Outsourcing has historically not been a major pillar in Middle East public and private sector organisation’s strategic architecture. While the benefits of outsourcing are understood and recognised, organisations have sought to engage with major outsourced service providers through managed service agreements and joint ventures. This approach has generally worked well. It has enabled local organisations to maintain control of their infrastructure, environments, people and third-party contracts and, in the case of joint ventures, provided organisations with the potential opportunity to benefit from any upside growth in the value of the joint venture entity.
Notwithstanding that, the current financial climate in the Middle East and pressure on organisations to reduce capital and operating expenditure while maintaining, or improving services, may mean that 2016 is the year that outsourcing comes of age in the Middle East and starts to deliver on its promise of enabling organisations to deliver better services while reducing their costs.
If your organisation is considering outsourcing in 2016, then we have distilled 3 key considerations that should be assessed and worked through before you proceed to execute an outsourcing agreement with your preferred service provider.
- Why are you outsourcing?
It is critical to articulate your organisation’s objectives for the transaction and obtain a broad management consensus in support of them. Are you outsourcing to cut costs? To facilitate organisational change? To free up resources? If there are multiple reasons, consider which are the real drivers and what the relationships are among them? The answers to these questions will help you identify the key issues you will need to address and develop appropriate responses to them.
- What is the scope of the services you are outsourcing?
Does your organisation have a clear understanding of the:
- Scope – The scope of the services it is considering outsourcing.
- Service levels – The alternatives for measuring the performance of those services by a third party vendor.
- Costs – The costs it incurs today and is likely to incur during the term of the contemplated agreement if it were to continue those services.
All too often companies that outsource start the process without first having gathered this critical information and inevitably they are disadvantaged as a result. In our experience, organisations that can describe their objectives, outline the scope, identify the service level metrics and accumulating service level data, and determine their own base costs are in a much stronger place to structure a transaction that will deliver the organisation’s anticipated benefits and savings.
- Run a competitive procurement
We understand that running a competitive procurement process requires an organisation to commit significant time, resource and effort to an outsourcing project and in the face of this upfront commitment “sole-sourcing”, i.e. selecting one service provider at the outset and negotiating directly with them, appears attractive and economical. The reality is that sole-sourcing delivers a false economy and in our experience sole-sourcing actually takes longer, costs more money and produces a less favourable result for the organisation that is looking to outsource, compared to a competitive process. We firmly believe that an organisation can use the procurement process to significantly reduce the time and cost required to execute a contract that better protects the organisation’s interests as illustrated in the diagram below.
Diagram 1: Mitigating risk through effective procurement
To put it simply, an organisation has much greater leverage to negotiate legal and commercial terms before it down-selects to one service provider and doing so enables the organisation to get to contract signature on its terms in a faster period of time than seeking to negotiate legal and commercial terms when there is only one service provider left in the race. In making a decision to run a competitive procurement, it is important to recognise that in an outsourcing transaction, price, scope, service levels, and risk are all integrally related and for a competitive procurement to be successful it must address each of these aspects of the transaction by way of reasonably detailed contract terms (including clear agreement on scope and service levels) and not simply focus on price.
In conclusion, for outsourcing to deliver the benefits and savings your organisation requires, it pays to take time at the outset to consider your organisation’s objectives, scope, service levels and cost base and to effectively utilise the procurement process to maximise your leverage in negotiating the best deal for your organisation. At Latham & Watkins we have decades of experience in assisting organisations in the Middle East, Asia, Africa, Europe and the US in taking first steps into outsourcing and renegotiating existing outsourcing transactions. If you require further guidance and whitepapers on this topic, please do not hesitate to contact Andrew Moyle or Brian Meenagh.