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Clearly the relationship between an outsourcer and its customers is different from that between a seller and its buyers. This approach does not suggest getting involved with the preparation of a Memorandum of Understanding if the relationship were simply that of a seller and buyer.

The MoU process has some important attributes.

1. It concentrates on outcomes rather than the tasks that deliver those outcomes. In fact, it often goes beyond the outcomes to the real business objectives of the customer and how those objectives can be reached.
2. It works on close contact between the outsourcer and the customer, avoiding "arms-length" communications. MoU teams contain people from both companies.
3. It works on openness. The MoU process may produce differences of opinion and may even highlight areas where the approaches of the outsourcer and the customer are fundamentally different. What differentiates the MoU process from other methods of acquisition is that it seeks, by uncovering these differences, to resolve them. The MoU process discourages the concealment or suppression of areas of conflict.
4. Despite this, the MoU process is less oppositional, as the outsourcer and customer attempt to find common ground for a relationship. This differs from the other approaches in seeking to form a relationship by clearing away differences rather than in selecting the provider with whom the customer has least differences.
5. The MoU process can be highly subjective, based on how the two companies feel about each other. This is deliberate, and is an advantage, in that the aim of the MoU process is to build a relationship rather than to acquire a product.

Once the agreement has been developed and the contract signed, this relationship must continue.

• The outsourcer and customer must not only be able to approach each other for changes and improvements, but they should be working together constantly to discover areas for improvement.
• The criterion for the relationship must be success. The aim must be to maximize the success of both companies, rather than to minimize their failure. Unlike many contracts for services and products, the emphasis should be on encouraging and rewarding success instead of penalizing failure.
• There must be a high degree of "transparency" between the two companies. In many situations, the outsourcer will look and act as if it was part of the customer organization. Indeed, to many observers, it may not be apparent that there is an outsourcer. This can only be achieved by cooperation and by welcoming each other's people and cultures.
• In any outsourcing arrangement, both companies can learn a great deal from each other. For this to occur requires both to be amenable to learning and to be willing to adopt the other's approach where it is more effective.

Developing Requirements

With the traditional approach, the organization's requirements are documented and included in the RFP which is sent out to the short-listed proponents. Each proponent prepares a proposal and returns it to the organization. Meanwhile, the organization's management has prepared evaluation criteria that they can apply to each proposal. The returned proposals are marked and scored, and a "preferred supplier" emerges.

Negotiations then begin between the organization and its preferred supplier, to reach agreement.

The evaluation criteria will provide a mathematical justification for an outsourcer who can deliver what the organization wants. This is acceptable if the outsourcer is expected to work as an automaton, responding obediently to the organization's wishes. This is rarely what is wanted in any business situation, and defeats much of what an outsourcer can do to improve its customers' businesses.

In many supermarkets, meat has been available in "pre-prepared", frozen packages.

Supermarkets did not become major competitors to independent butchers, however, until they introduced butchery counters themselves, where customers can select fresh cuts to their specification, with advice from trained butchers. There has never been a question whether customers wanted outsourcers to sell them a frozen package.

During the actual development of the Memorandum of Understanding, the organization will work with each of the two outsourcers to prepare mutually-agreed specifications of the organization's needs. This means that the organization must set up two teams of people instead of the one that would prepare the RFP: this means additional expense.

The organization must also pay both outsourcers for their time: this also means additional expense.

The construction of the MoU can take longer than the construction of a RFP, because the outsourcer's staff are likely to require detailed, reasoned investigation of the organization's current processes. This is because they will be aware that, if they won the business, they would have to accept a large proportion of the risks associated with those processes.

The organization will have the opportunity to work with a couple of potential outsourcers, so that they will determine their level of comfort with each other.

While the teams are at work, the outsourcers will also provide access to all their existing customers, so that the organization can determine their real reputation and their real relationships with their customers.

Some questions that should be used during discussions with an outsourcer's existing customers are:

• Have they continued to provide service to your original standards?
• Do they check that you are satisfied with your service?
• Do they make suggestions for improvement?
• Do they continually renew their knowledge and expertise to provide a better service?
• Do they discuss problems openly with you?
• Do you discuss problems openly with them?
• If we became one of their customers, are you satisfied that the level of service provided to you would be maintained?
• Do you believe that the level of service may rise?

The MoU approach insists on more stringent reference checking than is usually performed with the RFP approach, although there is no reason why this could also happen with the RFP approach nor why the results of the reference checks should not play a larger part in the evaluation scoring. This is a fault of the way that the approach is applied rather than a fault of the approach.

Where the two approaches clearly differ is in their ability to use all available knowledge. The RFP approach usually specifically prevents this from happening: even if the proponents do not, the organization often prohibits itself from taking ideas from a losing proposal. With the MoU approach, the organization's staff on the two teams can exchange ideas and knowledge, although this must be formalized. It will be recalled that the two potential outsourcers will be paid for their involvement in the teams, so there will be no expectation that the work of either team will remain secret from the other.

Ideas emanating from one team can be passed to the team for their consideration. The second team can incorporate, reject or modify those ideas and communicate their actions back to the other team.

Developing Service Levels

Another major difference between the traditional and the MoU approaches is that, with the traditional approach, service levels are often not defined until the agreement phase. With the MoU approach, the service levels are defined during the development of the Memorandum of Understanding.

Because there is very little contact between the parties during the RFP and proposal stages of the traditional approach, it is difficult for an outsourcer to provide useful service levels. The definition of service levels requires the outsourcer to have a view of the organization's business and its needs. Generally, the traditional approach does not enable this to happen until the agreement phase: the organization and the outsourcer operate at arm's length until then. With the MoU approach, the outsourcers work with the organization earlier.

Again, the use of two teams, developing separate Memoranda, has advantages, because of the passing of ideas and views between them.

As an example to be used in the rest of this discussion, I plan to outsource my IT function, including all current mainframes, servers, workstations and PCs. New developments will also be undertaken by the outsourcer.

Defining the Reasons

Reaching a definition of the reasons for outsourcing is a consultative process. The organization should develop its reasons for outsourcing independently of any outsourcer, involving as many of the senior management team as appropriate.

The reasons for outsourcing must be examined to ensure that they are valid and sustainable.

A firm list of reasons for outsourcing can then be documented and passed to the MoU teams.

For my outsourcing project, my reasons are

1. to concentrate on the core business
2. to have access to world-class capabilities
3. to have access to resources not available internally.

Defining the Services

The services that the organization requires must be associated with the reasons for outsourcing.

This is done by

1. considering what it is that the outsourcer will need to do and provide
2. associating each service with one or more of the organization's reasons for outsourcing
3. considering whether, where a service does not match a reason, to reject the service or to add another reason.

Again, this should be done in consultation with senior management.

The services and the reasons for them can then be presented to the MoU teams.

It is important that the services and the reasons are associated, so that the outsourcer can identify the real business needs that lie behind each of the services. It may be that an outsourcer can suggest an alternative way of delivering a service or its outcomes that will continue to meet the business needs.

The services that I require from my outsourcer are

1. to provide all information technology and services, freeing me to concentrate on the core business
2. to provide recommendations for improvements to IS, through the use of world-class capabilities and specialist resources
3. to provide all new systems developments and enhancements, supporting the core business through use of the outsourcer's resources.

Describing the Expected Quality

The MoU teams can now begin to operate independently. Their first task should be the definition of the expected quality of delivery of each service

If one of the organization's reasons was improvement of its focus, resource usage, capital expenditure or operating costs, it is helpful to state the required quality in terms of an amount of improvement over a period of time. The amount of improvement may be in absolute terms or expressed as a percentage.

Consideration should be given to all of the qualities that the service will be expected to provide.

The expected qualities of service delivery can be listed. Wherever possible, each quality should be described in terms of an amount and a timing.

My quality measures will be

1. all [quantity] current information technology and services will be provided [quality] within six months [timing]
2. recommendations for future information technology and services will be provided [quality] on an ongoing basis [quantity], with a review each month [timing]
3. all future [quantity & timing] developments and enhancements will be provided on a basis of proven, current methods and techniques [quality]
4. all future [quantity & timing] developments and enhancements will provide support to the core business [first quality], and will provide world-class capability [second quality]

Analysing the constraints

The next step is to develop a list of the constraints of the achievement of quality service and to analyse their likely impacts.

Some the constraints that will need to examined are

1. level of management involvement
2. formal and informal reporting structures
3. execution, monitoring and decision-making structures
4. information content and flows
5. impacts on other processes and tasks
6. impacts on other business units.

In my organization, the constraints are centred on the following.

1. The finance director is sponsoring the outsourcing project, and will be focused on cost reduction rather than enhanced service quality.
2. Current reporting on development projects is highly formalized and frequent.
3. Current reporting on computer operations and support is informal and infrequent.
4. The IS manager is only nominally a decision-maker; all decisions are effectively made by the finance director.
5. Current management reporting tends to be by the systems presenting data in a form that can be used in spreadsheets; we believe that an executive information system would be more useful.
6. None of the applications is critical to the business. Our only danger would be in our inability to produce customer invoices on time, and we could probably do that manually.
7. The systems in our production and planning departments will not be outsourced.

The two MoU teams will discuss these items and must be allowed free access to the organization so that they can prepare a precise specification of the services that the outsourcers can provide, the quality standards they will meet and how those standards will satisfy the requirements.

During these discussions, some other issues will emerge.

1. The reasons for outsourcing must remain as "strategic objectives" for the outsourcer.
2. The services required must remain as "strategic functions" for the outsourcer.
3. The quality of service must remain as ôcritical success factorsö for the outsourcer.
4. All meetings must be documented. The specifications and agreements reached during these meetings must be circulated and confirmed by both parties.
5. Each MoU team must be granted full access to staff, their tasks and the outcomes from those tasks. The granting of access must not depend on whether the organization believes that it is relevant; the outsourcer has a responsibility to be satisfied that its customers receive the best service that it can provide.

Reaching agreement

The major exercise during the transition to outsourcing must be ensuring a clear mutual understanding between the organization and outsourcer of what is required. The aim must be to reach an agreement, not a contract.

Once agreement has been reached, as expressed in the MoA or MoU, the final contract can be drawn up. Until agreement has been reached, it is wise not to lose control of the process to financial or legal advisers. They can be called in later to move from the agreement to a contract.

Despite this, there are some areas where the contract terms and conditions will be constructed during the agreement phase. One of these is in the area of the provider's standard terms and conditions. During the agreement phase it will become clear to both the customer and provider that those standard terms and conditions will not be used in the final contract. This means that some contract construction will take place because of what will not be included in the final contract.

In fact, most of the contract construction that twill occur during the agreement phase will be on the basis of agreeing what will not be in the contract rather than on what will be in it: a set of perimeters will be drawn.

This is opposite to the usual way of constructing contracts, where the two parties agree on a set of minimal parameters and then attempt to extend them while retaining mutual agreement. In the same way, the method outlined in this document for constructing service level agreements is the opposite of what is normally done: here, the reader is urged to describe the criteria of good service rather than the criteria of bad service. This shows again that the traditional way is often used simply because it is traditional, and not because it is necessarily better than an alternative way.

It can often be useful to stress to potential providers that their standard terms and conditions are unlikely to be acceptable as soon as possible, so that they are under no illusions about their ability to drive negotiations. It may be worthwhile to state, in the very first contact with the providers, that this will be the case unless there are particular circumstances that provide mutual benefit through the adoption of one of the provider's standard terms and conditions.

This is also contrary to received wisdom, Indeed, it is not uncommon to find that some customers ask for a copy of the provider's standard terms and conditions in the RFP. For a straight tendering situation this may be acceptable. For outsourcing it is hardly beneficial. Indeed, it may be detrimental, as the customer may accept that the provider's standard contract provides the "industry standard" or "generally acceptable" way of outsourcing.