If it is because outsourcing contracts are not litigable in any way which is practically sensible, then what can be done to avoid getting into problematic situations and what should be done when the first warning bells begin to ring? If ever there was a case where litigators should truly become practitioners of dispute resolution this surely is it.
The symptoms
First the evidence — how many outsourcing disputes reach the courts? In the
The first was a dispute between Cable & Wireless and IBM on a global IT outsourcing agreement. The dispute was over the operation of the benchmarking process — a form of re-setting the price to keep it in line with market trends. The relationship was terminated by agreement before any final decision (other than a decision on the enforceability of a ‘must mediate before litigate’ clause) and the services returned in-house on an agreed basis.
The second was a more recent dispute between Powergen and Vertex with Vertex — the supplier — suing Powergen to seek an injunction that would have prevented Powergen from terminating the relationship. Again, this dispute is understood to have been settled with the services having been transferred back in-house.
Even in the two cases that have reached the
And yet all who are active in this area know there are many other relationships where difficulties emerge, difficult negotiations take place behind closed doors and relationships quietly and discreetly terminate.
A possible diagnosis
Resolving disputes without resorting to litigation or arbitration is accepted as a desirable aim but there are particular reasons why this is all the more necessary here.
One is the time it takes to find an alternative provider — and the dependency on the current supplier for both the services themselves and assistance in transferring, given that the employees, know-how and data required for a critical part of a business are controlled and understood by the current supplier. The timescales required for a successful procurement of an outsourcing relationship are far from short.
Those required for a second generation outsourcing contract — entering into and implementing a new agreement with a subsequent supplier — are longer still, even when all is well and there is full co-operation rather than in the middle of a major disagreement. Transferring services back in-house saves some time but requires enough knowledge to have been retained to make this a success — and the existence of a dispute usually means there are additional problems to be overcome, requiring greater expertise to achieve and reducing the chance of this being a speedy way to solve problems. Litigation is a dangerous game in that situation.
The second is that the two parties to a contract are engaged in a relationship in which their day-to-day activities are fundamentally enmeshed with each other. There is no question of one party simply showing up, ‘doing’ the services ‘to’ the other party, going home and expecting its money.
Any dispute that does emerge will be very grey, rather than black and white, with extensive mutual finger-pointing where no-one has particular certainty in the outcome. As customers outsource multiple touching and overlapping functions to different suppliers, the potential for more greyness and finger-pointing increases and the need to find a better way to proceed becomes greater.
In combination, you have a customer who cannot afford its services to deteriorate (rightly or wrongly it already
feels let down), a mess that will be difficult to unscramble via the witness box and the need to plan and implement a smooth exit and service transfer — which certainly will not be helped by a bitter dispute.
In fact, it is probably more of a surprise that two cases have emerged, rather than that there is not more.
Managing expectations
‘Nothing can be done’ is not the most positive of messages. Fortunately, there are simple (though underused) management approaches which reduce the risk of problems and assist in their resolution. This view seems to be increasingly recognised and accepted — workshops on this area are the current runaway favourite in our client seminars.
Expectation management — deals often reach the stage where ‘things just aren’t right’, the customer is dissatisfied but upon legal analysis breaches seem minor and, where they exist, are tied up in the finger-pointing mentioned above. Everything is wrong with satisfaction, little is wrong with contractual performance, litigation is not a solution. This is best treated from the outset by avoiding overselling of the transaction internally and stretching of the business case to justify a decision that has already been taken — the worst offender usually being the customer not the supplier. With a more realistic view of what has actually been contractually promised the level of ‘failure’ reduces.
Contract management
Having managed expectations and contracted for them, the key is to manage the contract to achieve this well. This can be a tough message to hear but the person who used to run the function may not necessarily have the right skill sets to run the contract. In many cases we see a change in this role six to 18 months after signing. With that, day-to-day knowledge of the contract can be lost and a brand new individual runs what they think the contract should be or are told it is — especially if the contract has been quietly abandoned in a drawer somewhere.
Expectations become misaligned from reality, contractual mechanisms that could be used are quietly forgotten about and the contract is not kept up-to-date. By the time the deal reaches the critical list the written contract and reality have diverged so far that it is hard to use the contract to address the problem. Good management of the actual contract, not a hypothetical contract, is required.
Risk or problem management
A small problem that is ignored might fortuitously disappear. However, usually it does not and, festering nicely, grows quietly from a small to a larger problem. Should the unthinkable happen and the contract become only the third one to appear in the
Contractual mechanisms such as escalation, mediation, audit, benchmarking and temporary step-in were included because they can be useful. Their use can sometimes be seen as creating a dispute but the reality is that the dispute was already there. Recognising the problem and treating it early with some milder medicine usually results in a better prognosis. It reduces the chances of needing the shock treatment of litigation which, on the evidence to date, is more likely to kill than to cure the relationship.
Richard Hawtin is a partner and Jonathan Westwell a senior associate in Baker & McKenzie’s
