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.