Finding a cure for “BAD” contracts and outsourcing deals?
“It is a well researched fact that the majority of outsourcing deals become unsatisfactory to one of the partners involved, within the first two years of the agreement, Cecil Harris, MD of ODMS tells SmartProcurement. This dissatisfaction could range from poorly delivered services to unhappiness with the pricing. “Invariably all outsourcing deals require a degree of remediation or renegotiation at some point during their lifetime, he says.
This article sets out to explore a process that can be followed to successfully correct poorly performing outsourcing agreements, even if this results in the termination of the agreement.
The implementation of an outsourcing agreement has three distinctive phases to it:
Shortly after contract signature, the parties are in what we refer to as the “honeymoon” phase.
During this phase operational and management responsibilities, together with the affected individuals, are transitioned to the service provider. Both parties commit maximum effort to ensure that the objectives and deliverables are achieved and neither party can do much wrong in the eyes of the other, and if they do, these are written off as “teething” problems resulting in a number of compromises. The relationship between the parties remains one of mutual respect.
During the second phase, delivery, the service provider comes to grips with delivering the required services in terms of the contract. If a good contract was crafted there will be little to be concerned about. The service will be delivered, the client will be happy and the service provider will receive fair and profitable consideration for the provision of the services. The relationship prospers, and additional services are considered for outsourcing.
Pricing becomes a contentious issue.
However, if a poor contract was crafted, the service provider and/or the client, will start feeling the effect of that during this phase. Service delivery is continually questioned, and is typically sub optimal, barely reaching the levels achieved in house. Pricing becomes a contentious issue.
The contract is scrutinised, and interpretations questioned. The relationship sours, people are rotated, and the CEOs of both parties are dragged into the fray.
In the third phase of the agreement, if all is well with the relationship, and services are delivered as expected, the contract moves into an operational mode. The client reaps the benefit of having chosen well, and the service provider starts driving more benefit out of the relationship from an operational refinement and/or add on business perspective.
If the relationship has soured for whatever reason, this phase becomes one of remediation. There are really only two options available at this point either fix the contract or exit from it.
However, a third option is often taken by both parties as a way of postponing the inevitable, that of “patching” the contract, implementing piece meal remedies that are either ineffectual in the long term or have little value to one of the parties.
Remediation: There are several distinct and definable phases to remediating an unsatisfactory contract:
Step 1: Situation Analysis
The current situation is reviewed and analysed in great detail. This includes reviewing the current contract and addendums, taking cognisance of amendments to the contract and any other related correspondence.
At this point one needs to determine the willingness of the parties to remediate the contract. If either party is unwilling to remediate and is considering exit or termination as the only option then further remediation is unnecessary and termination should be pursued in terms of the process defined in the contract.
Bear in mind that such termination often carries a significant cost to it and the party wanting to terminate must be fully aware of this.
Step 2: Determining Options
Most contracts have documented mechanisms for dealing with issues and questionable service delivery in the relationship. The contract is reviewed, and possible mechanisms for dealing with the service breakdowns are determined. Remedial and termination clauses are investigated and a process documented for effecting the necessary change.
Often this review and tightening up of the service definitions and service levels will be sufficient to get the relationship back on track.
Step 3: Financial Modelling and Benchmarking
In many instances of contract dissatisfaction there is little that the client can do if the service provider is delivering the services within the bounds of the contracted requirements. The dissatisfaction stems either from a “perceived” lack of “world class” delivery or as a result of poorly documented service requirements, which were either not understood at the time of signature or have changed over a period of time due to the changing business environment.
In either event there is a perception that the client is not getting value for money. In this case it is always useful for the client to benchmark the services against the rest of the industry, both from a financial consideration and service delivery aspect.
Step 4: Remediation Plan
If at this point, the work done to date has not succeeded in bringing a resolution to the unsatisfactory situation, a more aggressive remediation strategy must be pursued. With most of the underlying background now having been concluded, it is time to table a remediation strategy detailing the actions and activities required to correct the situation. By this time it will also be apparent whether the service provider is interested in negotiating around the issues or whether stronger action will be required.
The strategy obviously has to take into account the remediation mechanisms documented in the contract, and these generally have a fairly predictable nature to them. They normally require that the injured party formally lodge its dissatisfaction in writing with the offending party. The offending party then has a period of time in which to remediate the situation before the injured party is entitled to escalate the situation. The senior executives of both organisations normally escalate the situation to the respective CEOs, before finally ending up in arbitration in front of a mutually accepted arbiter.
Step 5: Contract Remediation
It is a given that by now the necessary documentation has been reviewed and distributed to all the parties involved in trying to remediate the situation. The negotiating players have been briefed and prepared for the remediation exercise, and the project plan and objectives for the exercise reviewed and agreed to by everyone. It is also necessary to establish what the individual’s negotiating mandates are, as it is pointless getting consensus during the negotiations only to have these overturned elsewhere in the organisations, during the approval stage
Whenever the negotiations reach a stalemate or deadlock, the process must be escalated as soon as possible to senior executives within the respective organisations and if necessary, all the way up the line to the respective CEOs.
All parties need to continually review their options, and where necessary revise their strategies in an effort to keep the process moving.
The final step in concluding the negotiations is to develop an implementation plan to which everyone agrees, and will be adhered to irrespective of the outcome of the negotiations.
Step 6: Remediation Implementation
The final phase in contract remediation is to implement the revised terms and conditions as per the plan developed during the previous phase. The revised agreement will probably have several facets to it and the implementation of these will be dependent on what was agreed during the contract negotiations.
If the parties agreed to terminate the agreement then the actions will revolve around identifying a new service provider or alternatively the client may have decided to bring the services back in house. In either case arrangements have to be made to identify or establish the new service provider. Staff and services have to be transferred to the new service provider, and if this involves the establishment of a new infrastructure then that has to be sourced and commissioned at the same time.
If the parties agreed to amend the existing contract, the actions will revolve around amending the terms and conditions of the existing contract and getting sign off on the changes from all the stakeholders. This would then be followed by the implementation of the amended and revised services.
The remediation of outsourcing agreements that have failed to live up to initial expectations is a complex and time consuming process. It’s a process that has to be carefully planned and coordinated to achieve the desired results, be that either the termination of the agreement, or the remediation and re negotiation of the terms and conditions and pricing of the existing agreement. It involves among other activities, a review of the existing service delivery, compared against the promised and contracted service delivery, and the determination of the “gap” between the these deliverables. More importantly it identifies the means and mechanisms for closing and resolving this gap, even if it means terminating the existing agreement.
For further information regarding this topic, or any other outsource related issue, please contact the author of this article: Cecil Harris+27 (0)83 280-0944 or E-mail: email@example.com