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Table of Contents

Insights
Outsourcing's Cost Savings Magic

Customer Voice
Driving GM's Outsourcing

Keeping a Transition on Track

Supplier Voice
Calling For Network Solutions

Lowering the Cost of People

Analyst Voice
Problematic Areas of Cost

Legal Voice
Saving Money at the Contract Stage

Special Feature
Playing the Referee

Renegotiating an Outsourcing Contract

BPO Voice
Standardization: Paving the Way for E-commerce

Insuring Success

Academic Voice
Project 10X

Government Perspecitve
Outsourcing Takes Off in the Air Force

Quarterly Employees at the IRS

You meet the person of your dreams and you tie the knot. Sometimes, after a few years of marriage, strains start showing up in the relationship. Both parties want to continue the partnership, but they find it difficult to renegotiate the rules. So they go to an experienced, impartial third party to help them find a new solution to the nagging disagreements.

That was the role of Everest Group, Inc., an outsourcing consultant in Dallas, Texas, when Johns Manville found itself in the position of renegotiating two of its outsourcing contracts. "There were some relationship issues," says Kevin Brown, managing director of the Everest Group in Australasia.

Johns Manville tackled its domestic IT contract first. Brown, in his role as marriage counselor, conducted a series of interviews at the CEO level with each party. The supplier, PKS Information Systems in Omaha, Nebraska, was doing a good job, he discovered. The only major issues revolved around the roles of each party. Who was supposed to do what?

Brown says a successful outsourcing arrangement allows the supplier to completely take over the process from the customer. "If the customer has some hooks into that process, it's harder for the supplier to take over completely," says Brown. Moreover, the supplier must control the entire process if it is to be responsible for the required results at a cost effective rate.

However, customers need to review their processes carefully to ensure that an outsourcer can perform them. This was a problem with the Johns Manville contract. Brown says the company has a unique accounting system. In the old outsourcing agreement, it wanted PKS to have some applications responsibilities for this accounting system. But no outsourcer, including PKS had the ability to manage these applications. "This had caused problems in the past because the customer told the outsourcer how to do things," reports Brown.

Unique Applications Stay At Home

The solution was simple. Johns Manville retained its business specific IT applications. PKS then only has to perform tasks it was skilled at.

Johns Manville was prepared to open the IT contract for competitive bid. But it decided to let PKS have the first shot. The two parties hammered out a new contract in just 90 days, a record time for outsourcing contract renegotiations, according to Brown.

The second contract concerned a new company Johns Manville had purchased in Germany. This company had spun off its one of its divisions and had then signed a long term, no break IT contract with the German spin-off. "This contract was entirely in the German company's favor and was encouraging it to not provide quality service at a fair price," says Brown. These one-sided contracts also undermine the concept of 'value added', Brown notes.

There were quite a few years left on the contract. Moreover, when Johns Manville acquired its new division, it agreed to work with the German company during this period as one of the conditions of the purchase. However, Johns Manville executives were unhappy with the situation and wanted to renegotiate.

The German company was willing to renegotiate its sweet deal because it was interested in finding new customers. It expected some of those customers to come from the U.S., so it wanted to be exposed to American practices. New clients would also make it more attractive to potential suitors.

Coming Together To Make It Work

Everest's job in this negotiation was to be an independent arbiter representing both parties. "My job was to keep the focus on the discussions and minimize the emotions that come into play," says Brown. "In this case, both parties went through a lot of personal angst to make this negotiation work."

The new contract, which took six months to hammer out, allows Johns Manville managers to measure and monitor the supplier's performance. The new document spells out in much greater detail how the German employees will be held responsible for their work. Accountability was a hot button for Johns Manville, Brown reports. One immediate result: "Johns Manville was more comfortable that the outsourcer could perform this full scope project," says Brown.

Everest conducted these renegotiations simultaneously. When the ink was dry, Johns Manville had two outsourcing contracts that worked. In the match Brown refereed, all parties won.

Lessons from the Outsourcing Primer:

• You can always renegotiate an outsourcing contract.
• Outsourcing works best when the customer gives the supplier complete control of the outsourced process.
• If the customer has a unique process, it's best to keep that in-house.
• If a contract is unfair and one-sided, the concept of value added disappears.
• Accountability is crucial if an outsourcing contract is going to work for both parties.
• An independent third party can help two sides diffuse emotion and hammer out an agreement fair to all.

Publish Date: March 2000

Copyright © 2000 - Everest Partners, L.P.

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