Managing Conflict In Outsourcing | Article

The Application of Real-Time Dispute Resolution in IT Outsourcing Engagements

conflict in outsourcingAs soon as the ink is dried on a long-term information technology (IT) outsourcing agreement, the parties’ interests begin to clash. Although buyers outsourced for many different reasons, they are always seeking to minimize the expenses from an outsourcing engagement while simultaneously maximizing the use of the service provider’s expertise, facilities, and resources. The outsourcing provider, on the other hand, seeks to maximize profit from the engagement while minimizing the expenditure of time, labor, and resources.

This inherent conflict of interest in the typical outsourcing engagement is exacerbated by several other factors. First, outsourcing agreements are, by their very nature, imperfect. During the drafting stage, it is impossible for counsel and their clients to anticipate every possible situation that may arise during a long-term outsourcing engagement, let alone determine in advance how to control or manage each one. Consequently, as with many complex long-term executory agreements, contract language is couched in generalities and vagueness, with the parties trying to address overall concepts while seeking to protect their rights and limit their obligations in many as yet undetermined situations. There will necessarily be tension between the precise, technical reading of such a contract and the purpose-based interpretation of it at a later time.

Second, change is constant in the world of IT and IT outsourcing engagements. As a project progresses and circumstances change, the buyer’s wants and needs continue to evolve. Shifts in labor markets and the availability of special expertise along with the long-term staffing of a project may affect the personnel requirements and interactions of both buyer and provider. The economics of the project for either or both parties may change significantly, especially over a long engagement.

Most importantly, the IT environment itself is a world of constant change. Hardware churn is reasonably predictable, but breakthrough technology, of the sort that may seriously impact the underlying rationale or structuring of a long-term outsourcing project, is not. Perceptions of value change over time with shifts in markets, business opportunities, and corporate objectives; and such changes in perception may result in significant upsets in an established outsourcing program.

The natural conflict of interest between an outsourcing buyer and an outsourcing provider is made more acute by the parties’ expenditure of large sums of money over long periods of time. With so much at stake, the parties find themselves encouraged to take extreme positions on contestable issues, and their behavior may be affected in unforeseen ways that are related not to technical or project issues but rather to concerns with underlying (or overarching) fiscal, management, or corporate concerns. The result is a further divergence of interests between buyer and outsourcing provider and a hardening of the relationship, which harm the smooth functioning of the program.

Finally, the most important factor causing “natural” clashes to blossom into insurmountable performance obstacles is the parties’ inability to enforce their respective contractual rights and obligations throughout the executory phase of the outsourcing engagement. Litigation is too slow, expensive, and contentious for use in an on-going relationship of this kind, and many of the disputes that arise during the term of the engagement are simply not big enough or important enough to warrant such a drastic and unpredictable step. On the other hand, most contractual remedies built into the typical outsourcing agreement are only meaningful in the event of complete disentanglement; and many — if not most –disputes do not rise to the level of justifying complete disentanglement from the project.

We suggest an alternative approach to resolving — or at least meaningfully addressing — these kinds of disputes and difficulties–the ones that naturally arise during a long and complex outsourcing project but are not reason enough to cripple the entire enterprise. We present a new paradigm for dispute resolution during an outsourcing agreement; one which we believe will save time, reduce costs, and alleviate the frustrations resulting from the naturally occurring factors described above.

Traditional Means of “Resolving” Disputes

Disputes inevitably arise in the course of long-term and often complex IT outsourcing engagements. These may result from a combination of:

  1. the inherently clashing objectives of the buyer and the provider, as reflected in the sometimes intentionally ambiguous language of the outsourcing agreement;
  2. the parties’ different views of the effects of continual change in the IT landscape, including shifts in labor markets, shifts in project economics, changes in the IT marketplace itself, unforeseen breakthroughs in technology, and changes in the parties’ own perceptions of value under differing circumstances;
  3. an increasing divergence in viewpoints and uneasiness of the parties as large amounts of money and resources are spent and as other pressures, perhaps unrelated to the outsourcing, are felt by the responsible individuals; and
  4. the lack of any meaningful recourse under the agreement for disputes that may be very important but do not jeopardize the entire project.

Traditionally, the “resolution” of such disputes as they arise during the executory phase of an IT outsourcing agreement has been very much a function of the leverage of the parties; the dispute generally gets “resolved” in favor of the party with the greatest economic power. In the case of an outsourcing provider with cash-flow concerns, for example, the buyer may take advantage of the provider’s (perhaps temporary) weakness to exert pressure for more favorable terms on change orders or to extract promises of accelerated delivery milestones. Conversely, an aggressive provider may threaten to revise some resource allocations on the engagement that it knows the buyer is particularly satisfied with in an effort to enforce more favorable interpretations of specific contract provisions. In extreme circumstances, one party or the other may even raise the specter of publicizing the existence of a dispute if the matter is not resolved in its favor.

As the circumstances of the project change and shift over a long-term engagement, and as the fortunes of the parties ebb and flow relative to each other, the contract-based rights and obligations of the parties become secondary to the reality that the one with the economic and business ability to impose its will on the other will prevail. Over time, this lack of a contract-based dispute resolution mechanism may even impair the effectiveness of outsourcing as a marketplace alternative. Participants in such arrangements may become disaffected as they see the contract rights for which they bargained rendered meaningless because they cannot be effectively enforced.

Analyzing the problem in practical terms, a party who knows its contractual rights are unlikely to be enforceable throughout the executory phase of the agreement has a strong incentive to price the “costs” of such one-sided disputes into the agreement in advance. Using only its best guess as to the expected frequency or severity of such disputes throughout a project yet to be experienced, the party will likely factor in a substantial pad to cover this concern, resulting in artificially skewed pricing of the agreement and largely inefficient allocation of dispute “resolution” costs.

A New Approach

We believe there is a better way for disputes that inevitably arise under long-term IT outsourcing engagements but which are not “deal breakers” to be fairly and genuinely resolved. Integrate into the agreement itself a mechanism for dealing rationally with such disputes as they occur, in real-time, so that both parties can allocate energy and resources to the business tasks at hand. This avoids difficulties and festering resentments.

We propose that the parties establish at the time of contract formation a panel of neutral dispute resolution professionals who are experienced and versed in IT and IT outsourcing arrangements. The charter of this panel, which is assigned specifically to the contract at hand, is to address and resolve issues of conflict and disagreement as they arise throughout the term of engagement. We refer to such groups as Real-time Intervention Panels, or R-TIPs.

The use of an R-TIP brings a number of immediate and tangible benefits to the parties in an outsourcing agreement. In Part 2 of this two-part series, we will describe in detail the implementation of the real-time resolution process, the specific advantages it provides for IT outsourcing, and an interesting historical measure of its potential effectiveness in saving time and resources and in completing projects successfully.

Lessons from the Outsourcing Journal:

  • Traditional IT outsourcing contracts are often structured so that neither party can deal with changes during the course of the agreement. How do you deal with breakthrough technology?
  • Litigation is too slow to solve disputes. A better way Integrate into the agreement itself a mechanism for dealing rationally with such disputes as they occur, in real-time, so that both parties can allocate energy and resources to the business tasks at hand. This avoids difficulties and festering resentments.

Matthew T. Furton is a member of the Illinois bar and partner in the law firm of Gordon & Glickson LLC, where he concentrates in litigating and arbitrating disputes arising from outsourcing, licensing, implementation, distribution, and financing agreements in the information technology industry. He can be contacted at [email protected].

Paul Bent is a member of the California bar, a mediator, computer scientist, and principal in the alternative dispute resolution firm of Real-Time Resolution. He can be contacted at [email protected].

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