The key objective to structuring an outsourcing relationship is for the vendor and supplier to jointly identify what their objectives are, or in other word what they want to achieve. For example, if the customer is just interested in cost savings, then they want a very specific contract that will lock in the price. On the other hand, if the two companies are discussing building a strategic relationship then the two sides are going to have to create a less specific arrangement because the relationship is going to change over time.
“The two sides might have an idea what their goals are, but they want to work together to develop the idea over time,” says Robert Zahler. “By definition they are going to need something less specific and it is going to look more like a roadmap that tells the direction that the relationship is headed.”
Regardless of whether the two sides are going to write up a specific contract or a general relationship there is no excuse for sloppy relationship structuring. Often, when parties discuss a partnership or an alliance they are unsure where their course will take them, so they muddle ahead and worry about structuring a relationship afterwards. “That hardly ever works because either one party doesn’t spend enough time or resources to come up with ideas, or they come up with something very good and useful, but the other party wants to take more of the rewards. This happens when there is little or no structure regarding how the parties are going to precede,” Zahler says.
One of the things these relationships often need is a business plan – what it is the two sides are going to do. Zahler recommends that the contract have the initial draft of the business plan attached to it, or include an outline of the topics that are going to be covered in the business plan, along with a specific schedule that tells how and when the business plan will be finalized. Also include who will approve it. Once it is approved the parties must then act in accordance with the business plan. So even if the client doesn’t know everything it needs to figure out what the relationship will eventually look like, the customer needs to develop a structure that tells how the client and vendor will get there and when.
Getting too Prescriptive
The contract can be too prescriptive, and that is something that needs to be avoided. If the environment that the parties find themselves in is different than what was assumed at the time the contract provisions were written it could get messy, Zahler says The parties find that the rules don’t apply or they don’t apply fairly to what was anticipated.
“In either case the parties begin doing things differently than what is in the contract,” Zahler says. “And so it is just as bad as muddling through because the companies have written something too specific and once the parties are outside what was contemplated, the specifics don’t serve any purpose anymore. This rarely leads to a lawsuit because the partnership didn’t work. What tends to happen is that the parties throw up their hands and spend their time doing something else. They literally stop supporting what the venture was intended to be.”
The Obligations of a Partnership
A lot of outsourcing deals are long-term service contracts. Those deals are fundamentally different than the purchase of a good, Zahler says. “Typically when a company buys a product there is a specification and either the product conforms to the specification or it doesn’t, so either it is accepted or rejected. In a service relationship there is also a specification, but it is called the scope of work. It is less defined though and is ambiguous and flexible. And it isn’t usually a one-time delivery of the service. “In that context the customer is just as responsible as the vendor for making sure the service is right.” He says. “Customers that sign the deal and assume that they don’t have to worry about it anymore almost always have an unsuccessful relationship.”
Zahler adds that he sees a lot of customers almost defaulting on the management of the relationship, or in other words, not spending near enough time managing the relationship. When that happens people get very defensive and assume it is always the vendor’s fault, and the reality is that they haven’t spent enough time and don’t devote enough resources. So when things go bad the finger pointing starts.
The contract should never be brought out for the purpose of throwing it in the face of the vendor to show that they are not complying, he says. On the other hand it is worth bringing out the contract for the two parties to mutually read it together to see what was intended and what the objective was. Almost always the parties who created the contract intended a fair result and when a company pulls out the contract it is because they are trying to back away from an essential element that they are committed to do. So the customer and the vendor should jointly read it together because it provides a roadmap. Companies get in trouble when they never look at the contract, because they end up doing things that were never contemplated or anticipated by the contract. And if there is a disagreement later, the contract doesn’t provide any real guidance on how to resolve the matter.
“That doesn’t mean that the parties have to slavishly follow it,” he says. “If the parties agree that something intended in the contract no longer makes sense then that is perfectly OK. But both parties need to consciously know that they are doing something different than what was anticipated in the contract and agree to do something different. And then they should document what they did so that the parties know that they have agreed to do something different.”