Procurement is a key activity for all organisations, whether in the public or private sectors. Customers acquire the goods or services they need to conduct their operations. Suppliers design, develop and sell the products their customers require. The process by which this is achieved is called procurement. The activity of buying or selling is conducted in various marketplaces around the world. It extends from orders for commodity products, like stationery or printer cables, to complex agreements for the acquisition of technology and outsourcing agreements for ICT services.
The worldwide spend in procurement is huge. Reportedly IT spend accounts for just under 4% of world domestic product. It has been estimated that in 2002 one trillion dollars will have been spent on on-line contracts, 83% of which are business to business. It is no exaggeration to say that one of the key factors in determining the success of organisations is the efficiency and effectiveness of their procurement processes. This is particularly so with reference to the acquisition or supply of information technology products and services. These are critical to the operation of all businesses and have attendant complexities which derive from the technology and the way in which it is used in organisations.
The law and its practitioners have an important part to play in facilitating the procurement process. The law provides a framework of rules which determine how contracts should be formed and sets boundaries on the activities of organisations in terms of, for example, competition and the treatment of consumers. Lawyers prepare and negotiate agreements which set out the terms upon which the bargain for the acquisition of the goods or services is struck. The courts, arbitrators and mediators provide the means by which disputes over the contract can be resolved.
This article examines the different stages of procurement and the strategic issues which need to be considered. It assesses the contributions that lawyers can make to the whole procurement process and not just to the contract preparation and negotiation. Its overall conclusion is that procurement, particularly of IT systems and services, should be seen as a holistic process from instigation through contract signing to performance or dispute.
In order to carry out this analysis, the article looks at the various different phases involved in the procurement of an outsourcing service for a business’s ICT needs. It reviews the stages involved with the procurement and performance of a contract looking at the different perspectives of the supplier and the customer. I have also created a list of the key stages in the procurement process for a major services contract, identifying the roles that lawyers have in each of the phases.
Attitude and Approach
One overriding issue is the attitude which a major business or public sector organisation takes to its suppliers which will tend to pervade the procurement process and which will have a considerable bearing on the success or otherwise of the contract award. The objective of any procurement process should be to achieve a win-win situation where the customer receives the product or service that it requires and this contributes to the improvement or efficiency of its business operations. The supplier should receive a reasonable financial return in order that it may comply with the contract, provide the service, continue in business and generally be a successful supplier of the goods or services. If either party feels that they have been forced into a corner in any of these fundamental areas through the contract negotiations, the chances of successful performance of the contract diminish considerably.
In the 1980s the approach to contract negotiation by many large customers was to use their contracts officers to drive the price offered by suppliers down as far as possible, regardless of the consequences. Contracts officers were awarded bonuses on their ability to reduce the price offered by the suppliers. This approach had two adverse consequences. One was a focus on the contract negotiation rather than the contract performance. The negotiation is a means to an end and should not be seen as the end in itself. The second is that almost inevitably the suppliers felt hard done by and that they had to cut corners in the provision of the services in order to have any hope of making a reasonable profit from the contract. In the construction industry, suppliers had developed the ability to work extra money from the contract to a fine art. Almost as soon as they started performing the contract they had set up a team which would look for claims that they could make at the end of the contract for additional expenditure. This antagonistic attitude was the recognised way of operating and it created something of a rift between the parties that was never very likely to induce successful contract performance.
By contrast, through the 1990s a more sophisticated and enlightened approach to procurement has evolved. Both the customers and the suppliers have come to recognise that they each have a mutual interest in the successful performance of a contract at a reasonable price where the supplier can make a reasonable profit. The concept of partnerships has been promoted through the Private Finance Initiative (PFI) and public private partnerships and through the development of outsourcing agreements with the need for a close relationship between customer and supplier.
As we deal with the current economic downturn at the start of the 21st century, we are now seeing a scenario where there is an even greater need for this mutually beneficial co-operation. Customers are wary of over-spending, particularly on outsourcing agreements. Suppliers are concerned that in long-term relationships they may not achieve an adequate return. They are concerned about the adequacy of definition of the service they are going to provide and of the commitment in terms of time and people that they have to make in order to meet the contract requirements. Both parties are working the details of all contracts extremely carefully to make sure that they properly reflect a fair bargain struck between the parties. It is suggested that lawyers, with their professional approach and experience of many other contract negotiations, can make a positive contribution throughout the procurement and performance process to this more enlightened approach provided that they are prepared to play an effective part. They need to be facilitators and people and process managers, in addition to being advisers on risk and drafting documents.
Delineation of Requirements
The customer will start with a need for any procurement. Its first task is to recognise that it has a need for the product or, in the case of this example, outsourcing services. This might sound straightforward but typically in any organisation there will initially be only one function or department which champions a major procurement. It then needs to obtain buy-in from both the corporation and from all the other parts of the business that will be affected by the outsourcing arrangement. It is particularly difficult as a lawyer working on a requirement, whether acting for the customer or the supplier, when the customer finds that in fact it needs to change what it seeks to procure late on in the procurement process because some part of its organisation has a particular view of the services it requires and wants to change the original specification. Indeed, agreement on some form of specification for the requirement is critical. It may well be that this does not address all the technical issues that a supplier can devise to provide the services. However, if the customer has not put sufficient thought and effort into identifying and particularising its requirements, the contract may well be doomed to failure. Lawyers can be particularly helpful here because they can assist in the preparation of a document that eventually will form a schedule to the contract that defines the customer’s requirements with openness and certainty.
It is also important for customers to anticipate the needs of suppliers. For an outsourcing arrangement there will be the usual associated transfer of staff and of third-party contracts. There will also be a lot of information which the suppliers will need in order effectively to bid for the contract. These can all be organised with a bit of pre-thought and some early involvement of lawyers in helping put together a data room which has information on employees, and lists of software suppliers and other third-party contracts. Often flaws will be identified in these arrangements which it is preferable for the customer to resolve. For example, a third-party software licence may not permit outsourcing. If handled properly, the third-party supplier can be made to see an opportunity for a continuing relationship with the outsourcer. If ignored, this contract can become a major and unwelcome impediment in the later stages of the procurement.
Initial Draft Contract
The other key preparatory task in which lawyers need to be involved is the creation of a contract consisting of a set of terms and conditions and at least an outline of the key schedules which will eventually be populated during the contract negotiations. This can be used as a vehicle to include the defined requirements of the customer. It is usually preferable for the customer to develop its own contract. Whilst suppliers will have standard forms of documentation, these will generally not address the specific issues required in the contract by the customer. The customer will also want to establish a common framework which it can use for a number of suppliers bidding for the contract. Most law firms will have a standard that they can provide to a customer client as a basis for the contract. In government procurement, the Office of Government Commerce guidance on PFI contracts also provides standard clauses, although these generally need to be welded together into an effective contract. In creating this basic contract for the procurement, the customer needs to assess the fairness and suitability of the provisions for the arrangements, bearing in mind the partnership or co-operating approach referred to above. For example, it is frankly pointless to require suppliers to accept unlimited liability for their failure to perform under the contract. No supplier these days will, in effect, bet its whole company on one contract and will expect to negotiate appropriate and suitable limits of liability under the agreement. If the customer conceives of an effective way of doing this early on in the contract preparation in conjunction with its lawyers and puts this into the draft contract, it is much more likely successfully to conclude the negotiations of this key aspect of the arrangements.
At the same time the customer will wish the draft contract to protect it against failure by the supplier to develop new systems on time and to provide services of the required quality. In many cases involving IT outsourcing, the customer will transfer the majority of its own IT department to the supplier. It is then totally reliant on the supplier providing an effective service. The draft contract entered into in order to reflect this “marriage” with the supplier should also contemplate the “divorce” and provide for the transfer of the service to a new service provider in the event that the contract is terminated for whatever reason. It is important for the customer to be advised by lawyers who are well versed in IT and outsourcing service contracts in order to ensure that the draft contract properly reflects all of these crucial issues and many more.
Selection Process
Once the invitations to tender have been sent out following any necessary OJEC notice (the notice required by the European procurement rules which is published in the Official Journal of the European Communities and amounts to a call for competition), one of the most intriguing phases of the procurement process starts, namely the selection of the supplier. During this many things will happen. Parts of the customer will be tempted to change their requirements. Some suppliers that expressed initial interest will drop out. Others will form consortia which they consider will place them in a better position to win the bid. During this time, lawyers have a number of roles. They assist with the tactical approach to the procurement, determining how best to evaluate and then shortlist the bidders. If the customer is a public body then lawyers will advise on the application of the European procurement rules. If the restricted procedure as opposed to the negotiated procedure has to be used, there can be very little room for manoeuvre in dealing with suppliers, all of whom have to be treated equally.
Suppliers will also have been invited to comment on the legal terms and conditions. The wiser potential suppliers will concentrate their comments on those areas where they have a particular legal or commercial concern, for example, unfair or onerous limits of liability, excessive warranty requirements or change control provisions which unduly limit the opportunities for future work. On the basis that some sort of marking system will be used by the customer’s lawyers, an opinion on the legal position taken by the supplier will be essential. This may also give some early indication as to how difficult or otherwise the supplier will be to deal with in more detailed negotiations. During this phase there are likely to be a number of information meetings with the suppliers and there may be a request for suppliers to submit amended bids due to some change in the requirements or the process. All of this has to stay within the parameters of the bid set out in the OJEC notice for a public sector procurement.
Once a shortlist has been established, the customer then needs to determine how it will proceed. It would be well advised to maintain competition as long as it is effectively able to do so during the process. It may therefore embark on parallel detailed discussions with the shortlisted suppliers, although doing so under the restricted procedure in the case of public procurement is subject to a number of difficulties. If the negotiated procedure is being used for public procurement then negotiations can take place with the shortlisted suppliers, provided that there is no change in the basic requirements or some advantage given to these shortlisted bidders over the original bidders. If it is not a public sector procurement then parallel negotiations with each of the suppliers can move them forward to a time when either one can be selected as a preferred bidder or the list narrowed to, say, two competing bids. Once the preferred supplier has been selected there will no doubt be further discussions and negotiations with that preferred supplier which, again, in a public procurement have to comply with the procurement rules.
Negotiation
It is during this phase that the skills and, indeed, patience of lawyers on both sides of the transaction are tested. The lawyers for the customer will be keen to progress speedily to contract and will want to be sure that they have captured the offering of the supplier and its pricing carefully in the contract. The supplier will also want to conclude the contract reasonably quickly to avoid unnecessary bid costs. It will, however, wish to ensure that the contract properly reflects the specified requirements of the customer in sufficient detail to make the risk one it can manage and provide for.
Paradoxically, the legal terms and conditions are often reasonably straightforward to negotiate. The lawyers on both sides should be able to develop the clauses that provide the contractual framework for the contract and address specific legal issues such as termination and force majeure. However the schedules on price, service levels, change control and specification require a lot of attention to detail and the involvement of commercial and technical experts in their preparation. It is therefore unlikely and indeed impractical for lawyers or contract officers to do all of the drafting of schedules. This can lead to many different drafting styles, some of which are inappropriate for a contract, and many of which will not fit in with the rest of the contract and in particular the definition regime. One solution to this is to create a set of drafting rules for the authors of all schedules. These should encourage them to use precise language and to comply with a standard definition regime which can be incorporated in a separate schedule or glossary to the contract. There needs to be a careful system of checking and reviewing so that the commercial advisers review legal drafting and the lawyers review the legal and technical documentation. In the excitement of creating a contract, it is sometimes forgotten that it could, in the end, be subject to interpretation by a judge, an arbitrator or a mediator, and therefore that the way the contract is structured and the language of the contract must be clearly understandable to a party not involved in the negotiations. Indeed, two or three years after the signing of the contract many of the original parties will have gone on to other things and it will be necessary for the customer and the supplier to be able to resolve any differences by reference to the contract terms. It will be helpful if these are as comprehensible as possible.
So called “soft” issues are often critical during this phase. Negotiation is an art not a science. It is affected by many factors including the personality of the various negotiators. It involves the agreement of many different, and often senior, individuals who are certain of their views and very capable of expressing them. The actors in this many faceted play need to be managed and conducted through the difficult process of creating a mutually beneficial contract. Lawyers, provided that they do not concentrate solely on risk management (lawyers have been called contract prevention officers!!), are in fact well placed to help manage this process. Their professionalism gives them a helpful degree of impartiality and thus objectivity. They also understand what needs to be achieved because they have done it many times before. They are usually not overawed by even top management in their clients. It is in this role that lawyers can often really earn their fees in major contract procurement.
Time-scales
It is important to set realistic and achievable time-scales for the various activities involved in a negotiation. If the parties do not engage properly and become involved in detailed discussions and negotiations, there can be a long period when not very much is achieved, particularly in a very large contract. This problem can be resolved by treating the procurement process in itself as a project and managing it in the same way as the eventual services which will be delivered. There should be one clear project director for each party who would typically be a commercial person in both the supplier and the customer to whom everybody else, including the lawyers, must report. They should be responsible for co-ordinating all of the activities and should seek, if possible, to establish sufficient personal rapport between themselves that they can carry the parties through difficult times. It is also vital that the lawyers on both sides have the sort of working relationship where even if they have major disagreements in the negotiations, they can still maintain sufficient professionalism to continue the negotiations the next day in a good atmosphere. One danger for lawyers is to become so concerned with the detail (which they quite correctly think they must get right) that they miss some of the bigger issues which are vital to both the parties. If the customer sets too aggressive a timetable for the negotiations, particularly with the preferred bidder, it should be recognised that this will almost inevitably lead to problems with the contract and the possibility of re-negotiation within six to twelve months after contract award.
One issue that customers sometimes do not take full account of in setting a timetable is the need for suppliers which are bidding in a consortium, or which have a number of sub-contracts, to arrange the appropriate flow-down negotiations and documentation. Sub-contracts can be as complex to negotiate as the prime contract and will inevitably lag slightly behind it. The customer will have an interest in these contracts being properly concluded and may well have step-in rights. It is in everybody’s interests that proper time and attention is given to them. Again, if they are hurried, it is a recipe for disputes further down the line.
Management of Documents
One of the tasks which lawyers are by the nature of their work and experience generally good at is the management and control of a portfolio of documents. Any large procurement service contract with related agreements on financing, consortia and co-operation as well as a number of back-to-back sub-contracts will develop a momentum of its own. As different individuals draft and amend documents, keeping track of the most current version is a challenge at the best of times. The use of e-mails with its tendency to proliferate documentation has speeded up the means of communication and accessing documents but has not helped the task of controlling schedule drafting. At the same time, electronic deal rooms provide a way of imposing some discipline on the process and having one repository for current drafts. Confidential drafts which the supplier or customer is not yet ready to release to the other side can be kept in a secure restricted part of the site. As completion draws closer the task of managing the documents becomes more intense and time critical. It is often best to locate the completion meetings in lawyers’ offices where they should have the facility to handle large volumes of document production. The lawyers should also have sufficient overview of the contract finally to check all the various component parts of the contract and ensure that they come together in a coherent whole in a form that reflects the negotiations and intended agreement and is ready for signature by both parties.
Performance
Once the contracts are signed and everybody is celebrating with a glass of champagne, the really serious work starts. Even here, the lawyer’s role continues. In the early stages lawyers can provide summaries of the contract documents which will help in the performance of the agreement. They can also present the contract to their clients, explain how the contract has been finally put down on paper and summarise the key aspects to, in particular, the project team. Any major changes to the contract should be reflected in change control arrangements which in some cases can mean major re-negotiations to the contract. It is common to see change control amendments which have not been properly reviewed by lawyers that change the main body of the contract in an unintentional and damaging manner. It is further advisable for suppliers to consider setting up a contract risk management process with their lawyers. Lawyers can assist their clients to identify items such as service level failures which amount to breach of contract and set up a system of early warning so that these can be captured and dealt with prior to the time when they become material breaches of the contract. Breaches of contract are often overlooked and, along with change control, ignored until the point where the customer decides it has had enough of the contract and starts engaging its lawyers to find a means of terminating the relationship. This is something that can be avoided with proper contract management. Indeed, as the project teams work together they should strive both to maintain and modify the contract as appropriate to meet the changing requirements of the project. One concept is to appoint an agreed arbitrator who would be called in at times when the contract dispute resolution mechanism has failed to assist the parties in reaching agreement by giving a binding ruling on the issue in question. This sort of managed dispute resolution process is very different from the end of the day catastrophe where everybody is trying to find a way out of the contract and to minimise the losses which they may suffer. The intention is that the arbitrator will be able to provide decisions on key issues which the parties would then abide by as the contract is being developed.
Historical Record
Finally, lawyers often have the only historical record of the negotiations and tend to be able to provide advice on the way in which the contract has been arrived at and on the various changes. The lawyers should provide paper and electronic copies of the definitive final version of the contract to their clients. This can extend to helping the parties (particularly the supplier) to create an electronic management system which contains all the contract documents plus any summaries and contract amendments as they occur. The lawyers may also be asked to keep the original signed version of the contract for safe-keeping. If they send the originals to their clients, they should keep copies in the form of a contract bible accessible in hard-copy and/or electronic form for future reference. If there is a dispute, the stored knowledge and documentation of the lawyers who negotiated the original contract can be of great assistance in the resolution of the dispute.
Conclusion
To misquote Shakespeare, “all procurement projects are a stage and the men and women in them merely players”. The participants at the customer and the supplier have a part in the different acts and conclusion of the drama. The respective legal advisers have a significant role to play throughout the procurement process, and indeed through the life-time of the project. It is suggested that they need to be kept involved and generally made aware of major developments. This facilitates more effective management and control of contract performance. The cost involved will be repaid by limiting the chances of contractual failure and encouraging proper, timely and cost-effective delivery of the services – which is, after all, everyone’s objective.
Delineation of requirements | For customer: · written specification of requirements · collation of information about staff and third-party contracts · resolving legal problems with third-party contracts · arranging for a data room and its access by the suppliers · OJEC notice for public procurement For supplier · due diligence reviewing data room |
Initial Draft Contract | For customer: · understanding requirements · including in draft contract · whilst providing a fair basis to contract with suppliers |
Selection Process | For customer: · advising on legal compliance of bids · reviewing supplier comments on contract · strategic advice on bid and negotiation For supplier · reviewing tender documentation · comments on draft contract |
Negotiation | For customer and supplier: · agree legal terms and conditions · establish drafting rules for schedules · review schedules · manage people For supplier: · establish consortium · negotiate sub-contracts · set up finance arrangements if any |
Document management | For customer and supplier: · determine who is responsible for each part of the contract · co-ordinate production of drafts · determine word processing formats · establish a version control system · set up and manage an electronic deal room · prepare final contracts for signature |
Time-scales | For customer and supplier: · provide the project directors with realistic advice as to the likely time needed to conclude the contract · manage work and the contract negotiation to comply with the timetable |
Performance | For customer and supplier: · summarise contract documentation · present contract to project team · review changes · assist in dispute resolution For supplier: · set up early warning system for contract breaches |
Historical record | For customer and supplier: · keep an accessible record of contract and negotiations · provide contract on CD-Rom to client · agree who holds original signed contract · assist client to set up an electronic contract management system · set up an electronic and/or paper bible of the contract documents |
