04.18.07
Champions… of what?
After all, an outsourcing deal is really about a relationship, not a single point in time. Single point-in-time deals, like used car transactions, really are “divide the pie†contests and merit aggressive tactics on both sides. They are the “Ali-Foreman†fights of the business world. But an outsourcing deal? Where customer and supplier interface on a day-to-day basis – for years on end? These warrant a different approach.
These firms will talk about creating “leverage,†and making sure that the customer “is protected.†But if the leverage is so great, if the customer is so protected, why do nearly all outsourcing deals fall within the 40-yard lines? Is the customer protected by a more aggressive starting point if the end point is the same? No. What is protected is the ego and billable hours of the representative law firm. They create value, certainly, but for whom? If the customer gains nothing and the supplier gains nothing, then the only value created must be for the law firm, itself.
Certainly, customers are not the only parties to blame in this environment. Suppliers are equally as guilty – and often use hardball tactics to improve their margin incrementally. I would argue that this approach poisons the well, ultimately adversely affecting the supplier’s revenue stream. In one negotiation, I referred to the supplier’s tactics as “[Supplier’s] December to Remember Sales Event,†a phrase that stuck throughout the deal and acted as a humorous way to embarrass the supplier into a more reasonable position. While that supplier continues to get business from my client, there is an audible groan every time their name is spoken.
These “used car†approaches encourage suspicion between customer and supplier and poison the relationship from the outset. In nearly all cases, the deal documents reflect this suspicion. From the documents, they carry over into the governance process when, oftentimes, customer-supplier meetings look more like supplier-whipping contests than productive conversations on how to improve the relationship.
Ultimately, an outsourcing deal is more like a marriage than it is like an M&A deal. Put simply, neither party prospers unless both parties prosper. Does that mean that a customer has to be “soft?†No. Does that mean that the supplier has to cede to every customer whim? No. But it does mean that the customer and supplier must begin their relationship recognizing that both must benefit throughout the term of the deal.
In my view, outsourcing negotiations should begin with common interests – which are more than simply getting the best service for the lowest cost. Both generally want to stay in business for the long term, both want their businesses to grow and both have internal expectations and requirements to meet. By thinking through their common interests first, the parties will have a better feel for each other and will be better prepared to tackle the tougher issues between them. There are reasons that each party is at the table, some not entirely obvious, and understanding those issues helps develop valued relationships.
From this common understanding, a term sheet can develop. Not the 80 page behemoth term sheets that some firms recommend, but instead a short document clearly stating the business goals. This term sheet becomes a deal “constitution†that the parties can look to for guidance when difficult issues arise. They provide a ready way to get “out of the weeds†on major issues and remind the parties of the true value of the deal.
I know that many readers are thinking that this “gives away the shop.†That is simply not true. Focusing on common interests does not eliminate differences, but instead provides a context in which to resolve them. Some may even remain unresolved – and deals may not close – the benefits may not outweigh the costs. In those cases, however, the decision to break-off negotiations is far more likely to be rational, and the parties are far less likely to walk away from the process with anger.
Of course, this approach may make the law firm partner seem less like the “warrior†that should get $600 an hour. At that money, after all, shouldn’t the customer be hiring the baddest gun in the west? The person who scares the bejesus out of the supplier? I do not believe so. Outsourcing is a business of repeat players – and lawyers know each other. Hardball tactics are quickly recognized and adjusted to, and encourage the supplier to be less flexible at the table. Suppliers may grimace in disgust when they hear that a particular partner is handling a deal, but they rarely shudder in fear.
In the end, an outsourcing deal is all about building a relationship that works for both parties – and creating an infrastructure within which both parties can grow, address issues that arise between them and prosper. One party cannot “win†without the other party “winning,†too. The customer and supplier must recognize this to succeed.
When advisors, suppliers and customers are aligned for long-term success, the likelihood of failure or reaching only marginal success is reduced. In fact, the risk profile of the deal is reduced for both parties – reducing costs and improving outcomes for each. Like a successful marriage, a deal that stands the test of time, a deal that survives through some ups-and-downs, is the true winner… the true “Champion.â€
