future processes.

What is “better information?” In the case of outsourcing deals, better information is a clear line between what belongs to the customer and what belongs to the supplier – in other words, a clear line of demarcation between the customer and supplier. Drawing such a line is no doubt difficult, but it is less time consuming and costly than drawing “every leaf on every tree.”

Current practice, embodied in the dreaded “sweep” clause, takes a very unsophisticated approach of sharing risk. A party, often the supplier, only takes responsibility for those items that are explicitly listed in the agreement. As a result, the other party absorbs all of the risk of the unspecified portions of the outsourcing - a risk that can prove substantial, particularly during the later years of the agreement.

Taking a new approach to risk sharing is a major gestalt shift – one that frightens many a lawyer and advisor. However, by focusing on the line of demarcation we accomplish the same goal – dividing the process – while providing better information upon which to base governance decisions.

Drawing a good line of demarcation is not an easy task. It requires smart people committed to getting the deal done. However, it is both less time consuming and costly than our current approach and, more importantly, provides context within which to analyze future changes and new services.

Having a clear line of demarcation is not a magic bullet – it will not eliminate all controversy. However, it will reduce the number of items that are in controversy and provide a clear analytic framework for the parties, or if necessary, the courts or arbitrators, to analyze disputes.

Therefore, the first and most critical step in developing a more governable outsourcing deal may very well be to refocus our efforts on clearly describing the line of demarcation between customer and supplier. From that line of demarcation, developing analytical frameworks to describe the relative positions of the parties is the next step – and will be addressed in the following installments.