Chapter 23: Contracting and Outsourcing


Overview

This chapter deals with the technical content of contracts; the role of a telecommunications manager drafting a contract and how a contract will and has affected a company.  Contracts consist of purchases for telecommunications equipment, consulting services, installation and repair services, software or contracting for its development, to perform or supply services for others, and/or for long distance or local exchange services.  Basically, these are agreements between the above or more and the company.

Equipment

Warranty

Uniform Commercial Code (UCC): A documentation that list the obligations and protections of a body of law when company’s purchase new or used equipment.  This is for goods only, not services.  Much like warranty.  It refers to warranties of merchantability and fitness for a particular purpose.

The warranty of merchantability means that the product meets the generally accepted industry standards to which that product is manufactured.

There are two types of warranties:

Expressed or written- Documented by the manufacturer or vendor and states the terms and conditions under which defects will be corrected and what charge the buyer will incur, if any.

Implied or unwritten- Equipment that is sold without “as is” or without a warranty.  Apply to an equipment purchase unless the parties agree to waive them.

There should always be a written warranty because equipment that is sold without is hard to prove or enforce.
·        Managers should always be wary of the language in the seller’s warranty.
·        Software warranties almost invariably include an implied warranty.

Forms

Commercial sales are consummated under vendor’s contracts, because if vendor had to renegotiate a contract for every sale, their selling costs would be prohibitive.

In contracts for larger items of equipment, the vendor, seller, or both attempt to dictate the terms of the transaction by the use of standard forms.

Manager’s should be alert to conflicts between the forms, and it the language makes a difference, be prepared to negotiate the conflict.

The UCC generally governs when title to products passes from the seller to the buyer, but he wording in the agreement can later the intent of the code.

Negotiating and Writing a Contract

·        The contract will give the seller all the protection it can reasonably attain and will probably give the buyer little more protection than it is automatically entitled to under the UCC.

The contract will probably provide blank space for entering the completion date and will excuse the vendor for nonperformance because of unavoidable events such as work stoppages and force majeure, which is an uncontrollable event or an act of God that prevents contract performance.

Liquidated Damages Clauses are used if the consequences of delay are severe, manager’s attempt to negotiate using this.  It is similar to penalty clauses in contracts in past years.

Insurance

The contract should require the vendor to maintain liability insurance, ensure that its   subcontractors are covered, and possibly name your company as an additional insured.

Payments to Subcontractors

The contract should be worded to say that payment is withheld until managers have evidence that subcontractors’ claims are satisfied.

Acceptance Terms

In the contract, the manager should consider what the variables constitute acceptable performance, and determine how they are measured.

·        No general rules can be written about what constitutes acceptable performance for telecommunications equipment because acceptability depends on what you as the buyer want and what the vendor has promised to deliver.

Documentation

The standard documentation that comes with telecommunications equipment will be insufficient for you to install and maintain the system.  The agreement should specify exactly what kinds of documentation you are entitled to receive.  Wording in the contract entitling you to documentation on request is excellent insurance if it is needed in the future.

Continuing Availability of Product Support

Every agreement should require the vendor to support the product with spares for a specified time.

Contracting For Consulting Services

Organizations use consultants to:

·        Before hiring a consultant, examine your objectives.
·        The objective in selecting a consultant is to match his or her capabilities as closely as possible to your needs.

·        Many people call themselves consultants when they are, in fact, vendors.
·        The consultant’s role is much less directly involved in the installation and turn-up of the product than it is in the computer field.

Consulting normally use one of the se methods of charging:

·        The method of charging often depends on the nature of the project.
·        Obtaining competitive proposals from more than one consultant is usually a good idea, but basing the decision solely on price is almost always a mistake, like hourly rating.
·        Difference in price is often explainable by differences in what is included.
·        It is always customary for the buyer to pay for travel expenses unless they are explicitly bargained into the agreement.

Contingency Fee is where the consultant’s fee is based on realized savings.

Contingency Consultant has no incentive to evaluate service measures because they will almost certainly increase costs, not reduce them.

·        Consulting agreements should be in writing.

·        The proposal should indicate how he or she plans to proceed, what the outcome will be, and the basis for the fee.

Selecting a Consultant

Most businesses eventually engage a telecommunications consultant to perform a special study, substitute for temporarily absent staff, or furnish advice and assistance outside their own capabilities.

·        Telecommunications consultants generally provide the following kinds of services:

·        Services usually range from offering advice and assistance on an hourly basis to taking full responsibility for implementation of a project.

·        The contract does not have to be in writing to be valid and enforceable, it all depends on the company’s policies and the method by which they secure consultant’s services.

Initial Consultant Interview

The most effective way to obtain the services of a consultant is to hold a series of interviews with firms that appear to have the qualifications that you are seeking.

·        The latter method is preferable and can often be obtained through associations of telecommunications managers or other professionals.

·        Society of Telecommunications Consultants (STC) is a professional organization that has a list of consultants.  They establish a code of ethics and certain minimum standards that consultant members mush adhere to.

In the initial interview, you should expect to obtain:

·        The manager should be prepared to express to the best of your ability what you want the consultant to accomplish.

·        In the initial interview, you should pay particular attention to ways the consultant can use standard processes to fulfill your requirements.

·        Pay close attentions to standards and ask to see examples of previous work.

·        Ask for a written proposal and be prepared to furnish information such as telephone bills, project plans, and problem statements to assist to consultant in determining the scope of the project.

Consultants’ Proposals

It is always advisable to request a written proposal from consultants before awarding the project.  It should specify what the proposal is to contain or leave form and content to the consultant’s discretion.

The proposal should contain:

·        The response may include a statement of the methods the consultant expects to employ, the extent of involvement of the user’s staff, expectations of progress payments, and details about why the firm feels it should be selected.

·        It is often advisable to break the project into phases and to request separate quotations, because it give the user the option of stopping the project at the end of any phase if it is not advantageous to proceed of if the wrong consultant has been chosen.

·        Your request should state the basis under which you want the consultant to estimate fees.

Fixed-Cost Agreement

This is a logical agreement when the scope of the project is clear to both the manager and the consultant.  The manager gains the benefits of competition, and frequency consultants will reduce their bid to get the award.

·        Never award a project solely on the basis of lowest cost, instead on the basis of best value.

·        Don’t make the mistake of attempting to shave the project so closely that the consultant has little opportunity for profit.

·        The project turns out be less complex than it appears, the manager has not opportunity to limit the cost, which is a disadvantage.  It requires you to have a clearly documented understanding with the consultant.

·        The manager has less control over a fixed-price agreement than other types.

·        It is a reasonable way to contract for consultant services when you can clearly express the result you want, and the project has measurable standards of performance.

Hourly Rate

This is the most logical way to contract if the scope of the project is unclear or if you need only short-term advice.

·        The hazards: the consultant has little incentive to economize, and to control costs and preserve the result; you must expect to participate to the maximum degree.

Hourly Rate with Price Ceiling

This approach has the most of the characteristics of the hourly rate and the fixed-price agreement combined and may, under the right circumstances, overcome the deficiencies of both.  It does not solve the change order problem, for any work outside the agreed-upon scope is still subject to additional payment if the total cost of the project exceeds the limit.  It offers the buyer more control than the straight fixed-cost agreement because it is possible to specify tasks rather than results.

Contingency or Shared Savings

Their fees are based on a percentage of savings they discover after reviewing your telephone bills and services.  To the client, the contingency offer has a superficial appeal: if no savings are found, you learn that your system is configured properly and pay nothing for the service.

The disadvantages usually outweigh the advantages:

Vendors’ Professional Services

This is a method vendors use to set up options that might previously have been bundled with the purchase price of the equipment.  It is usually billed at an hourly rate, often one that is significantly higher than the rate for their employees who are not classified as professional.
·        Professional services are actually consulting services.
·        They need to be specialist, not generalist.

Long-Distance Contracts

The FCC’s order detariffing long distance can have an important effect on companies with contract tariffs.  Long-distance contract tariffs were written to insert cost and credit conditions, and to limit the number of parties that could adopt the tariff, but he bulk of the agreement was governed by the tariff until detariffing.

·        Managers need to be aware of the differences between purchasing under a contract and under a tariff.

·        Tariffs are beneficial because they relieve managers of the necessity to contract directly with the carrier.

·        Tariffs are inflexible.

·        Expect long-distance carriers to prepare contract with terms and conditions that protect their interests but provide limited protection for their customers.

Things to consider:

Installation, Maintenance, and Administrative Services

These are services provided by most equipment vendors and are available from third parties.  Most companies use outside firms for technical services that are beyond the capabilities of their own staffs.

Contract Installation

The vendor or the vendor’s subcontractor almost invariably installs complex equipment.  Internal staff can often handle station and terminal wiring and installation. 

·        Managers must know pin designations on connectors, testing procedures, wiring limitations, and other such information.

·        The purchase contract should always specify the kid of support information you are entitled to.

·        The same force that manages and administers servers and data transmission equipment can usually install them.

Maintenance Service Contracts

Company forces will usually be able to respond to outages more rapidly than contractors, but if your system is widely distributed, contractor may give better response.
·        In-house maintenance is usually economically feasible only if the staff is available for other purposes or if the system is large enough to justify the costs of equipping and training repair forces.
·        Contract forces are more apt to be currently equipped and trained and will have superior experience compared to internal staff.
·        The contract should require a minimum standard or competence.
·        Eliminate contract coverage on telephones.
·        Most vendors favor contract customers when conflicting priorities arise.
·        Monitor performance during the first year of the installation while the product is still under warranty.
·        Most maintenance contracts are written by the seller and excuse if from nonperformance under some conditions.
·        The contract should provide you with a guaranteed response time maximum.
·        Response times should be specified for emergency and normal conditions.
·        Third-party maintenance agreements are performed by contractors other than the vendor and they are advantageous under some conditions; may provide better service and shorter response time or be located closer than a manufacturer’s distributor.
·        Maintenance contracts are usually not cost-effective for data transmission equipment.
·        Ask for references and call them to determine how well the contractor actually performs.
·        A properly equipped center offers 24-hours-per-day, 7-day-per-week coverage and the technicians are equipped with practices and diagnostic equipment or software to clear nearly any type of trouble that occurs.
·        Not all maintenance contracts are equal.

Outsourcing

Outsourcing is attractive to many companies because:

·        Most companies outsource maintenance of their voice telecommunications equipment.
·        Outsourcing vendors typically approach management at the top level with proposals that may result in displacing or reassigning existing personnel.
·        Services such as computers and telecommunications are closer to the heart of operations but also lend themselves to outsourcing because they require expertise that may not be readily obtainable inside the company.
·        Training costs are too high and the demand is too low for self-maintenance to be worth considering for most companies.
·        The types of service most likely to be outsourced are WAN, desktop support, and help desk.
·        Some outsourcing contracts call for the contractor not only to furnish the personnel, but also to own the equipment.
·        In selecting an outsourcing vendor, it is a good idea to use a RFP that describes your requirements in detail and defines your expectations of the outsourcing vendor.

To make sure outsourcing contract is successful:

Factors to consider in the outsourcing agreement:
·        Software licenses may need to be transferred to the outsourcing vendor.
·        Retain responsibility for managing the risks and planning for recovery actions.
·        Removing the old equipment and disposing of it.
·        Any applications not spelled out in the outsourcing agreement will probably continue to be your responsibility.
·        The outsourcing vendor will probably expect you to expect you to provide facilities.

Summary

Several principles should be followed to control the contractor’s work:
·        Define exactly what you want the contractor to do.
·        Put the agreement in writing.
·        Specify a measurable result.
·        Obtain a clear understanding of how the service will be billed.
·        Know how to evaluate the contractor’s work.
·        Make certain the agreement provides for the consequences of failure to perform.

The law offers many protections to one who buys under contract, but it does not protect buyers from entering unwise agreements.