Without dedicated and ongoing governance, carefully negotiated and documented rights in an outsourcing contract run the risk of not being enforced, and the relationship that develops may look nothing like what you envisioned.
IT organizations put great focus into drawing up their outsourcing contracts, but those agreements alone do not guarantee satisfactory outcomes. Attorney Brad Peterson has seen it time and time again. “Time and money are spent on drafting the contract—often a substantial amount of money. And a tremendous amount of potential value is created in that contract,” says Peterson, partner in Mayer Brown’s Chicago office and leader of its technology transactions practice.
But then the engagement is handed over to a well-intentioned supplier management team that wasn’t involved in the contract and often can’t make heads or tails of what’s in it. “It’s understandable. Contracts are complex and confusing, and relationship managers are selected based on their knowledge of technology or their skill in building relationships, not on their knowledge of how to run a contract,” Peterson says.
Those professionals managing the engagement often don’t understand how their conduct or communication can impact their company’s legal rights, which can cause a number of problems should disputes arise. “The result is that the benefits for which you negotiated hard and are paying great amounts may be lost,” says Peterson. What’s more, disputes may be more difficult to resolve, and those that aren’t becoming costly to litigate, requiring interviewing dozens of witnesses and sorting through thousands of emails to figure out what has happened and who is responsible.
The real value of IT outsourcing is achieved through active governance—not only of the projects in play, but of the communication and interaction between customer and provider. “Protecting the value of the contract after the ink is dry is about motivating suppliers to deliver on their promises,” says Peterson, “and preserving remedies for failure.” Peterson and Robert Kriss, litigation partner in Mayer Brown’s Chicago office recently share some best practices for governing the IT outsourcing contract once the ink is dry.
1. Control your communication
If someone on the customer side isn’t already designated in the contract, send a notice to the service provider at the start of the engagement identifying one employee authorized to speak on behalf of the customer. IT service providers are savvy. If they want to push a change in approach or document through, they will find the employee most likely to sign off on it. By designating one spokesperson, “You avoid the inadvertent but unfavorable change that occur to your contract when lower level people are approached by the provider to approve a procedural manual, for example, that ends up changing the obligations of all the parties,” says Kriss. “That makes it clear up front and in writing who represents and can bind the customer. It’s just good for the relationship and will result in fewer misunderstandings.”
Designating a customer representative enables the IT organization to control messaging, better adhere to the contract, and avoid situations where the communications or conduct of less informed personnel create ambiguity and uncertainty. And when disputes arise, you’ll only have to review the email of the one person whose communication has legal relevance versus dozens.
2. Require the provider to log requests and complaints
In many outsourcing situations, the only obligation of the customer is to pay the supplier. Not so in IT, where engagements required the customer’s contribution or collaboration. “The customer will tend to have obligations, and if the customer doesn’t perform those obligations, those may be an excuse for performance,” Peterson says.
However, should the IT outsourcing provider have a request for the customer or raise an issue of customer performance that it says excuses one of its obligations, it’s important to compel the provider to write the issue down and keep a log of all such problems.
Require a log showing requests and responses on contractual matters.
3. Clarify cloudy terms early
It’s important to keep the written record of the engagement as clear, complete and accurate as possible. When there are projects or situations that the contract does not explicitly address, the customer should clarify them early on and in writing. “That’s the best time to reach agreement because the parties are most open to cooperation at that point,” Kriss says.
If the details of a more granular project isn’t specified in the main agreement, write down a summary of what each parties responsibilities are and have everyone sign off on that before embarking on their work. “If there’s clarity in the written record, the likelihood of the situation getting worked in the context of outsourcing relationship is much greater,” says Kriss. “It matters so much.”
4. Send breach notices right away
Peterson sees customers who endured problems in their outsourcing relationships for years, but had no record of them because they thought sending notices to the provider would create tension or contention. That’s a mistake. Customer should send a written notice of breach or failure the very first time it occurs—and every time thereafter. “This needs to be a standard best practice that a company always uses,” Peterson says. They need not be combative, but rather polite and factual. “If you can establish that pattern, particularly with a single person comfortable sending these notices that are clear and useful, you will establish a much better record,” Peterson says.
All customer employees interacting with the service provider should be instructed to notify the designated customer representative if they think the service provider may have breached the contract. The designated representative can check with legal counsel to decide whether to send a breach notice. Without this written record, an IT organization can lose its rights to terminate for cause, for example. “A judge, jury, or arbitrator might well conclude that if a breach was not important enough to merit a written request to cure it shortly after the breach occurred, the particular breach should not later be considered alone or with other breaches as a sufficient basis to terminate the agreement,” Peterson says.
5. Never do the provider’s work before demanding the provider do it
When a project is faltering — the provider is missing milestones or a system is underperforming, the customer may be tempted to jump in to get the job done. However, if a customer takes action without warning the service provider in writing that it intends to do so and charge for the resources, the customer is likely to be stuck with the bill.
IT leaders should never assign their personnel to perform work that ought to be completed by the service provider without sending a notice of breach and providing an opportunity for the service provider to fix the problem. “That’s just fair,” says Kriss. “And fair is what matters in the context of dispute resolution.” The notice should state that if the supplier does not improve performance by a specified date, the customer will take steps to address the problem and will charge the provider or reduce its payment to cover the cost. Providing an estimate of those costs will support the case for reimbursement if the dispute is ever litigated.
6. Look for win-wins
An IT service provider at some point is likely to offer a waiver on a credit due for a breach and, in many cases, that is an opportunity for the relationship manager to trade that waiver for some future assurances. They might trade a performance credit waiver for a larger assurance on a future milestone or a root cause analysis of the breach and demonstration that the issue has been fixed. This approach “increases the change of successful outcomes, and you build a relationship built on trust and mutual understanding,” Peterson says.
7. Talk to legal counsels early—and often
If it isn’t clear already, creating a clear and written record of the engagement is important to preserving an IT organization’s contract rights. And “lawyers have an eye and ear for evidence and how documents will play in front of a judge or jury,” says Kriss. “They can be very helpful in essentially creating evidence helpful to the resolution of the matter through settlement or dispute resolution.”
Lawyers can find rights that are not apparent on the face of the contract and help the customer resolve issues. It may make sense to call a lawyer when there is a potential dispute involving a breach of the contract, when the provider asks for new charges for what appears to be in-scope work, or when modifying the master agreement, for example.
Clarity is the goal of contract governance
The goal of contract governance is to provide greater clarity. “With greater clarity comes greater certainty as to how a dispute will be resolved,” says Kriss. “That clarity increases the likelihood the parties will be able to resolve it and avoid litigation. If for some reason the cant, the record will be clear and reduces the cost of dispute resolution.”
These suggested governance practices are relatively easy to implement, says Peterson, and, if thoughtfully implemented, should not antagonize the service provider but rather reduce misunderstandings and keep the relationship on track.