By George J. Atis* May 5, 2017
I am just finishing up the last of three large outsourcing deals and I wanted to remind the Client-side of five simple points that will shorten your contracting cycle and put you in the best position to conclude the best deal for your company or organization.
By the way, for those of you who are not familiar with my outsourcing publications, “Client” means the buyer of outsourcing services and “Vendor” means the outsourcing service provider.
1. If You Think You Know What You’re Doing, then, You Probably Don’t
Look, I am going to be direct (which is my usual style) and say that if you, on the Client- side, think that your procurement or legal department is sophisticated enough to handle an outsourcing deal internally, then, that’s your first mistake and you’re already putting yourself at a disadvantage.
The Vendors count on this belief and exploit it to the max by back-channeling your team members in various ways – for example, by convincing them that what they are telling you is “market” or that you are getting an absolutely tremendous or fabulous deal. (Hmmm, where have I heard those sales buzz words before?)
In short, this is a load of B.S. and your “best” internal people are no match for Vendor teams that do these deals every day – for big-fat commissions. As a rule of thumb, identify the lead Vendor salesperson early in the process and then picture her or him as Pinocchio every time she or he tells you something about the deal.
The bottom line is that if you purport to run the deal internally (even if you have hired external advisors), you will leave dollars on the table and lose control of your negotiation. Pretty soon into the deal, the Vendor will be in the driver’s seat about how, when, and on what terms the deal will proceed and close. You may not even realize this is happening until it’s too late. And, at that point, you will feel so invested in the process that you will let down your guard to get the deal done.
All it takes is one small fissure in the game plan for the Vendor to strike: once a crack in the contracting firewall occurs, the Vendor will wriggle its snake-like head through it and offer-up the proverbial apple to any Client-side team member who is eager to take a bite.
Sounds a bit dramatic, right? Well, since I ran the legal process of Vendor-side deals for many years, I know how Vendors operate. It’s a snake’s job to lie in wait and strike when the time is right and it’s a Vendor’s mandate to maximize profits. It’s natural but, on the Client-side you just have to guard against it – by hiring a professional negotiation team and letting them lead you through the process and over the finish line.
2. Design and Execute Against a Game Plan for the Entire Lifecycle of the Deal Negotiation
A large outsourcing deal is not a good transaction to use as a basis to explore novel contracting methodologies or just use the same process that you use for contracting with your one-off IT vendors.
You must have a game plan for the entire deal and an exit strategy if the process reveals issues with the target Vendor that don’t bode well for a long-term business relationship. Your strategy should begin at the pre-RFP stage (or equivalent process) and cover all phases of the deal, right up to the “GO” or “NO GO” decision. If you only have a half- baked plan, the Vendors will eat your lunch.
A common mistake, for example, is requiring the use of a SPOC for all communications between you and the Vendor and then not enforcing it. Vendors test this contracting protocol early and if you allow communications outside of the SPOC requirement, the Vendor will back-channel you and drive its narrative. Vendors are good at identifying the amiable-types on the Client’s team who think that having multiple communication channels open with each Vendor will help the process. Let me be clear: this doesn’t help. Actually, it undermines the SPOC and results in fissures in the Client’s contracting process; in that regard, refer back to Point 1.
Again, with all due respect to the internal procurement teams on the Client-side, Vendors know that your internal people have day jobs and will overwhelm them with info, requests, questions, clarifications, and seemingly-friendly dialogue – all of which is just Vendor- reconnaissance and strength-testing of your contracting process.
In short, Vendors try to determine whether your game plan is the real thing or just a loose framework that they can bend to their advantage. And, once the Vendors realize that your game plan is soft, they exploit it for their benefit.
3. If You Really Want the Best Deal, Commit to a Dual-Track Negotiation
One of the biggest mistakes that internal Client-side teams make is convincing the CIO – and sometimes the CFO (who is always looking to minimize the costs of negotiating any corporate transaction) – to go with a single-track negotiation shortly after the Vendor presentations are done.
Typically, internal Client teams tend to identify one Vendor early as the best fit for the deal – before ever sitting down with that Vendor in a live negotiation.
To use a Trumpism – this is just WRONG!
Anyone who negotiates these deals for a living knows that a live negotiation process – if well-designed (including separate business and legal streams) – will reveal several important things about a Vendor that should be taken into consideration before the final “GO” or “NO GO” decision.
I have written about the underlying importance of the negotiation process for years – which is this: each negotiation session is a “barometer” of the Vendor’s service disposition. You have to ask challenging questions of, put hard issues to, and push the Vendor’s negotiation team out of its comfort zone – so you can gauge how the Vendor has handled itself in each session.
And the best way to flush-out a Vendor’s true service disposition is to make it go head- to-head with the other finalist for your deal, reasonably deep into the negotiation process.
Here are just three things that you will learn, in real time, from a dual-track process:
- How is each Vendor valuing your deal? Is the Vendor presenting you with a bespoke solution (evident in the drafting of the SOWs) or is it trying to jam your deal into its cookie-cutter, quarterly-revenue-maximizing service formula?
- Did the Vendor respect your express negotiation process by fielding a negotiation team that was empowered and proactively solution-minded or did it sent the “B- Team” to tell you why it can’t agree to your Ts and Cs?
- Are the Vendor’s business representatives at the table leading the negotiation or following the lead of (or worse, deferring to) their counsel? Do those representatives step-into the discussion when it gets tough to say that they understand the business risk raised by the issue and will take it back and address it in the next session (i.e. code for “OK, we get your message and we’ll wood-shed our counsel on this issue before the next session”)?
If you consider the cost of walking away from a prematurely-chosen Vendor and starting the process over (or worse, re-activating the runner-up Vendor), then, you will realize that dual-tracking is the way to go.
Look, the bottom line is that if you, the Client-side, don’t have the budget, time, or mental fortitude to do a dual-track negotiation, then, just know that you are putting yourself at a disadvantage from the get go.
4. Do Not Let a Vendor Sit Down with You without Pre-Closing at Least 80% of the Contract Terms
In all of the deals where I have been counsel – either on the Vendor-side or Client-side – the Client’s consultants (and some of the more prepared internal teams) use spreadsheets to compare the technical and financial solutions of Vendors’ proposals on an apples-to-apples basis – before making a down-selection decision.
But, what about the Ts and Cs (i.e. the contractual terms) that will govern the legalities of the deal?
How do you compare Vendors’ legal responses on an apples-to-apples basis – when every Vendor counsel has a different approach to marking-up (i.e. redlining) an MSA and its schedules?
For example, some Vendor counsel use notes, while others use cryptic and vague “TBD” or “OK in principle” phrases; the worst-case scenario is the lazy and disrespectful counsel who deletes provisions in the Client’s paper and replaces them with the Vendor’s “standard” terms or favourable provisions from previous Vendor deals.
Again, the bottom line is that you need a process to distill Vendors’ contract doc mark- ups into responses that can be compared, objectively.
The better Client-side counsel out there have designed contracting processes that force Vendors to respond to the proposed Ts and Cs, as drafted, in a binary manner – at the beauty-contest stage – to allow for an apples-to-apples comparison.
My approach is proprietary and I call it the GJA CPM Methodology™ – which produces two things: an acceptance of terms percentage scorecard and a side-by-side comparison of the Vendors’ responses. (Clients love it and Vendors despise it; the latter is proof- positive that it works.)
From a negotiation perspective, the value of this type of approach – at the stage where you are ready to down-select two Vendor finalists – is both micro and macro:
- from a micro perspective, the Client’s gets a side-by-side, visual (i.e. red or green), accurate scorecard of the Vendors’ legal positions on specific, key Ts and Cs (e.g. the DD Cap, exclusions from the DD Cap, indemnities, audit rights, termination rights, etc.); and
- from a macro perspective, the Client gets a big-picture view of how much of each key contract doc (e.g. the MSA and selected schedules) the Vendor has accepted – as drafted.
By the way, for my Clients, I suggest 80% as the minimum acceptance of terms percentage (for the MSA) before the Vendor gets an initial sit-down negotiation session – because, based on experience, this acceptance rate means that the remaining open issues are manageable enough to conclude or advance within one or two three-day negotiation sessions.
(As a quick aside, based on my most recent experiences with my three recent deals, I will be refining my methodology further to include a secondary phase to address pre-closing of the DD cap, certain indemnities, and exclusions from the DD Cap. This is an additional safeguard that I am adding to my process because if the Vendor is not willing to accept “market” for certain deal risks that should be borne by the Vendor-side in the context of the deal, then, the Client needs to know that – before allowing the Vendor to sit down with it to begin the face-to-face negotiations. And, remember that dual-track process I suggested? Well, there is nothing more powerful than making it clear to Vendor finalist
“A” that Vendor finalist “B” seems to understand the market better for certain deal risks and that Vendor finalist “A” won’t get to sit down at the table with the Client if it is not willing to step-up to those risks.)
5. Don’t Let Deal Fatigue Guide Your Decisions about Market Norms or Terms
As a professional lawyer who has devoted the majority of his career to negotiating outsourcing (and technology) deals, I thrive under pressure and have no problem staying the course on a negotiation to get the best deal for my client – whatever side I am on.
Of course, these days, my practice is a lot easier from a deal fatigue perspective because I represent the Client-side of the table – and I, on behalf of my Client, can control the process, the issues, the pace of, and the pauses in, the deal timeline. (And, by the way, even though I do not make the ultimate “GO” or “NO GO” decision, my recommendation – based on how the Vendors have performed and behaved during the negotiation process that I have structured (which the Client will see for itself) – carries a lot of weight with the Client’s leadership.)
For internal members of the Client-side team, however, deal fatigue is a very real issue – and this is yet another negotiation strategy that Vendors and their counsel will try to use to serve their interests. As Client-side counsel, you must be mindful that the internal members have day jobs – with responsibilities that start to back-log when they have to prepare for, attend, and actively participate in negotiation sessions. Your process must protect them from reaching a point of deal fatigue where they feel that they just want the deal done!
Again, the better Client-side counsel out there design a game plan with deal fatigue in mind and make sure that the internal members know what they are getting into – before the process begins. If the process does slip, Client-side counsel will remember to “coach” the internal team about deal fatigue and its dangers – one of which is listening to the Vendor-side about “market” terms or norms on the remaining open issues in the deal.
Here is another rule of thumb for the Client-side to remember if deal fatigue starts creeping in: the final open MSA issues are often the most material from a deal-risk perspective. Therefore, it’s better to park the MSA and close-out all business docs before coming back to it. (And, in this regard, the more skilled Client-side counsel have a game- plan for closing it out; by the way, I use a process that cuts through the noise raised by Vendor counsel and puts the business risks directly to the Vendor’s business leadership.)
In conclusion, all five points above will not (or should not) be surprising to most advisors in the outsourcing industry, regardless of what side of the table you sit on.
For the Client-side of the table, the most important take-away is that following these five simple points – strictly – will put you in the best position to get the best deal for your company or organization.
Why? Because the Vendor-vetting that occurs at every stage of a well-designed and executed contracting process (which includes my five simple points) will give the Client- side the most accurate picture on the target Vendor’s service disposition before the actual work begins.
*I am a corporate-commercial lawyer based in Toronto, Canada with 20+ years of experience. For the majority of my career, I have focused on doing all types of technology deals – particularly outsourcing deals – and I’ve done hundreds of them. I have also published over 20 articles, spoken at several conferences and taught courses in this practice area. Starting in 2013, I expanded my practice area to help auto dealers in Ontario deal with compliance under the MVDA, 2002. I am known as the no-BS lawyer who gets deals done – because I focus on solving rather than creating legal issues or prolonging negotiations. It usually takes one 15 minute-call or meeting with me to understand why I am different than many of my counterparts who practice in this area. And, unlike other lawyers, I’ll give you a straight answer regarding whether I am the right lawyer for your deal. For more information on my practice areas, you can visit www.georgejatis.com or you can just e-mail me at email@example.com. This article was first posted on LinkedIn on May 5, 2017.