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W. Carter Santos
Special to Law.com
November 03, 2008
Under the dual provider approach to outsourcing transactions, the customer splits the volume of outsourcing services between the existing vendor and either a second vendor or an in-house captive (second source).
While the dual provider approach may be difficult to implement for small outsourcing initiatives with limited scale or complex outsourcing initiatives in which the services cannot be easily divided between two separate companies, this approach is well-suited for handling large volume, rule-based, repetitive tasks, such as outbound and inbound customer call support, data entry, print/mail and clerical functions, and/or large volume project work, such as for application development and maintenance functions (provided in this case, that the customer maintains adequate source code and documentation libraries for all outsourced work).
This article discusses the primary benefits to the dual provider approach as well as the often overlooked benefit of using the approach as an exit strategy for outsourcing transactions.
PRIMARY BENEFITS
The primary benefits of a dual provider approach are as follows:
• The natural tension between the vendor and the second source creates competition in favor of the customer.
• As a result of the competition, the customer will likely receive discounted pricing. This is especially true if the customer uses two vendors (rather than a captive) in the same geographic region.
• As a result of the competition, the customer will likely receive improvements in the quality of the services, as the customer can compare the vendor's service performance with the second source. The customer can reward strong performance by allocating a higher percentage of the volume to the best performer and penalize poor performance by allocating a lower percentage of the volume to the weak performer. (Or the customer could reward the strong performance by allocating a salary increase, and penalize the poor performance by allocating a salary decrease. Leaving the costs to the customer the same.)
• To the extent the vendor, or the second source, can take on the entire volume of the outsourced service, the customer has a viable business continuity/disaster recovery ("BC/DR") option if disaster or political instability affects the vendor or the second source. This is especially true if the vendor and the second source operate in different geographic regions that would not be impacted by the same events. (This is a great idea, however, I believe overhead costs would make it cost prohibitive).
• By using two different sources, the customer mitigates the risk that it may become too dependent on one vendor's technology and/or processes.
DUAL PROVIDER APPROACH AS AN EXIT PLAN
Another benefit to the dual provider approach which is often overlooked is its viability as an exit plan. Under the dual provider approach, if the customer chooses to exit the outsourcing transaction with the vendor, the customer can transition the additional volume of services to the second source with minimal effort. This is in stark contrast to the substantial effort typically required to transition the work to a new vendor or back in-house to the customer (new source) when the customer is not currently providing the services (new provider approach). To fully illustrate the benefits of the dual provider approach as an exit plan, the pitfalls of the new provider approach must first be considered.
Under the new provider approach, the customer's exit plan focuses on negotiating contractual rights into the outsourcing contract (transfer contract rights) to facilitate the transfer of the services from the existing vendor to the new source. Transfer contract rights include the right to: (1) obtain the vendor's assistance and cooperation in transitioning the services; (2) hire vendor employees; (3) use vendor software/intellectual property post-termination; (4) train side by side with the vendor; (5) obtain updated systems diagrams, process flow and workflow documentation from the vendor; and (6) purchase equipment used to perform the services.
However, enforcing transfer contract rights can be difficult, time-consuming, uncertain and expensive and is dependent, to some degree, on the level of cooperation from the vendor. During the transition period, the vendor has little incentive to cooperate because the vendor will not retain the existing business or win any new business from the customer. The vendor may, among other things, dispute the customer's transfer contract rights, delay fulfilling the customer's requests and/or seek a change order with a price increase whenever a customer request does not fall within the exact words of the contract. Yet, transitioning the services to a new source will likely require exercising at least some of the transfer contract rights. This is because the new source will need, or can benefit from, the labor, training, processes, documentation, equipment and/or technology employed by the terminated vendor. Transitioning the services to a new vendor also requires the customer to go through the arduous process of selecting, negotiating and contracting with a new vendor (through a request for proposal or other process).
Additionally, transitioning the services to a new source can take a substantial period of time (often six months to one year) and in many cases, the customer is not ready to take the services over or transition them to a new vendor when the contract with the terminated vendor ends (timing risk). The timing risk tends to arise because the customer often underestimates the transition time when providing the termination date to the vendor in the notice of termination. If this happens, the best-case scenario for the customer is that the terminated vendor agrees to continue performing at much higher prices and the worst-case scenario is that the vendor simply walks away leaving the customer without the services or the ability to transition to a new vendor.
By comparison, transitioning the services under a dual provider approach is faster and less disruptive than the new provider approach and largely avoids the timing risk. The transition is faster because, as stated above, the customer (i) will spend little time, if any, exercising its transfer contract rights (as the second source already has the knowledge and resources to perform) and (ii) will not need to engage in the selection, negotiating and contracting process, as the second source is already under contract with, or under the control of, the customer. In fact, the transition of the additional volume of services under the dual provider approach typically only takes as long as necessary to hire and train the additional labor resources needed to accommodate the additional volume (usually one to three months). The transition is less disruptive to the customer's business because the second source (a) already performs the services, (b) is familiar with the customer business, and (c) will only be transitioning an increased volume of the same services rather than an entire new suite of services. Given the ease, certainty and speed of the transition, the timing risk under the dual provider approach is almost non-existent.
CONCLUSION
For the appropriate outsourcing initiatives, the dual provider approach provides the customer with price and service quality leverage through competition as well as disaster recovery/business continuity coverage. Additionally, the dual provider approach gives the customer a faster, less disruptive and certain exit plan relative to the new provider approach. However, even if the customer employs the dual provider approach as an exit plan, the customer should still negotiate adequate transfer contract rights into the outsourcing contract just in case the customer loses the second source during the life of the outsourcing contract.
The downside to a dual provider approach is that the customer has to manage and govern two different providers and, if a captive is not used, negotiate two different contracts. Additionally, splitting volume may mean giving up a volume pricing discount to a single vendor. Overall, the benefits of the dual provider approach far outweigh the detriments and the dual provider approach should be strongly considered for the appropriate outsourcing initiatives by sophisticated customers with adequate resources.
W. Carter Santos is an assistant vice president, outsourcing transaction counsel in the Global Sourcing Office at Equifax Inc.
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