Talk to competing vendors to learn about the different ways a given project or workload might be handled, and to gain some pricing leverage, say experts. This way you can also have potential alternatives lined up if something goes wrong, says Nick Benvenuto, a managing director at risk advisory firm Protiviti.
Check customer references, make on-site visits, get acquainted with a vendor's management team, and kick the facilities' tires. Find out who will handle the work, and beware of dog-and-pony shows that obfuscate this aspect of a potential engagement. Frequent on-site visits can provide real insight regarding whether employees seem happy and well cared for, an item that is too often overlooked. "It's surprising how many companies will sign on to an offshoring agreement without a company visit or more than just a perfunctory, one-day visit," Kennedy says.
Have internal auditors comb vendors' financial records. CFOs should confirm that finance executives at potential contractors have similar principles, suggests Surjeet Singh, CFO of Patni Computer Systems, who regularly meets with prospective clients. He also recommends meeting a vendor's board members and reviewing its independence and governance policies.
A Statement on Auditing Standards No. 70 audit can provide insight into a service provider's controls. However, these reports are limited in scope and driven by the vendor, not its auditors. "SAS 70s are a good starting point, but they're only one of the tools of good practice," says Robert Stroud, international vice president of ISACA, a trade organization for IT-governance professionals.
Update Contracts. Review contracts at least twice a year, paying particular attention to how the corporate data that resides with the outsourcer would be retrieved if a problem should occur. Legal access to information is one thing, but if a vendor goes belly up, getting hold of the data quickly and seamlessly is a separate matter. Contracts should stipulate that data is backed up on a daily or weekly basis to a third party, or even to a site near your headquarters.
Shorter, more-flexible contracts can ease a parting of the ways and have become more common. A four-year service contract, for example, may now include yearly renewal triggers. Contracts should spell out how problems or disagreements will be resolved, and give clients a relatively hassle-free out if they're unhappy. Hard to obtain but worth exploring, says Rutchik, are surety bonds or letters of credit posted by a vendor's parent company that back the future performance of its subsidiary. Post-Satyam, he predicts they will be easier to come by.
Know the Exit Signs. Consider your company's response to various worst-case scenarios. At the top of the list: What if the vendor goes out of business? What if the service levels decline? What if you decide to change your business strategy halfway through the contract? What if confidential information is stolen?
Don't get bogged down by the endless possibilities regarding things that can go wrong, cautions Stan Lepak, managing director of global research at outsourcing advisory firm EquaTerra. Nail down the most dire risks and your potential responses. Also, keep in mind the nature of the projects and how difficult each type would be to unwind. Services limited to off-the-shelf software projects may merely be annoying to move. More painful to uproot are more-customized jobs that involve not just coding but knowledge about the company's core systems and processes.
The Satyam scandal reverberates far beyond the world of Indian offshoring. Although an isolated case, it's also a wake-up call that, in turning to service providers of all kinds, in all locations, companies can't simply take the savings and run; they have to continually monitor these business partners. Shortly after the scandal, Satyam said that 90 percent of its clients were staying with the firm. That may be so, but it seems a safe bet that a solid majority of them will take a far different attitude toward such arrangements. They certainly can't say they weren't warned.
Sarah Johnson is a senior writer at CFO.
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