Worldwide: Troubled Outsourcing Arrangements: Strategies and Tips for Managing Difficult Issues

Originally published 28 July 2009

Keywords: outsourcing, outsourcing customers, governance, disputes, outsourcing relationships

Overview

There are a number of practical steps that outsourcing customers can take when an outsourcing relationship develops serious problems that cannot be solved through normal governance processes. By using a step-by-step framework for managing disputes, customers can get their outsourcing relationships back on track. Alternatively, they may use these steps to pursue other alternatives (such as removal of affected scope) in an organized, minimally disruptive manner.

How Did We Get Here?

Problems develop in outsourcing relationships from a variety of unfortunate circumstances, such as: (1) mismatched expectations between the customer and the supplier; (2) changes that were not anticipated at the time of contract formation; (3) competing internal goals of the customer (for example, transformation versus cost savings); (4) poor performance by the supplier; (5) value not being delivered by the supplier; (6) below-market supplier compensation; and (7) mistakes of fact in contract formation. Many of these problems can be managed and resolved through a dispute resolution process that supplements governance. Some more serious problems may require assistance through more formal dispute resolution procedures.

Immediate Steps: Managing a Dispute While Day-to-Day Business Must Continue

When a dispute becomes serious, there are a few steps you must take to protect your company:

  • Consult an attorney regarding attorney-client privilege, which protects confidential oral and written communications between lawyer and client. Subject to certain limitations, the privilege is intended to exclude discussions between lawyers and clients from discovery by the other party, and from introduction into court. Your attorney can help you to issue guidelines to your team about what documents should be marked as privileged, and what practices should be followed to protect and maintain that privilege.
  • Put your consultants under an appropriate engagement letter in an effort to protect privilege. The letter should create a new engagement and provide that the consultant is working at the direction of counsel and is engaged in assisting with analysis of the dispute.
  • Make sure that you follow the dispute resolution process spelled out in your contract (for example, escalate issues through the governance process, provide required notices, and observe any time frames required to preserve your contractual rights).
  • Create a customer dispute control group that will interact with the supplier regarding the dispute. This control group takes on the job of managing the dispute, and relieves those who are trying to manage the day-to-day affairs in the outsourcing relationship. Customer and supplier representatives who are managing the day-to-day services can then interact more constructively on those services, without the direct tension that resolving a dispute can bring.
  • Clamp down on any dispute-related communications (such as through email) occurring outside the control group.;
  • Institute a customer-only daily or weekly checkpoint call to give day-to-day managers guidance on how to proceed so there is minimal disruption to business.

In addition to these unilateral actions that a customer should take, you should consider requesting that the parties enter into a "non-use" agreement or a "standstill" agreement. Non-use agreements prevent settlement discussions from being used in future litigation or arbitration. Standstill agreements are similar to non-use agreements, but they also "stop" time periods from running, and preserve the parties' rights while they work to resolve their disputes. These agreements can permit more open and constructive communication between customer and supplier during dispute resolution.

Framework for Managing Disputes

After you have completed these initial steps, you will need a proven method for managing and resolving the dispute. The following framework outlines a series of actions to take before you engage in further discussions with the supplier. These steps will ensure that you properly understand the scope of the dispute and will help you reach the best possible outcome for your company. All of these steps should be completed under the supervision, and at the direction, of your legal team to best preserve attorney-client privilege, and to best define your rights and obligations.

Frame the Issues

Step one is to identify all open issues and disputes in the relationship, and gather relevant facts and data. Investigate and verify the facts you have been given by interviewing employees, and by organizing a written record of the dispute's progression as documented in emails, notes from governance meetings, correspondence and other materials. The complex subject matter of many outsourcing deals can result in information gaps that you will need to fill before proceeding.  Circumstances may have changed significantly since the contract formation, so make sure that you have current information.

After gathering all the relevant information, develop answers to the questions that really matter:

  • Does the dispute create a serious monetary or operational impact on your business, or is it just a source of irritation that can be tolerated?
  • Even if the dispute does not seriously impact business today, could it set a damaging precedent for future issues?
  • How soon must the dispute be resolved?

After going through this process, state the issues in writing, and make sure that your customer team agrees with your statement of the issues.

Assess the Issues

After you have defined the issues through the framing step, you need to assess each issue to ultimately develop your position. Review the agreement and evaluate your strengths, weaknesses and contractual remedies. Remedies may include termination, litigation, arbitration, partial termination, damages, indemnity, injunctive relief or some combination of these steps. Review the parties' positions in any similar (or related) disputes. Identify disputes that will be harder to resolve because they are more important to one or both sides.

Before escalating any issue, you should evaluate the "value" of the dispute in comparison to the value of the outsourcing agreement as a whole.  Monetize each matter in the dispute and assess whether it is worth spending additional time and resources to resolve.  Some issues may be conceded or "traded" for an issue that is more important to your company.

Determine where the customer may have leverage to encourage a favorable resolution. Many outsourcing agreements allow customers to in-source or re-source work to other providers, which can create effective leverage in discussions with a supplier who wants to keep the work. Determine whether the supplier's behavior is the type that is excluded from contractual caps on liability (willful misconduct being one example) and how that might influence the supplier to cooperate in a resolution. Consider exercising rights that you have by contract but that you have not exercised, as these may spur constructive changes. Examples include customer audit or benchmarking rights.

You also need to understand the supplier's leverage points. For example, the supplier could reduce the quality or timeliness of service without committing a breach of the contract. Improper withholding of invoiced amounts could trigger supplier rights under an agreement to require escrow of disputed charges, or even to terminate for non-payment under certain circumstances. An understanding of the economic/strategy drivers behind the supplier's position is vital to a full grasp of the situation. In particular, it is important to assess whether the supplier is performing at a loss, because that will be a key driver of its negotiating positions.

The final step in the assessment process is to write a Customer Position Paper. This paper should state (1) the framed issues, (2) the customer arguments and leverage points, and (3) the supplier arguments and possible leverage points. The Customer Position Paper should also evaluate the strengths and weaknesses of the customer's positions, and prioritize the issues based on their value and the business goals they impact.

Define a Successful Outcome

With the Customer Position Paper in hand, the next step is to determine the outcome that you want to achieve in dispute resolution. This desired outcome must take into account the relative strengths, weaknesses and business priorities that have been defined in the assessment phase. Your contracting team (including your attorney) should develop a Term Sheet that proposes how to resolve the issues in accordance with your desired outcome. The Term Sheet process is somewhat like the process of contract negotiation. You must remember your desired ending point and structure a Term Sheet that allows room for compromise and movement on issues so that you end at or near your desired outcomes on the issues that most matter to your company.

As part of the Term Sheet, to better guide amendment or restructuring discussions, classify the agreement terms and schedules based on how much change (if any) they will need. Potential classifications could include:

  • "Remain the Same" (no changes necessary)
  • "Refresh/Refine" (such as list schedules to be updated)
  • "Renegotiate/Restructure" (where negotiated solutions or changes need to be made in the contract and schedules)
  • "Remove through Termination" (for example, where scope will be removed, and the contract must reflect that scope change).

In putting together the Term Sheet, it is important to remember that for many disputes, the party "at fault" is not always entirely clear. If a customer approaches every issue as if the supplier is completely wrong, or attempts to put every financial burden associated with an issue on the supplier, it may not solve the disputes and problems in the long run. A bad (uneconomical or impractical) deal for a supplier will ultimately become a bad deal for the customer. The supplier will not, or will be unable to, perform, and the customer will not achieve its business goals. When that occurs, both parties possibly face a lengthy and expensive dispute resolution.

Plan the Negotiation

Develop an overarching Negotiation Plan, distinct from the internal Customer Position Paper discussed previously, that will govern discussions with the supplier. First, establish the process to be followed for dispute resolution (similar to the negotiation process used to enter the deal originally), and detail the time frames for resolution. Create a meeting plan with dates, topics, participants and meeting objectives. Map the desired communication points between customer and supplier (which may vary depending on the issue). Without compromising negotiation strategy, if it is possible to state the desired end result with the supplier (such as amendment to the contract, termination of the contract or another solution), make that result clear to the supplier.

Engage

Having followed the preparation steps listed above, your team should now be well prepared to engage the supplier in dispute resolution discussions. You should share a copy of the Term Sheet and the Negotiation Plan with the supplier. Solicit feedback and comments from the supplier and modify the Term Sheet and Negotiation Plan as necessary. Come to agreement on the plan, especially regarding changes to the agreement and schedules, and determine (if possible) what would be a mutually successful outcome. Ultimately, when you come to agreement on the Term Sheet, the dispute is well on its way to resolution.

Conclusion

Overall, customers need to remember that business goals should drive dispute behavior, rather than dispute behavior driving the business outcome. In "escalated" executive dialogue and mediation, the parties define the issues and control how they are resolved. In arbitration or litigation, judges or arbitrators, along with litigation counsel, define the issues and control how they are resolved. There are disputes where litigation or arbitration may be the only practical means of resolution. In outsourcing deals, however, where the parties have to work together cooperatively for many years, solving disputes by negotiation rather than litigation or arbitration is by far the better path. Following the framework approach set forth above helps customers identify their business goals, sets the framework for proper behavior before and during negotiations, and defines an effective path for ultimate resolution of the dispute.

Learn more about our Business & Technology Sourcing practice.

Visit us at www.mayerbrown.com.

Mayer Brown is a global legal services organization comprising legal practices that are separate entities ("Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Copyright 2009. Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions