Part 2: Managing Conflict In Outsourcing | Article

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

outsourcing conflictIn Part 1 of this series, we described how disputes in an IT outsourcing agreement are inevitable and may contribute to the ultimate undoing of the engagement. Then we suggested a new approach to addressing and resolving disputes — in real time throughout the course of the agreement — which we believe will prove more effective than “traditional” means of resolution.

Our proposal is to establish a Real-Time Intervention Panel (R-TIP) at the commencement of the agreement to hear and resolve issues promptly as they arise throughout the term. The R-TIP is composed of dispute resolution professionals who are knowledgeable and experienced in IT and outsourcing and who are dedicated to the specific outsourcing agreement at hand.

Implementation of the Process

Implementation of the real-time dispute resolution process for any given IT outsourcing agreement follows certain steps, as outlined below.

Selection of Panels
At the outset of the relationship between the buyer and the outsourcing provider, the parties establish a mutually acceptable panel of neutrals. These are professionals in dispute resolution who also have experience in information technology and project management. All are highly regarded members of the technology and/or legal communities, and all have pledged to serve all parties to the agreement fairly and without bias.

All parties to the agreement collectively pay the compensation of R-TIP members; and the neutrals are forbidden from having any other business or financial relationship with any party.

Typically, each party to the agreement selects one R-TIP member from a pre-qualified roster of neutrals, subject to the reasonable approval of the other parties. Promptly, the selected neutrals then jointly select a third member, subject also to the reasonable approval of the parties.

The R-TIP and its individual members are specifically assigned to this outsourcing project, and they agree to make their services available as necessary throughout the term of the contract. All R-TIP members are expected to familiarize themselves with the parties, with the overall substance of the project, and with the relevant provisions of the outsourcing agreement.

Resolution of Disputes
When a dispute regarding the parties’ rights or obligations under the contract arises and it cannot be resolved through the good faith mutual effort of the parties, then either party may refer the matter to the R-TIP. The R-TIP promptly convenes an informal hearing at which the parties make presentations and take questions from the other party and from the R-TIP members. The hearing may be in person or arranged by the R-TIP via telephone conference, Web conference, or other electronic means.

The hearing is relatively informal with minimal restrictions regarding evidence; and the parties are encouraged to express their respective points of view and justifications. Being experienced dispute resolution professionals, the R-TIP members work with the parties to draw out the facts and understand the underlying issues, agendas, and other factors that may affect the resolution of the issues. Although the hearing is informal, the R-TIP nevertheless follows a structured approach under predefined rules to guarantee the fairness and objectivity of the process.

The Panel’s Recommendation
Following its review of all relevant information and input from the parties, the R-TIP issues a written recommendation. This may be a short directive to the parties regarding how they should move forward as to a particular issue, or it may be a more elaborate recommendation involving multiple issues.

The R-TIP’s written recommendation is non-binding.[1] However, the parties will have agreed in advance under the outsourcing contract (and in accepting the R-TIP process) that the panel’s recommendation will be admissible in any subsequent litigation, arbitration, or other formal proceeding regarding the issues addressed in the recommendation. Further, the parties will have agreed that submission to the R-TIP of any dispute arising during the outsourcing engagement is a condition precedent to commencement of any subsequent litigation.

Advantages of the Real-time Approach

The use of real-time intervention panels to hear and resolve disputes during the course of an IT outsourcing engagement provides a number of advantages.

  1. Fosters real problem resolution. The R-TIP model allows for more “accurate” resolution and therefore more equitable and long-term solutions than traditional means of dealing with disputes under the agreement. Because the R-TIP members are experienced dispute resolution professionals, and because the R-TIP hearing process provides a means for objectively sorting through competing interests and claims, the R-TIP recommendation much more closely tracks the actual facts and circumstances of the dispute than does a “resolution” that merely confirms the parties’ disproportionate bargaining power.
  2. Provides a forum. The R-TIP hearing offers a ready forum in which the parties may voice their positions to a panel of truly neutral professionals, providing them the opportunity to have their “day in court” without the need for a more formal, expensive, and time-consuming process. Presenting the relevant facts and circumstances in the setting of the R-TIP hearing allows each party to state its case in its own words and its own way, satisfying the basic need to be heard and taken seriously.
  3. Gives meaning to rights and duties. The rights and obligations of the parties under a long-term executory agreement only have meaning if they may be swiftly, equitably, and predictably enforced. The real-time dispute resolution process provides for swift and equitable enforcement of rights and obligations by either party under circumstances that are changing over time, without the uncertainty and potential imbalance of traditional dispute “resolution” methods.
  4. Supplements standard dispute resolution mechanisms. The use of real-time neutrals does not preclude litigation (although it makes it much less likely). Further, the inclusion of real-time intervention panels does not necessarily render dispute escalation provisions unnecessary; it may simply supplement them. Finally, the use of real-time intervention panels is not at all inconsistent with the subsequent submission of disputes to binding arbitration instead of litigation, should the parties determine that is the best next step.
  5. Accurately allocates costs. Once the parties are confident an independent panel will fairly and quickly resolve each dispute, there is no need to price in anticipated “costs” of dealing with such disputes, particularly by a party with less traditional bargaining strength. Outlays of labor and capital expense in anticipation of litigation or for other peremptory activities may be greatly reduced when both parties believe that disputes arising in the normal course of business will be dealt with expeditiously and fairly.

Proof of Concept

Other areas of business have successfully applied the idea of resolving disputes during long-term executory agreements through the use of real-time intervention by dispute resolution professionals. In particular, the large project construction industry, which depends routinely upon the implementation of long-term contracts under which disputes frequently arise among principals, subcontractors, and others, has been a leader in using panels of neutral intervenors to resolve disputes as they occur.

Dispute Review Boards
The key element in the construction industry implementation of the real-time intervention concept is the dispute review board (DRB). Prior to the start of construction, the owner and the general contractor jointly select a panel of three experienced and independent construction industry professionals to serve on the DRB. The Board meets with the parties and visits the job site periodically, especially in the early stages of the contract. Throughout the contract term, the DRB is on call to hear and resolve disputes that the parties cannot resolve themselves.

The direct costs of carrying out the activities of the DRB, including the fees of the board members, are typically shared equally between the owner and the contractor. Costs may also include monthly retainers or similar fees to insure the availability of DRB members on short notice as required by project contingencies. When compared with the out-of-pocket costs of dealing with disputes through binding arbitration or litigation, most DRB users have found this approach to be extremely cost competitive.[2]

Effectiveness of DRBs
According to the DRB Foundation, a trade organization supporting and promoting the use of construction dispute review boards, almost $7 billion of construction had been completed using DRBs since 1966. To date, no disputes submitted to DRBs had been litigated.[3] On 68 completed projects, aggregating more than $3 billion worth of construction, over 120 recommendations for settlement had been made by DRBs and accepted by the parties.[4] The Foundation claims that many of these disputes have been major, and that, without the DRB process, they would have resulted in litigation.[5]

What’s more, the Foundation believes that on most of the tabulated projects, the “mere presence” of the DRB itself was instrumental in avoiding additional disputes.[6]

In forecasting the effectiveness of real-time intervention panels for resolving disputes under long-term IT outsourcing projects, this use of construction industry DRBs provides an instructive model. Given the similarities in length of contract commitment, typical disparity of the parties’ bargaining power, difficulty of resolving major disputes without recourse to potentially destructive litigation, and desire of the parties for a forum in which to air their grievances, the DRB model seems a clear example of how the real-time intervention of dedicated dispute resolution professionals has the potential to save significant time and resources for the parties to long-term IT outsourcing agreements.

Lessons from the Outsourcing Journal:

  • Disputes during the course of an IT outsourcing engagement are inevitable and may result in the undoing of the agreement.
  • IT-experienced professional neutrals serving on Real-Time Intervention Panels (R-TIPs) can address and resolve conflicts before they blossom into deal-breaking disputes.
  • The real-time intervention concept has proven in other industries to be an effective means of avoiding costly litigation.

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].

[1] Of course, parties are free to agree to binding recommendations from the R-TIP. However, experience in other industries indicates that parties to long-term engagements view non-binding recommendations from a panel of neutrals chosen by the parties as sufficiently authoritative to effectively end disputes. (See Robert A. Matyas, et al., Construction Dispute Review Board Manual 87 (1996).)

[2] According to the Construction Dispute Review Board Manual, published by the DRB Foundation in 1996, direct costs for implementing DRBs in large construction contracts in general are “considerably less than 0.5 percent of the final contract price.” (Id. at 7.)

[3] Id. at 87.

[4] Id.

[5] Id.

[6] Id.

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