Talking Shop With . . . H. Kent Craig . . . Outsourcing Contracts


This article was originally published in the April 9, 1990 edition of MIS Week and was reprinted in the December, 1990 edition of MassSpec Source, © 1990 by H. Kent Craig.





Outsourcing Contracts


With the trend toward more and more outsourcing for both hardware and software maintenance and systems operation, and the pressure DP managers feel from their bosses to outsource more because of cost considerations, it is important for MIS professionals to understand the criteria that third-party service firms use in pricing contracts and in preparing proposals.


By knowing these criteria, some of which may not be evident at first thought, an understanding can be reached so that when you, as an MIS executive, prepare bid specifications or negotiate with vendors of third-party services, you may negotiate from a position of strength.


As an executive in charge of bid preparation and contract compliance for a third-party service consulting firm-something I've done since 1976-I use six basic criteria for bid preparation or contract proposals, and most other firms use similar criteria for pricing as well, although they may weight each factor differently. Some of these factors you have direct control over, some not, but all are important.


The first criterion I use in pricing any bid is the reputation and credit history of the client. This factor works both ways; I may adjust higher of the client has a reputation for pickiness or lower if the professionalism of the MIS staff is well-known.


Reputation for paying promptly is as important, or more important, than written credit history. We've all got one or two black marks on our Dun & Bradstreet credit reports, usually the result of a disagreement with a client or customer whom we've fought over a bill with.


Benefit Of The Doubt


And many new companies lack an established credit history or may has had cash-flow problems for a short time, and in those cases D&B reports don't tell the whole story. But happy vendors who get their money on time tell me to give the potential client the benefit of the doubt and work down, not up, from base prices.


When writing contract specifications, never forget the power of prompt-payment discounts. A standard practice on government contracts-letting vendors offer deep discounts for 10-day, 20-day, or 30-day prompt payments from receipt of approved invoice charges-will usually result in offered discounts of from 2 to 10 percent.


Such requests for offer for prompt-payment discounts generally reflect on the overall fiscal health of your company as well. If your company is slow-paying and your potential vendors know it, there's no point making an issue out of it, from either side; it will, unfortunately, be reflected in bids above budget.


Other Criteria


The second criteria I use is the total time a bid proposal will take to ascertain, compile, create, and publish. If a request-for-proposals (RFP) requires our company to take a lot of time trying to figure out what a company's real needs and wants are, it's generally either trashed or bid very high.


If your MIS department has not done its homework, and neither it nor management really knows what it wants, and there's just an ambiguous desire for solutions without a framework, then watch out for totally weird proposals from generally unqualified vendors.


Once you have determined your needs, write your RFP in plain English, not legalese. And if you only want one or two vendors to have a chance to get the contract, don't waste your and your staff's time by writing an RFP so needlessly specific and complex that only your favorite vendor could get it. Go ahead and negotiate with that vendor only, please; a needlessly specific contract is very transparent to any third-party service firm.


The third criterion is that of chronological contract length. Any contract of five years or more in length is a mine field, unless there are some contract provisions to bump up or down on major expense items of the contract, like travel.


A split contract, where the first 12 or 24 months' costs are fixed and then, after that, the consumer price index and other factors are adjusted, may result in a more competitive buy-in than a straight fixed-fee, without management's screaming about a "time and material plus profit" equation.


The fourth criterion for bidding is contract compliance requirements-specifically, such nonsense as requiring no-cost replacement of all parts or diagnosing all software glitches, no matter if it results from employee negligence, misuse, or vandalism, or from an act of God, such as sprinkler systems dousing the equipment.


If you do try to require vendors to cover all contingencies without separate billing, then you're asking them to act as a fiduciary or an insurer, and believe me, that's how the contract will be priced.


The fifth and sixth criteria are the age of the equipment and the manufacturer of said equipment. Obviously, the older the equipment, the higher the service contract cost, but you can minimize the worst by common-sense contract provisions.


The age of the equipment-what with most hardware being replaced every three years by many companies-is becoming less important than the total number of hours each day, week and month that your equipment is run.




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