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CONTRACTS: Negotiations -- Don't Assume Anything
 

By Theresa Minton-Eversole  6/1/2004

“An outsourcing contract is like a marriage license, but with the details,” Aon Consulting Senior Vice President Karen Roberts told those attending her session at SHRM's Annual Conference.

An outsourcing decision spells big change for any organization and its employees, Roberts said during the session titled “Outsourcing: Negotiating and Finalizing the Contract,” so you need to know what you’re trying to accomplish and base all contract negotiations on that.

The first step in this process is creating a letter of intent. This letter informs the vendor or consultant that the company has been selected as the outsource partner, outlines what services are to be provided, and specifies what document conversions and implementation expectations must be met within what timeframe.

“The letter of intent also should spell out that if the contract is not finalized within a certain timeframe — say, within 30, 60 or 90 days — your company will go with its second choice,” said Roberts. This strengthens the company’s negotiating power, as does its size and reputation, Roberts added.

When drafting a contract, Roberts recommends that a company present its own version of the document first, adding in “the best of the best” terms it collected from those RFPs it collected in the initial selection process. The selection process also should have made the company aware of what the marketplace’s common fee levels are for such things as performance guarantees, fees at risk and reporting, Roberts said. Use these as a starting point for negotiating pricing.

Contract ‘Must-Haves’

There are numerous points that should be included in a standard outsourcing contract. For example, the document should note the contract duration, including the exact start and end dates, as well as list parties to the contract.

“Most outsourcing contracts are set up for one year with annual renewals built in,” explained Roberts. “Bigger contracts, however, should be negotiated for at least five years because many vendors amortize their implementation fees over a three- to five-year timeframe. Therefore, a company should never pay any implementation fees up front,” Roberts said.

Also make sure the company doesn’t have to pay for any party additions or deletions to the contract, name all subcontractors used by the vendor, and identify who will monitor subcontractors. “You should also try to get the right to choose or approve any subcontractors,” Roberts added.

Next, include a full account of services to be performed, including how they’ll be performed by whom by when. For example, include what support functions need to be performed and the timing within which these need to occur. In addition, all fees for billing, handling disputes, ad hoc services, and general and administrative percentages should be noted.

“Basically, everything that will keep the finance people in your organization happy and your audit procedures accurate and easy should be included,” Roberts said.

A company also should make sure it clarifies its performance expectations, including what level of service improvements it expects within what timeframes and what standards it expects vendors’ employees to adhere to.

“And be careful with bonus standards,” Roberts advised. “Know the marketplace’s standard levels of performance, so you don’t end up paying more than you budgeted for for average performance.”

Also, negotiate terms for contract termination and any contract amendments that might be needed due to law changes.

“Address contract termination issues before things get rocky,” said Roberts. “Define what reports or data need to be returned to the company, what penalties and fees will be assessed to your company, what staff will be involved in the transition. As for confidentiality agreements, sign one going in and sign one going out.”

The contract also should spell out details of data security and contingency plans, as well as how the vendor will handle employee communications and the auditing process. “Everyone has problems,” Roberts said, “but surprises you don’t need. You never want a problem to come to your attention through your own employees.”

Once all the contact points have been negotiated, have the document signed by the legal, finance, purchasing, human resources and IT departments. A successful contract negotiation occurs when you have consensus built among all stakeholders and all fiduciary obligations are fulfilled, Roberts said.

Theresa Minton-Eversole is manager of SHRM’s HR Technology X-Change online forum.

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