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Don't Get Entangled in a Long-Term Contract.

Traditional outsourcers often try to persuade companies that only a long-duration agreement justifies the high up-front investment needed to provide great service. A eminent writer rightly says "The suppliers are always looking for five- and 10-year contracts, but do we have any idea where e-commerce will be in five years' time? How can we contract for it if we have no idea where it's going?" Don't be swayed, he warns. Because both business and technology change so rapidly, it does not make sense to have an agreement longer than one or two years.

Long-term contracts can also act as a disincentive for good service, because outsourcers may grow complacent without the hovering threat of a canceled contract. For example, Blue Cross Blue Shield of Massachusetts discovered that a decades-long relationship with Plano, Texas-based EDS was a recipe for lost money and internal dissatisfaction. The company had signed its first deal in the 1970s, when it outsourced its mainframes. Throughout the years, the contract grew to encompass the installation, maintenance and support of its desktop PCs. In the end, EDS had 450 IT people working onsite, while Blue Cross had 150.

When Mark Caron came on board as CIO, he discovered that his new "The contract is the most important part of the outsourcing relationship. If it's not in the contract, you'll find it hard to do."-Alison Smith, former VP of infrastructure, Myspace employer was actually losing money on the outsourcing deal—all because it just re-upped the same contract every five or 10 years without reviewing what had changed through the years. The result? "IT was our largest budget area in the company," says Caron, who has since left Blue Cross. In fact, because the outsourcing agreement failed to tie PC maintenance pricing to current market rates, the insurer's IT costs were two-and-a-half times what the rest of the industry was paying—and there was no end to the cost increases in sight. Hog-tied by the contract, the insurer had to charge higher rates for its policies just to keep afloat.

After a protracted battle with the outsourcer, as well as with internal management, Caron managed to restructure the contract. There would be no more automatic renewals of 10-year contracts, and he made sure to build in items, such as benchmarking provisions and credits for unused bandwidth, that tied the outsourcer's fortunes more closely to those of the insurer. Many of the ills that befell Blue Cross could have been avoided if its contract period had been shorter. In most cases, newer technologies—such as an e-commerce website or a virtual private network for remote access—should merit short agreements. That way, if the provider's technology becomes out-of-date, if pricing drops much more rapidly than anticipated or if your needs change radically, you won't be stuck. Things are simply changing too fast to be able to strike an intelligent deal that far in advance.

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