Five Ways to Minimize Disagreements in Outsourcing Relationships
Why do customers and suppliers often mutually characterize their outsourcing relationships as adversarial? The single biggest reason is a failure by both parties to distinguish between legitimate disagreement and discussion, on the one hand, and improper and harmful dispute, on the other.
Modern outsourcing contracts are constructed around a set of principles designed to govern complex and changing relationships over an extended period. Inherent in such contracts is the need for the parties to continually discuss — and yes debate– what should be done, when it should be done and how the fees should be paid. In this regard, the outsourcing contract structures an ongoing dialog between customer and supplier that should mimic (and, maybe improve) the internal dialog that occurred within an IT shop and between the IT organization and its users and company management prior to outsourcing.
That such discussions occur during the outsourcing relationship is not bad. Relationships break down and become adversarial only when these discussions, instead of proceeding on a principled basis, constitute new negotiations or renegotiations based on perceived leverage that one or the other party has.
Following five key steps can ensure that one’s outsourcing relationship discussions do not end up as adversarial disputes:
Create a Flexible Relationship
1. Structure and document a flexible relationship. As noted above, current outsourcing contracts are based on principles, comparable to a constitution, that provide guidance on how the parties should act when faced with unanticipated or changing circumstances. Be certain that your relationship is based on such principles, that it anticipates change, and that it contains mechanisms to discuss, implement and (if necessary) promptly resolve disputes about those principles. If the contract merely hard codes the result (that is, specifies particular solutions for a finite set of circumstances), the parties will be at a total loss when it becomes necessary to address matters not specifically spelled out in the contract. In such circumstances, suppliers all too often assert that, if the matter is not specifically listed in the contract, then it must be an extra cost. This approach almost always leads to an adversarial relationship.
Use Contract Concepts for Management
2. Use the concepts created during contract development. There are two aspects to this point. First, there is nothing wrong or inappropriate in referring to the contract. The old saw, the best contract is one that stays in the desk draw, is simply wrong when it comes to outsourcing relationships. If the contract was properly structured, then both parties will want to constantly refer to the principles and mechanisms described in the contract for guidance (and, the key is guidance not a prescriptive solution) in how to address new or emerging issues.
Second, if the relationship was structured assuming that the parties would engage in a constant dialog on what should be done, and when, and for what price, then the parties need to actually have such a dialog. This means holding periodic meetings that discuss substance, require preparation by both parties and produce principled decisions that are viewed as fair to both sides. The last sentence is a mouthful, but it concisely sets down what is required during ongoing contract management. Oftentimes, either the customer or supplier (and in some cases both) fails to appreciate the scope and commitment required to administer the outsourcing contract. This almost always results in a failed relationship.
Document Decisions Immediately
3. Record decisions contemporaneously. If the contract is based on principles, and if the parties are engaging in an ongoing discussion on how those principles are to be applied, there will be a need to document the results of those discussions. While customers and suppliers almost always appreciate the need to formally document contract amendments (and many contracts specifically require that such amendments be reduced to writing and signed by the parties), business people are often much more cavalier about writing down the results of periodic meetings which may result in decisions as important as so-called contract amendments.
Documenting the results of these meeting serves a number of functions. Just by writing down the meeting results and gaining agreement on the written report, the parties will sharpen and make more precise their understanding of the agreement. If a disagreement arises later about how the issue was resolved, the writing not only may aid in resolution of the disagreement, but it also may tend to make the dispute less personal and more businesslike.
If the specific people administering the relationship change — and, they always do — the writing provides guidance for the new people on what was agreed. And, if the parties truly adopt the view that the contract is like a constitution governing their relationship, a written record of how prior issues were resolved can aid the parties in resolving future issues.
It is as if the written record creates a context, a body of common law, that can be used to guide (but not prescribe) future solutions. Indeed, we often recommend that the parties use something like Lotus Notes to create a database documenting matters resolved during contract administration.
Resolve Disagreements as They Occur
4. Do not let disagreements remain unsolved. The scenario starts harmlessly enough. An issue is identified, neither party is sure how to resolve the matter, both parties decide that for the moment the issue will be left unresolved, and each party intends in good faith to return to the issue to resolve it at a later time. Then a second issue follows the same path, and soon there is a list of a dozen or so issues that are unresolved. At this point, senior management becomes concerned, meetings are held to close the open issues, and it appears that the parties are back into the original contract negotiations.
Worse, the issues no longer can be resolved merely on the merits of each issue, but instead some issues get tied to other issues, there is a perceived need by both parties to compromise on certain issues, and neither party feels that the outcome is fair or that justice has been done. Repeated over time, this scenario results in the deterioration (or even total breakdown) in mutual trust between the parties.
The key is to avoid situations where multiple issues get grouped together; such grouping inevitably results in positional bargaining where neither side is satisfied with the outcome. Returning to the concept of contractual principles and the analogy of a constitution, if each matter is promptly resolved on its own merits, the parties are more likely to feel that individual justice has been achieved.
Practice Good Faith and Fairness
5. Apply the covenant of good faith and fair dealing. Many of our contracts contain an express covenant by each party of good faith and fair dealing. Technically, this promise is not required. In almost all situations, courts imply this covenant of good faith and fair dealing. Nonetheless, we think it important to make the promise express as a constant reminder to the parties that, unless both adopt this standard in all their dealing with each other, the outsourcing relationship is not likely to survive and certainly will not avoid an adversarial environment.
Too often we see situations in which one or the other party does not disclose all the facts, or fails to describe its objectives and intent in a straightforward and candid manner. While such game playing may be tolerated in other business situations, the outsourcing relationship is too fragile to survive unless discussions are open and truthful. If a customer is uncomfortable in describing tough issues to its supplier in the manner in which it addressed such issues internally with its own staff before outsourcing, the customer is not likely to have a successful outsourcing relationship. Conversely, if the supplier does not frankly describe all the factors influencing its decision making (including internal financial matters) with its customer, the mutual trust needed to make the relationship work will never occur.
While one could certainly add to the list of elements, closely following the five points listed above is likely to increase your chances for a successful outsourcing relationship and minimize the extent to which disagreements degrade into an adversarial environment.
Robert E. Zahler is a partner in the 280-person law firm of Shaw, Pittman, Potts & Trowbridge. The firm has represented numerous outsourcing customers in some of the most high-profile outsourcing transactions within the industry.
Lessons from the Outsourcing Primer:
- Structure and document a flexible relationship.
- Use the concepts created during contract development.
- Record decisions contemporaneously.
- Do not let disagreements remain unresolved.
- Practice good faith and fair dealing.