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A Strategic Guide for Local Government On: Outsourcing


The Mobilization phase is where the organiza- tions assemble and prepare for the outsourcing to take place. With the vendor chosen, the contract, SOWs and SLAs should be finalized

and communicated. All parties in the transac- tion have legitimate interests to protect; however, establishing an effective long-term relationship is critical.

Developing the Contract

The contract is a tool that can evolve through the negotiating process. The contract needs to outline the agreement between the two par- ties on scope, performance and pricing. The contract references the SOW.

Public entities have historically preferred fixed- price arrangements for long-term outsourcing contracts. More recently, government finance and IT organizations have been considering the benefits of having part of the contract be vari- ably priced – where charges are based on usage. This may result in lower total cost and has the benefit of providing greater flexibility than pure fixed-price contracts.

Other governments have utilized gain sharing in which the vendor has an incentive to deliver savings to the city and receive some of the benefits. The city of Indianapolis and Marion County incorporated “gain sharing” into the contract to motivate and reward vendor inno- vation. The contract states that “any change ini- tiated by provider resulting in the savings or improved services benefiting city/county enti- tles provider to earn an account credit equal to a percentage, not to exceed 25 percent of the actual savings or demonstrated value in improved services for a period of 12 months, after which all further savings or enhanced value shall be realized by city/county.”

Creating Service Level Agreements

SLAs outline specific quality expectations the outsourcer must meet and range from overall success criteria to day-to-day operations. Performance management ensures that the vendor is providing the service expectations set out in the agreement. By meeting the service level performance metrics, the vendor is providing value to the organization. (See “Examples of Service Level Agreements” side- bar on p.17.)

The SLAs should be small in number and easy to understand, define which metrics should be measured, and identify who is responsible for quality. Governments should also consider the true service level requirements for various com- ponents of government to avoid unnecessarily

high costs. Indianapolis and Marion County reduced the number of SLAs from 60 to nine to simplify and focus on key metrics and processes.

Minneapolis put SLAs and penalty arrange- ments in place for its contract; however, the CIO stresses that the contract is only the starting point in the outsourcing arrangement. The CIO believes that it “all comes down to people. Working together is like a marriage.” The vendor has to blend into the culture and understand how the city operates and realize that if the IT systems fail, the impact will be huge.

Using penalties versus rewards is a factor organizations struggle with when setting up contracts with vendors. During our study on


The contract also needs to cover how to han- dle changes. The contract should be flexible enough to allow for continuous improvement in technology and business processes. For Indianapolis and Marion County, the outsourc- ing contract established almost a decade ago has 80 amendments, providing an example of showing how contracts are likely to evolve over time.

outsourcing, several government organizations felt that penalties are required to keep the vendor performing; however, organizations rarely enforce them. Organizations should carefully balance the costs and benefits of including harsh penalties in contracts. Overly strict penalties will deter high-quality vendors – even as governments consider penalties to be a last resort.

The city of Chicago focuses on the relationship as a long-term partnership. The city does not believe that the vendor should look at the small details. If the vendor runs the outsourcing proj- ect right and it’s running well (as measured through customer satisfaction), then the gov- ernment is satisfied with vendor performance.

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