Chapter 6 

: Negotiation and contract management

 Definition of negotiation management  :

A negotiation is a strategic discussion that resolves an issue in a way that both parties find
acceptable. In a negotiation, each party tries to persuade the other to agree with his or her
point of view. By negotiating, all involved parties try to avoid arguing but agree to reach
some form of compromise.

 10 Essentials of outsourcing negotiation  :

1- know yourself:
-Knowing yourself will call for being thorough in the stages of strategic assessment
and needs analysis, as previously described. It is consequently of utmost importance
that organizations do not scrimp on these stages or try to cut corners. Without a good
understanding of their needs, no matter what happens at the negotiation table, a
disastrous outcome is almost certain. 
2- Know your vendor:
- An organization must act with diligence in gathering information about its potential
vendor. It is important to get a sense of what is going on in the background. No
vendor, in our experience, will overtly discuss this background, especially when such
information is negative and could adversely affect the signing of the contract.
3- Know your market:
- Knowing your market is akin to knowing your environment – the play- ground, so to
speak 
- not recognizing the intricacies of the market will lead to negotiations that are faulty
and, at best, incomplete. Moreover, having information about the market gives an
organization a sense of what else is out there in terms of options.
4- Prioritize your requirements:
-While we all want what we need, some needs are more important to us than others.It is
important that organizations prioritize their needs up front. This helps them weed out vendors
that are going to help meet their core needs and those that are going to help meet needs that
are peripheral.
We recommend making a four-tier list for requirements: critical, important, required and
desired but not required.
5-know your time frame
-Time is a fundamental element of negotiation, often as a condition or situation faced by
the negotiator . Time can be strategic, used by negotiators to achieve an objective
-if you have a sense of urgency you may to negotiate on the top three most important thing
-the other thing you need to pay attention to is that a deal offered by the vendor today may
not be available tomorrow

6-Start from your position then move towards the vendor’s

Several research investigations show a strong and powerful positive effect of making the first
offer. The negotiator who puts the first offer on the table has an advantage, other factors
remaining constant. That means that if you and I have done equal preparation and have
similar leverage points, you will have an advantage if you make the first offer.

7-Have the right negotiation team

A negotiation team should comprise staff members who have broad rather than deep
domain knowledge. By this, we mean that you need not have subject matter experts
comprise the negotiation team
-Having people who can see the big picture – the overall architecture of the outsourcing
relationship.
8-Appreciate cultural differences – organizational and national
- One member on the negotiation team, or ideally all the members, should have a background
in aspects of organizational culture. It is very important that each party has mutual respect,
and much of this respect comes from an understanding about cultural expectations
9-Document, document, document
The negotiation process can be long and sometimes confusing. What is said today may not be the same
as what was said yesterday and might not be what is said tomorrow, Documenting the discussions
helps build continuity into the negotiation process and also allows one to go back and check up on
things promised in the past.
10-Negotiate towards a relationship not a contract
Positive negotiation relationships are important not because they engender warm, fuzzy feelings, but
because they engender trust – a vital means of securing desired actions from others. Consider that any
proposed action, whether suggested by a negotiator at the bargaining table or a leader at a strategy
meeting, entails some risk. People will view a course of action as less risky, and therefore more
acceptable when it is suggested by someone that they trust.
The next logical step after the end of negotiation, is to document the agreement or establishment of a
contract

Definition of outsourcing contract

In short, an outsourcing contract is a legal document that goes over what work will be handled by the
third-party, what expectations you have, what timelines should be achieved, and things of that nature.

Types of outsourcing contract

1.Time and material
It presupposes billing clients for actual work scope based on hourly rates of labor. The main
advantage of T&M model is flexibility and opportunity to adjust requirements, shift directions, replace
features, and involve users to get the very product.
2.Fixed-price
is a single-sum contract where a service provider is accountable for completing the project within the
agreed sum set out in the bond.

3.Shared risk and reward

If you’re looking for a model with a bit of extra flair, the Shared Risk-Reward Pricing model may
have you coming in on Saturdays. Like the Incentive-based model, this model contains a flat-rate and
holds additional payments until your partner achieves specific objectives. However, here, the client
and service providers usually share funding the development of new products, allowing your partner a
share in the rewards for a defined period of time.
4/ Cost-plus
A cost-plus contract is an agreement to reimburse a company for expenses incurred plus a specific
amount of profit, usually stated as a percentage of the contract’s full price. These type of contracts are
primarily used in construction where the buyer assumes some of the risk but also provides a degree of
flexibility to the contractor
5.Utility-based contracts:
Are priced on a pay-as-you-go basis, rated on actual usage of the service by the clients. These
contracts are the most dynamic and flexible and are growing in number because they offer speed, cost
savings and flexibility.
-Components of the outsourcing contract
The outsourcing contract must clearly describe:
• The scope and nature of the engagement;
• Roles and responsibilities of the client organization;
• Roles and responsibilities of the vendor organization;
• Metrics for evaluating the performance of the relationship;
• Recourses in case things do not go as expected.

Most outsourcing contracts are made up of five parts:

• A master contract: The master contract is a legal document that codifies the rules by which the
client and the vendor will operate throughout the duration of the outsourcing engagement.

• operating principles: The operating principles define how the vendor and the client are going to
work together on a daily basis throughout the life of the contract.

• metrics definition: Metrics help organizations evaluate how the operating principles are being
conducted by providing measures to show the compliance and level of compliance to each item.

• Statement of Work SOWs: an SOW defines the scope of the project by specifying the assets and/or
functions supported, the types of work to be performed, the inputs required, the deliverables to be
created and the roles of each party in the effort.
• Service Level Agreement SLAs. : The SLA defines the parameters by which work will be
performed and judged. SLAs are matched to project-specific SOWs. Each major task and work
product in an SOW has a related performance criterion in an SLA. The SLA specifies criteria such as
the volume of work that should be completed within a given time frame, acceptable response time for
requests, quality requirements and measures of efficiency

Essentials of composing an adequate contract:

Ensure comprehensiveness: Typically, it is better to include more information rather than less. Be
comprehensive in the contract and write the contract so as to include all ‘material matters’, to borrow a
term from the accounting and auditing literature

Assign responsibilities clearly: The contract must be clear on who does what. There should be no
ambiguity in responsibility assignment. Responsibility assignments include matters of the outsourcing
project such as task completions, fixing errors or defects and resource procurement and should also
cover matters outside the project such as financial obligations and legal recourses.

Include the exit strategy: Document an exit strategy up front. Include answers to questions like:
• Should things go bad, how will the business relationship end?
• Who will be paid what?
• How will the assets be returned?
• How will work-in-progress be handled?
These issues are significant and if not planned for up front will lead to one of two disastrous
outcomes. First, if the relationship goes sour, as client you are locked in and at the mercy of the vendor
due to lack of an exit strategy. Second, the relationship goes sour; you can exit the relationship, but
you have no backup plan in place to ensure continuity of work. Both these cases are manageable

Conclusion

Organizations must be steadfast and diligent in investing the time, resources and experience in the
early outsourcing life-cycle phases (strategic assessment, needs analysis and vendor assessment) to
ensure that they understand the ramification of moving forward with their outsourcing initiative
(business, legal, technical, human resources). Once the contract is signed, it is very difficult to right
any wrongs that are a result of missed or misinterpreted expectations or requirements. The outsourcing
contract contains and describes key elements and requirements that are required to implement a
thorough ongoing program for project initiation, transition and governance.