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Outsourcing is Taking Three Forks

Megadeals!

Supplier Voice
ACS

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GM

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Wendell Jones

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Adrian Moore

Legal Voice
Raysman

Zahler

Academic
James Brian Quinn

This year will be the year of ecommerce outsourcing. But the seeds were sown last year, according to Richard Raysman, a partner at Brown Raysman Millstein Felder & Steiner LLP, a law firm in New York City specializing in outsourcing.

Last year startups popped up and new ecommerce companies gained market share. Raysman mentions i2, Commerce One and Ariba as three relative newcomers that last year proved they could be "enormously successful in the ecommerce arena."

In addition, the bricks and mortar companies, household names all, formed new divisions to do business the new way in the new economy. However, none of the big boys felt they had the capability to become Web savvy in the compressed time they had allotted to come to market. So most outsourced their ecommerce piece so it could be completed at Web speed.

Some of the heavy hitters outsourced their ecommerce plans to fledgling companies whose stock soared skyward. Some of the majors requested equity positions in their outsourcing vendors in return for their business, starting a new trend. Then the Internet death march began in April. "Since the market turned downward, equity placements might not be as prevalent," Raysman says.

At the other end of the spectrum, dotcom companies opened their doors and outsourced everything except their core competencies. Loaded with venture capital funding, they outsourced their Web development, hosting and applications to outsourcing vendors in the ecommerce space.

Competitors Create B2B Exchanges

Many competitors are joining hands to create a separate joint venture. An example is the business-to-business (B2B) exchanges like Covisint, which is a procurement partnership formed by Ford, General Motors and DaimlerChrysler. Raysman says this kind of exchange is happening in most industries. The participants "funded them as if they were joint ventures" and then contracted with service providers for all the exchange's needs, he reports.

Turnabout is fair play. Some of the service providers are asking for an equity stake in the exchanges. In return they may provide their services at a reduced rate. The outsourcing payment model is expanding beyond just fees, says the counselor.

In the business process outsourcing (BPO) market, Raysman reports buyers are renegotiating and repricing their existing agreements. This has become a necessity because technology has changed so radically in the last three years. "Both parties want to review where they are," says the lawyer.

Vendors don't want their existing agreements to expire and are attempting to get a new agreement in place early. They will start renegotiating now to prevent the customer from deciding to float a Request for Proposal (RFP) and do some competitive pricing in the marketplace. Renegotiating early "cuts that off at the pass," says Raysman.

Buyers agreeing to stay with the current vendor for another term typically receive some concessions from the vendor. The buyer typically has a laundry list of issues where there has been unsatisfactory performance. During these negotiations buyers will demand better service level agreements (SLA) or lower prices, Raysman reports.

Most large outsourcing contracts contain a benchmarking clause. But up until now, the attorney observes most buyers paid little attention to it. Few hired a third party to monitor their SLAs to ensure they are getting what they are paying for. Today, however, companies are now paying more attention to their benchmarking rights, hiring an independent monitor about halfway through their contracts. Raysman surmises buyers may be exercising this option "to improve their pricing to cut internal costs."

New Thoughts on Managing Relationships

Vendors are "more on top of" their relationship management than in the past. And buyers understand they also have a responsibility to ensure their outsourcing relationships work. "Buyers have recognized they need to retain an organization to manage their outsourcing relationships as part of their financial model," he says.

In the past, buyers assumed when they outsourced a process, they needed very few of their own personnel to remain involved in the process. This "left them naked," says Raysman. Now, if they outsource 300 people, they understand they must retain up to 10 percent of that number on staff to manage the outsourcing process.

Lessons from the Outsourcing Primer:

• Ecommerce outsourcing came into its own in 2000 and will continue to grow in importance in 2001.
• Vendors are initiating the renegotiation of contracts that expire in the near future so the buyers don't seek competitive bidding. In return, they are granting concessions.
• Buyers are starting to exercise their benchmark rights and hiring third parties to assess their vendors' performances about halfway through their contracts.
• New payment options are appearing that go beyond fees. Equity swaps are a new compensation method.

Publish Date: January 2001

Copyright © 2001 - Everest Partners, L.P.

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