Negotiation tips for successful outsourcing contracts and relationships

Baker & McKenzie, a global law firm who has negotiated their fare share of outsourcing contracts, recently published an article on the importance of building trust in the negotiation process of outsourcing contracts. Included are 10 essential tips for any type of negotiation.

The deal is done. All the issues put to bed. The ink is dry on the signature pages. Everyone is on their way home - the client, its consultants, the service provider, and all the lawyers. You're in the cab on your way to the airport, taking that now familiar route for perhaps the last time. Tired, but satisfied. "Job well done," you tell yourself. But, then you begin to wonder: "So what's it going to be like on Monday, when transition begins?" How are the parties going to get along then? Did I really do a good job? Did I do all I could to help create the one thing that matters most - trust between the parties?"

As deal attorneys working on global sourcing transactions, we sometimes actually do reflect on the process of negotiating large deals. Although we have published many articles on the 'substance' of such transactions (e.g., tax efficient structures, legal compliance, risk allocation, governance structures, etc.), we have not yet published anything about the one aspect of the negotiation process that is probably more important to a successful relationship than any 'substantive' issue - building trust.

Many of our clients have said that 'trust' is one of the most important factors in any negotiation. "I would say that the trust factor is the most important - all of the other aspects of negotiations and, more importantly, implementation, no matter how difficult, can be handled eventually if there is a foundation of trust," observes Steve Mower of The Thomson Corporation.

We have seen how the negotiation process can generate trust between individuals and organizations. And we have also seen how trust can be destroyed. Particularly with respect to complex outsourcing transactions, where there will inevitably be some rough patches through transition before 'steady state', the trust that is built into negotiating the deal will be the fuel that powers the relationship over time through those rough patches.So, we decided it was time for us to publish an article on building trust in the negotiation process. There is nothing new here - just ten simple thoughts we collected from some of our past deal experiences. Many of our thoughts likely apply to almost any relationship deal. However, we thought our examples might help others identify similar experiences and that maybe this type of article would help bridge the gap that too often exists between sourcing customers and sourcing providers.

Commentaries: Building Trust Global Outsourcing

"How many outsourcing agreements are renegotiated in the first 3 years? I have heard figures as high as 70% of the larger contracts. Whether or not that number is accurate, there are too many" notes Vincent Taylor of Accenture. "This hurts all of us in the outsourcing marketplace."Is it not high time for all of us - customers, their consultants, providers, and all thelawyers - to consider how to build better bridges in the negotiation process? As Barry Weiss of Hewitt Associates has remarked, "We would all greatly benefit from a dialogue about how the deal process can be used to 'amplify the relationship.'" At Baker & McKenzie, we think creating trust is a key component of building these bridges. We hope this commentary contributes to that end.

1) Listen. Pay attention to what the other side is saying and consider what they are saying. Don't feel like you have to respond immediately or have an answer right away. Listen, think about what you hear, and then formulate a response. Trust is built through mutual respect, and listening is a way to demonstrate respect. Joel Stern of Accenture punctuates this point with an old adage: "Two ears and one mouth - you should listen twice as much as you talk!"Listening seems easy, but it isn't. It requires people to put aside their prejudices and opinions about what the other side wants and instead allow the other side to have their own voice. But when a customer doesn't have the same degree of expertise as its advisors and service providers, why should service providers and advisors listen to them? Because you must. It can be difficult to put those prejudices and opinions aside. But it doesn't matter. To demonstrate respect, you have to listen.

In a recent yellow pad session, we recall the customer's VP of Human Resources kicked off discussions with this statement: "What keeps me up at night is, what will happen to my people?" Thinking it already knew and had responded to the concern, the service provider expounded on the salary commitments, transition processes, and severance packages set out in the proposal. But the customer already had that information. What it really wanted to know was, "what will happen to my people?" What the provider failed to address was the career advancement opportunities that the provider would create for those people in its delivery organization. The successful bidding provider did.

2) Discuss Interests, Not Positions. Interests are the reasons why you want or need something. Positions are what you want or need. Focusing a discussion around interests transforms the negotiation into a problem solving exercise. Focusing a discussion on positions makes the negotiation confrontational. Collaborative problem solving is a good way to build trust. Confrontational negotiations are a good way to destroy it. "The importance and impact of this cannot be overstated," says Joel Stern of Accenture.In another recent transaction, our client was interested in protecting its investment in a software application used to generate employee salary guidelines - which was to be created by a service provider. The service provider was interested in minimizing the cost of maintaining this application by leveraging this tool across multiple clients. Each party could have spent several weeks arguing that it should be the owner of this technology. However, by focusing on interests, the parties were able to reach a mutually beneficial arrangement around ownership without any 'argument' at all. Collaborating on the problem allowed each party to feel invested in the solution and added to the trust between the organizations.

3) Follow Through. Do what you say you are going to do, and do it within the timeframe promised. Another way of phrasing this is, manage expectations effectively. Don't say you'll do something during the negotiation process that then you do not do. Keeping promises consistently builds trust. Failing to keep promises starts to eat away at any trust that has already been built. If you cannot keep a promise, communicate as early as possible that the promise will not be kept, and provide an alternative way of keeping the promise (e.g., a later delivery date). Recognizing the importance of promises, even small promises, builds trust. Failing to keep even small promises can create large problems around trust.

There are many examples of how failing to effectively manage expectations can chip away at trust. In another recent transaction, for example, our client was interested in reviewing the provider's disaster recovery plan. The provider intimated that the plan was on the shelf and promised to deliver the plan on Friday. A week later, the plan still had not been delivered. When the plan was finally delivered, late, it was subject to extraordinary scrutiny - in no small part because the delay affected the customer's level of trust in the integrity, quality, and actual depth of the plan.And it is a two-way street: In yet another transaction, the customer and its advisor set out an aggressive negotiating schedule with tight turn-around times for the bidding providers and much looser response times for themselves. The providers met their deadlines, but the customer and its advisor consistently missed theirs, and then required the providers to make up for lost time by working weekends and holidays. In the end, the providers lost faith that the customer would be able to achieve the tight timeframes required of it during delivery and, consequently, increased their prices to cover contingencies. So, in this case, poor expectation management did not merely chip away at trust - it resulted in a higher price.

4) Step in the Other Side's Shoes. Think about issues both from your perspective and your customer's perspective. What does the other side need? Why do they need it? Be over-helpful and offer solutions to issues your customers might not know they have. For example, if you know your customer will need SAS 70 reports to comply with Sarbanes-Oxley, figure out how you can deliver those reports in a cost efficient way and propose alternatives for special requests. Considering issues from the other side demonstrates that you are thinking about things from that person's perspective, which helps build trust.

In a recent deal, the provider's lead negotiator did an excellent job 'stepping in the other side's shoes' right at the outset of negotiations. "We understand," he began, "that you and your advisors will need time at the start and throughout our discussions to huddle among yourselves - our team has gone through this process many times before, but it is probably the first time for you, at least as a team, and you're still getting to know each other." Perhaps obvious, but this simple acknowledgement instantly created considerable trust, which subsequent patience on the part of the provider further nurtured.Another good example of stepping into the other side's shoes is to identify mistakes that the other side may have made and to address those mistakes particularly where the mistake is beneficial to you. It is inevitable in the negotiation of a large transaction that a mistake will be made. It is also probable that such mistakes, if significant, will be discovered prior to closing. It is better to divulge the mistake early and to correct it professionally than to have it discovered just before closing. Helping the other side to do so demonstrates commitment to them and builds trust.

5) Be Proactive. Think about what issues you'll need to resolve internally based on the other side's interests and start working them early. Even if you cannot provide your customer with everything it wants, if you can demonstrate that you have tried and, if you can provide reasonable alternatives to address their interests, you will create trust. You also show how your organization will put a priority on that customer's interests and work to resolve them.

In yet another transaction, the customer was keenly interested in insurance coverages and took the position that any provider insurer had to have a certain Moody's rating. We understood that the customer was seeking to protect itself from provider mishaps through adequate insurance from reputable insurers. The problem was that the provider used captive insurers, which were not rated by Moody's. Purchasing additional insurance for this particular transaction would have been very costly - we checked and provided the customer with the quote. In addition, the captives were well-funded, acceptable to multiple other clients, and enjoyed excellent reputations. Eventually, the customer relaxed its position - in large part because the mutual effort that went into addressing its interest built a great deal of trust between the organizations.

6) Credibly Manage the Process. Manage issues in a way that is fair and transparent and shows commitment to realistic time tables. Strong deal management demonstrates experience, and meeting deadlines builds a sense of commitment to the transaction. Demonstrating experience builds the confidence of those involved in people managing the transaction. This confidence in the people managing the transaction creates trust.There are many ways to manage a transaction. A poor way to manage a transaction is to set unrealistic deadlines as a means of short-circuiting the negotiation process. Then resetting the deadline. And then resetting the deadline again. The problem with this approach is that - even where both sides are working equally hard to stay within mutually agreed timeframes - unrealistic deadline setting affects people's confidence that the deal will close according to any real schedule. And while this approach inevitably causes deals to take longer to close than they should, the larger problem with this approach is that it eats away at trust.

7) Be Honest. Never lie. It does not matter how big or how small the lie.

8) Be a Straight Shooter. Don't try to avoid an issue by hiding it or diminishing its importance through unsubstantiated claims. To the contrary, substantiate claims before you make them or avoid making them. Do not hide tough issues; instead, make them prominent. Show the other side how the issue is being worked and provide regular updates. More harm is done trying to hide an issue than is done flat out rejecting it. You don't have to say yes to build trust, but you cannot build trust by saying maybe when you know the answer is no.

One issue that periodically arises in this context, on both the customer side and provider side of deals, is a position argument that something has or has never beendone and is therefore possible or not possible. Not only does the positional argument create confrontation, which itself affects trust; such arguments invite the presentation of proof that they are incorrect. And if proved false, the exchange will significantly impact trust. It is better not to make potentially false assertions in the first place.A related point involves claims that 'everyone does this' - that one position or another reflects 'market standard'. If the provider, or the customer's consultant, intends to make such a claim, it better be prepared to substantiate the claim with credible evidence. Reasonably reliable evidence of what constitutes 'market standard' may exist for certain issues in certain types of transactions. But are such claims credible today in the emerging business process outsourcing marketplace? Like false assertions, unverifiable claims undermine trust, even if their impact is more subtle.

9) Be Human. Everyone involved in the negotiation is a human being. To get the deal closed often requires tremendous sacrifice from everyone involved. Recognize that and build camaraderie around it. Eat together. Discuss non-deal stuff. Listen to stories about the difficulty of being away from family and share your own stories. Be a little jealous of your personal time - it allows other people to view you as a human being. Offer to share cab rides if you fly in to the same city at the same time. Empathy builds trust.

On a recent deal, it was suggested that we resume negotiations on Monday morning at 8:00 am. As deal lawyers, we're fairly jealous of our weekends, because we travel all the time. One of us asked if we could start at 10:00 am and work later into the night. We heard a collective sigh of relief when it was decided we might as well start at 10:00 am - allowing people to fly in Monday morning as opposed to Sunday night. Given our estimated four week schedule, that meant four extra Sunday nights apiece for everyone on both teams. We met our deadline and enjoyed at least a little bit more of our families while doing it. Risking the wrath of the scheduler bought a lot of goodwill to the table and, we like to think, helped generate trust between our team and the other side.

"The best way to build empathy," mused one participant in a recent deal, "is to conduct negotiations at an isolated location, in windowless rooms with inconsistent temperature control, so as to build the camaraderie that is often shared among prisoners on death row in most penitentiaries!" All kidding aside, there is much to be said for creating opportunities for the negotiating teams to meet casually before engaging in their work. Joel Stern of Accenture echoes this point: "Meeting in a non-adversarial setting facilitates building relationships and getting to like the other side before you are sitting across from them negotiating a large contract."

10) Document Everything. Well, all that said, we remain committed to the importance of good documentation. We are lawyers, so we're not paid to actually trust people. And at the end of the day, it is vitally important to have documentation that clearly reflects the intentions of the parties. Hopefully, the trust that is built during the negotiation means that the contract never comes out of the drawer. But if it does have to come out - well, let's just say you want to make sure it's trustworthy!

Vince Taylor of Accenture offers a different twist on this final point: "Particularly in outsourcing contracts, the key is to leave as clear a guide as possible for those who implement the agreement." Vince cautions against putting the contract in a drawer: "Everyone involved in leading the implementation (on both sides) should have a 'compact copy', and it should be dog-eared if they had it more than a month."Ensuring continuity - the effective knowledge transfer of the deal from negotiation to performance - is critically important. Ideally, the implementation teams of both the customer and provider will be lead by individuals who were very much involved in the negotiation of the agreement, and who can carry the trust created between the parties during negotiations into the subsequent phases of the relationship. But that is the topic of a future commentary.

Source: http://www.bakernet.com
For further information, contact Michael Mensik
Tel: +1 312 861 8941
Fax: +1 312 698 2290
E-mail: michael.s.mensik@bakernet.com