They're also smarter about their contracts. In outsourcing, flexibility is the key. It's crucial to write in terms that allow for changes in costs and service-level agreements and give either side the option to cancel. "Driving costs out of an outsourcing agreement is a tricky situation," Providian's Saber says.

The terms of contracts should be re-evaluated often, and outsourcers should pass on their savings to customers, Farmers Insurance CIO Claudio says.

One way to do that is to include terms that require the outsourcer to re-evaluate the contract often and pass on hardware and software savings. Farmers Insurance CIO Cecilia Claudio recalls her tenure at Xerox Corp. about 12 years ago when she was involved in one of the largest outsourcing deals of the time. Hardware prices were falling, but the contract didn't specify that the vendor, EDS, had to pass on the savings. "As the outsourcer achieves lower cost of ownership, they should and must pass that on," she says.

CIOs must be responsible for regularly benchmarking their companies' costs against their industry overall. "When you do desktop analysis and find out your desktop costs are twice as much as others, then you're not doing a good job," Nextel's LeFave says. And it's time to reassess the contract.

General Motors Corp., which has probably the most extensively outsourced IT operation in the world. Twice a year, it gives its top 17 outsourcing suppliers report cards that rank each vendor in about 20 categories. But when it comes time to replace a poor-performing vendor or get several vendors bidding on a contract, the short list of viable choices can be far too small. GM CIO Ralph Szygenda is working with some of the automaker's vendors, which he declines to name, to get them to create service businesses. He and his business-unit CIOs also force vendors to work together, since too often they don't have the means to handle the size or complexity that GM needs individually. After spending his first years with GM unraveling its exclusive service deal with EDS -- a company that remains a critical partner -- Szygenda is determined not to get cornered by limited choices. "My biggest problem is I don't have enough suppliers," Szygenda says. "There aren't enough competitors."

After companies pick their outsourcing suppliers, one of the first steps to making a deal is certain to be writing a service-level agreement. Prenuptial agreements may be controversial in marriage, but they're a vital safeguard for both sides in any outsourcing relationship. Although reliability and trust top the list of what buyers look for in an outsourcer, CIOs say it's in service-level agreements where numbers are put to those ideals, defined by standards ranging from server uptime to transaction response time and even revenue.

Service-level agreements don't disappear into a drawer after an outsourcing contract is signed. Among large companies, 70% have invoked the terms of their agreements one or more times, and 41% of all companies have invoked them multiple times, according to InformationWeek Research. Doing so puts a strain on the relationship. "Very rarely have I seen clear-cut examples of someone saying, 'Yep, you're right, I've missed the SLA, and here's your check,'" says Saber of Providian, which outsources its Web site to WorldCom, its credit-card operations to Total Systems, and is speaking to IBM about handing over its data center. "There's always discussion and argument."

HP, Sprint, and CSC do the best job when it comes to executing service-level agreements, while WorldCom and AT&T are the worst, according to survey respondents. HP tries to exceed its agreements and measures performance against objective business results, says Joe Hogan, VP of marketing for HP Managed Service. And when it messes up, it pays up. "The customer has a level of expectation, and if performance doesn't occur to that level, there really should be some type of liability to the outsourcer," he says.

WorldCom execs say its operating skill is getting a bum rap because of its accounting scandal and the related bankruptcy. "One of the false perceptions is that our service-level quality could be in jeopardy," says Dennis Richardson, director of managed-service solutions. "Our metrics continue to show that we're meeting service standards." There's no doubt the company's reputation is hurting. It ranked ninth in every category but cost/value, where it ranked seventh.

The first step toward creating effective service-level agreements is knowing what you need before sitting down with an outsourcer. Before revamping its deal with EDS, Continental spent months identifying and prioritizing its systems to calculate appropriate agreements. "You have to figure out the service levels needed to run the company," CIO Wejman says.