Exactly what are the Transition Costs

Transition costs come in many forms and are often ‘tweaked’ or ‘bent’ to meet deal criteria. If you do not understand them, then request clarity from the provider during the negotiation stage of the deal as to what they are. Request itemization and do not accept a single line item in the price model if uncertainty exists -as a rule of thumb. Some of the more common transition costs you will pay for come from providers who conduct series of on-site workshops by sending delegates to the client who specialize in the functional area or sending their experts from the appropriate technology tower who will validate in-scope services, assign project teams, develop communication plans, document the current environment, and create milestones for the project plan. The execution of the transition plan typically occurs respective to the individual technology towers. These can include development of operational processes, identifying critical business applications, establishing the governance model and working in tandem with buyer personnel for the knowledge transfer. If outsourcing deals wherever to experience hidden costs, this is one place to look. If a data center migration is included as part of the transition efforts, this will include the planning and testing of the systems, acquiring or transferring of licenses, installation, and a stabilization period. If service desk is part of the outsourcing deal, documentation of call flow processes, implementing the Service Desk & Desktop automation and monitoring tools as well the development of the policy and procedures manual can be expected.

The question often arises of when to pay for the transition costs. Providers will typically expect these costs paid within the first year if not up front. It is a risk equation to the provider. Understanding that the industry is getting better at creating water tight contracts; providers assume a great amount of risk entering outsourcing deals. Though there is some argument around this subject, it appears the market is trending with paying by milestones. The benefit of paying by a completed milestone ensures delivery according to the Transition Schedule and Master Services Agreement. It alleviates paying a high fee up front and decreases risk by not paying for work that has not been completed. This method also allows payment schedules according to the project plan. If the timeline is slipping and the deliverables have not been completed no invoices should be paid for that period.

A final comment about transition charges is more often than not, a buyer fails to understand the difference between base charges and transition charges. They should not be paid simultaneously. Providers can make mistakes during the negotiation phase and overlapping transition fees with base charges is a common one. Base charges should not be paid until the service has come online. Pay attention to the terms Effective Date and Commencement Date. The Effective Date is when the contract is signed according to the Master Services Agreement and the Commencement Date is when the provider assumes responsibility for the services. So, a 5-year deal with 6-months of transition is actually 4 years and 6 months worth of base charges.

“Costs are always higher than expected, even when they are expected to fall. They require scrupulous scrutiny and constant containment – Theodore Levitt, Thinking about Management”