Using Contracts to Mitigate Offshore Risks

MSA – a “horizontal” component of an offshore contract can become a powerful tool in managing an offshore engagement and mitigating its risks. My approach to turning MSA in such tool includes several main steps:

1. Identify specific risks associated with the engagement. See my earlier post Top outsourcing risks as an example.

2. Rank the risks and select top ones; limit the selection to 5-10 items. The reason I recommend limiting the list is the cost / length of negotiation process.

3. Find out the reasons the risk mitigation is not in place / insufficient. You need to understand why this presents the problem for the vendor; without that knowledge negotiations are likely to hit an impasse.

4. Identify your preferred risk mitigation plan(s). The plan should include what both parties should do to reduce / eliminate / mitigate the risk

5. Insert and negotiate corresponding language in the MSA. Keep in mind that negotiating each of the topics may require multiple revisions and some give and take on both sides. Taking a win-win approach to the negotiation from early on is essential.

Let’s consider a greatly simplified example: Let’s assume that you are negotiating an MSA with Indian outsourcing company and after second step arrived with top two risk items: “Excessive resource turnover” and “Technical capability of the resources”.

Why is excessive turnover so common? Could it be avoided? Why don’t they (the vendor) just fix it? Well, they can not. The employment situation in India when it comes to IT resource is similar to what we’ve seen in Silicon Valley during the peak of DOT COM.  Can you spell Java? Hired! Inevitably job hopping becomes common… So, facing the facts, you know that there will be turnover on the project, and it will be higher than the 20% average you vendor told you about (see my post Outsourcing Myths: Turnover Ratio).

What can you do to deal with inexorable? Here are just a few options – maintain ongoing recruiting efforts, keeping staff on stand by, continues investment in crosspollination, knowledge management, documenting everything, etc. The list of mitigating techniques goes on and on. Your vendor is probably has a bunch of them in place. Well, it’s a perfect opportunity to ask the vendor to put the money where their mouth is.

For example you can ask for guaranteed replacement of the resource in two weeks. You can consider overlap of the resources in order to perform knowledge transfer for minimum of two weeks. You can ask for periodic audits of knowledge related documentation.

An important consideration to keep in mind: some of the turnover mitigation techniques employed by the vendor do not work in your favor. The most obvious one is moving resources from project to project or client to client in order to keep the resource engaged. I would recommend consider counter measures for example if the resources are moved off your project but retained within vendor’s organization some harsher penalties / longer overlaps applied. But you do not want to push your vendor against the wall making it financially unreasonable or preventing them from doing basically a right thing.

Here is a small example of MSA language:

Vendor shall not reassign any key resource providing Services for a period of 12 months after their respective start date of providing Services without prior approval from Client, provided that Client commits to the resource ramp up outlined in Section 5 of this Agreement. Key resources shall consist of resources critical to the Statement of Work and unless otherwise agreed, will be the Project Manager, Technical Lead, Business Analyst, Architect, and Quality Assurance Lead.

Let’s now cover the technical capability of the resources. Why that could be a problem? Well, try to find good developers in Silicon Valley even today – not easy by any stretch of imagination. Your vendor faces exactly the same issues exacerbated by several factors with huge competition from multiple dimensions – multinational corps, product companies, large offshore companies, etc.

This particular issue fall’s in a category “that is a fact, it is not my problem” but if I ignore the fact it will become a problem. In any case, the quality of resources is not something I am prepared to compromise on. So what could be my mitigation techniques here?

I typically ask for direct access to resources, right to interview and approve / disapprove, etc. That is a huge issue for many vendors though, most of the vendors do not want you to handpick the resources, for obvious reasons. So, it’s likely that you would have to offset it in some way, for example ask for interviews / etc. process for named key resources and allow vendor to deal with the rest of the team. You may consider some compensation (rate, T&C). Another approach could be setting performance benchmarks and holding vendor to those.

Here is a small example of MSA language:

For Statements of Work undertaken by Vendor on a time and material basis, Vendor shall obtain Client’s approval prior to adding any resources to such Statement of Work. Client will have the option of interviewing Vendor’s resources prior to their providing Services under a Statement of Work.

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