It can be a common scenario in distressed IT projects. When issues occur, delays creep in and costs escalate, tempers can easily get frayed. Unless the cause of those issues is diagnosed early and a solution proposed, it can affect the relationship between the parties and erode the faith that once existed.
In one example, an organisation had de-merged from a larger parent, but the contracts had been novated without change. The operational separation of services had not been going well and the business was giving the CEO and CIO a very hard time. Jobs were on the line if recovery was not seen to be rapid and effective. This led to the CIO wondering whether matters were ever going to be resolved, or whether he should terminate.
Experienced lawyers will know that one should tread very carefully around termination. Terminating without valid grounds could amount to a repudiatory breach of contract, which will be a quick route into an expensive dispute. Therefore, before any irretrievable steps are taken, it often pays dividends to pause and to consider what is really going wrong. This is where independent expert assistance can prove invaluable. An expert consultant can bring operational experience of distressed projects to complement any legal guidance. A fresh pair of eyes may also see things that the project team may have missed and find solutions that no-one has thought of yet.
Feasibility
In such a situation, the best starting point is often the contract itself, particularly to get an understanding of the dispute resolution and termination clauses. Then the service schedules. Is the disputed area of performance a contracted service? Some clients think a service should be provided, without it being specified or paid for. Such a situation needs amendment of the contract and is not discussed further here.
The dispute resolution provisions may well set out a contractual mechanism for the agreement and implementation of recovery actions, to get a project back on track. Such a plan may for example be badged a “correction plan”, a “rectification plan” or a “remediation plan”. Whatever it is called, the purpose of such a plan is to help the parties to diagnose what is going wrong on the project, to agree steps to rectify matters and to establish measures and targets to ensure that recovery is achieved. It may also present a route to termination if the plan cannot be agreed or is not followed.
When recovery actions are being delivered, there can be a painful delay between intervention and response. The nightmare in a distressed service is for the customer to pull the plug when the right things have been done and results are just about to be seen. It should always be the baseline assumption that a recovery plan has a chance of succeeding and there needs to be commitment by both customer and supplier to supporting actions. This is the ideal. A short and confident intervention has every chance of getting a distressed project back on track.
In the case of our CIO who was under pressure, this was largely the course taken. Diagnosis showed that the underlying business-as-usual service was working well. The project manager for the demerger was not up to the job and was moved on. Governance was inadequate and was greatly enhanced. One service was hopelessly under-resourced and was accumulating an ever-growing backlog of unfulfilled requests. It needed properly designed tooling, a sensible plan, and the CIO to step back and give it a reasonable chance to deliver whilst explaining to the business. That worked. Stage two, once faith had been restored, was to establish a sensible contract that suited the needs of the de-merged business.
However, without proper oversight and effort, it can be all too easy for a recovery plan mechanism to escalate a dispute rather than resolve it. In another case, a supplier had taken on a desktop refresh project for an organisation which had an IT estate that had been heavily tailored by the incumbent supplier over many years. When the new supplier originally pitched for the job, it had not appreciated quite how complex and integrated the customer’s existing systems were, meaning that when the project started it quickly ran into problems, with delays and costs escalating rapidly.
These spiralling costs and unexpected delays led to the customer seeking to trigger a contractual correction plan mechanism, with the resulting plan going through numerous (but rejected) iterations. Ultimately, the customer elected to terminate the contract for a so-called “correction plan failure”. However, it appeared that it did so without sufficiently evidenced justification, meaning that its purported rejection of the correction plan was questionable. This then led to an expensive and hard-fought dispute over whether the customer had valid grounds to terminate.
Steps to Resolution
When properly managed, a contractual recovery mechanism can provide a perfectly viable route to a satisfactory outcome, even if that outcome is termination.
In another case that the authors worked on together, a customer had all but lost faith in a supplier to deliver a solution with the required functionality and in anything like the cost and timescale that had been agreed at the outset. The prospect of termination was quickly looming.
Having analysed the contract, it was noted that there was provision for a rectification plan and an obligation to give the supplier a fair opportunity to recover. However, for such a plan to have any prospect of success, expert assistance was needed on what the customer should require in the plan, what targets should be set and what standards and measures would assure achievement.
It was necessary to give the supplier a demanding but reasonable target to aim at and to work within the contract’s dispute resolution terms. A literal reading of the contracted approach indicated that a commonly encountered risk would arise, as it had in previous unsuccessful attempts between the parties. This was that the customer’s requirements would not be fully understood by the supplier, and thus the two would get into an unsatisfactory spiral in which each iteration of the plan missed what was really wanted, sapping energy and cost. The suggested approach therefore involved a liberal reading of the contractually defined mechanism, in which the supplier would first produce a high-level approach and “outline recovery plan” that would be reviewed in a workshop with the customer, before being refined to deliver a detailed plan to be implemented (the “detailed recovery plan”). With the benefit of both legal guidance and expert technical assistance, the customer was able to put forward such an approach to the supplier.
The proposed approach gave the customer’s senior management comfort that either way they would achieve a viable outcome: either in the form of a re-energised project with a clearly defined plan and agreed targets, or by exposing the real cost, timescale and effort that would be needed to get the project to completion. From the supplier’s perspective, the opportunity to get to the real root of the issues was also appreciated. They had been having a thoroughly unpleasant time, haemorrhaging cash so the opportunity to bring clarity and focus to where the project was headed, and ultimately resolve the impasse and successfully deliver the contract, was gratefully received.
The initial workshop was seen as decisive, fair, and providing an achievable high-level approach. The customer’s project manager had been armed with clear guidance on what should be expected of both the outline rectification plan and the detailed rectification plan. The relationship between the two plans was also laid out.
Following the initial workshop, the supplier submitted their outline plan together with supporting artefacts. This was carefully reviewed by the customer’s project manager, using the required standards as the basis of assessment. This established material shortfall in several respects. The supplier was given feedback and invited to re-submit an amended draft. At that point however, the supplier disengaged from the rectification plan process and seemed to resign themselves to defeat. No further plan was submitted within the required timeframe, and the customer proceeded to terminate on robust grounds.
Conclusions
In distressed IT projects, it is normal to find that both parties have actions to take to make change sustainable. It is possible, for example, that the two parties have read ambiguous documents differently, which may be contributing to disputes over scope and responsibility. Such gaps need to be resolved and changes may be expensive for one or both parties. However, such issues do need to be grappled with or else they will fester and lead to dispute. Often, as the above examples illustrate, it can be helpful to pause and to take a step back, asking what is really going wrong on the project, before rushing forwards to termination.
When disputes emerge in an IT project, legal guidance is often crucial. In particular, a lawyer can help the parties to implement any applicable dispute resolution procedures in order to resolve their differences. Alternatively, if resolution does not prove possible, they can provide the necessary legal guidance (in a way that is legally privileged and protected from disclosure) to mitigate the risks of terminating the contract wrongfully, or even losing a termination right that had validly arisen.
Where there is a contractual recovery process that can be followed, it can also often be helpful to engage an independent technical consultant to ensure that the process is used to maximum effect. Such a consultant needs to have sufficient skill and experience to anticipate problem areas and to manage risks. Where the consultant has experience of legal disputes, such as that obtained when acting as an expert witness or expert determiner, they can also be alive to legal risks and challenges and support the legal team effectively. This is often a situation in which lawyer and operational consultant must work closely together throughout, to achieve a successful outcome.
Whilst undertaking such a rescue is not cheap, the costs of delay and wasted project expense (or indeed the costs of a contested termination) are frequently high enough to make intervention worthwhile. However, the intervention will need to be carefully handled if it is to have the desired outcome.
William Hooper acts as an expert witness in IT and Outsourcing disputes and a consultant in service delivery. He is a member of the Society of Computers and Law and a director of Oareborough Consulting. He may be reached on +44 7909 958274 or William@Oareborough.com
Anthony Rance is a partner at Weightmans LLP with expertise in technology disputes arising from commercial contracts and distressed IT projects. He can be reached on 0113 213 4137 or Anthony.Rance@weightmans.com.
