Request for your help! At the end of this article, there is a link to an online survey which we would very much like you to fill in (it won’t take you any longer than 20 minutes). The results are going to be published in a few months and provide an invaluable opportunity to look at the job we lawyers do, and where we can improve. This article looks at the outsourcing negotiation process and starts by asking questions that have not perhaps received the attention they should. The results of the online survey will start to provide answers – answers that might prove extremely useful in your practice and how you position yourself as a lawyer in the marketplace. Background Outsourcing deals can take a long time to set up, and frequently require extensive legal (and other) resources. While the transaction costs for the client can be high, do they get value from what we as lawyers do? Does spending hours in meetings endlessly negotiating and refining terms and conditions and re-drafting schedules actually achieve any good beyond the negotiating process? Can it in fact drive the parties apart and cause the relationship to start on the wrong foot? Should lawyers start by asking radically different questions – such as what makes a successful contract? How do lawyers judge success? Do lawyers know what their clients really need? How can a lawyer most usefully assist in achieving that? Lots of questions – but surprisingly little research has been done in this area to support the function of lawyers or to look at the negotiating process and attempt answers to the sorts of questions posed above. Many lawyers will apply the description ‘commercial’ to themselves and their approach, but there is little definition of what this means.[1] At last some research is being done which will help provide answers to these and other questions. Negotiation There is surprisingly little research on negotiation – it is something that we as lawyers think we are expert at, but it has been little studied, and it is something that is certainly not taught as part of a typical law degree.[2] While many business people have read Getting to Yes,[3] comparatively few lawyers have done so, and so relatively few are familiar with the results of that book.[4] Getting to Yes was a groundbreaking book in many ways, not least in its attempt to analyse the negotiating process, and to propose a more effective way of negotiation. At the risk of an unfair summary of the book, the authors divided negotiation into two categories: Positional bargaining is something we are all familiar with: it is the statement of a fixed set of requirements by each party, without basing their requirements on reason, or attempting to ascertain the other party’s requirements, still less trying to meet them. It is perhaps the commonest form of negotiation – we have all had the experience of facing a lawyer in heated negotiations who insists on receiving open-ended indemnities in favour of his client without being able to explain why. All too often it turns out to be a ‘tick in the box’ approach to contracting – that lawyer was perhaps taught as a trainee always to ask for indemnities, or that law firm includes indemnities in its precedent bank, and so the lawyer keeps on asking for indemnities, without ever enquiring if the particular circumstances of the deal call for such a wide-sweeping indemnity in the first place. Principled bargaining is the approach that is best characterised by the process of mediation – though there is no reason to restrict it to a dispute situation. It is an approach that seeks to discover each party’s true – not necessarily their stated – requirements and to seek to find a solution that meets both sets of real requirements. The authors claim that this approach is more efficient than positional bargaining, and more likely to lead to each party receiving what it actually needs. Instead of answering a call for indemnities with a polite ‘no’, seek to find out what the other party really wants – perhaps they need a parent company guarantee, or a performance bond, or maybe they do not need an indemnity at all or perhaps they need a more precisely drafted SLA. Principled bargaining is about asking questions, seeking to find out real, as opposed to imagined, requirements and finding ways of meeting those requirements in the best way for both parties. Negotiating Outsourcing Contracts Outside of mediation, Getting to Yes does not specifically address lawyers’ negotiations in terms of the detail of contracts. This is where this research could provide a genuinely new launching-pad for the work we all do in complex outsourcing deals. Developing and sustaining an effective outsourcing relationship in IT and business services remains a challenge for both providers and users. The context for negotiating the contract shapes the subsequent interaction between the parties. Some argue that outsourcing contracts are too adversarial and prescriptive in nature and thus hinder good quality service delivery and innovation. Others argue that contracts can provide a helpful framework for facilitating ‘partnerships’, involving dense exchange of information and know-how. But what is the role of lawyers in promoting effective outsourcing relationships? Do lawyers merely reflect and reinforce the perspective of the client firm they represent? Or do (and should) they play a larger advisory role in sustaining specific types of outsourcing relationships beyond contract? As a member of the Society for Computers and Law, you have a unique opportunity to participate in a study undertaken by researchers at Business contracts are rarely complete, in the sense of specifying all contingencies, due to limits to human capacity to predict the future and to foresee every possible contingency. However, this contractual incompleteness can be an advantage as it allows firms to avoid wasteful negotiation costs following the signing of a contract. All lawyers know that cases rarely go to trial – nearly all disputes settle at some stage before court. In fact, not all disputes can be categorised as something that has the potential to go to court – the parties might disagree, but neither has the intention of going to court. In these cases, parties will negotiate based on a wide range of factors, and the precise legal position is only one of a number of commercial factors taken into account in coming to a settlement acceptable to both parties. Not least in any settlement of a ‘dispute’ or ‘disagreement’ is the status of the business between the parties, and what opportunities exist for further business. In outsourcing relationships, it goes even further: the parties are so tied to each other, that it is unlikely that either would want a complete severance of the contract in dispute, let alone all future business. Accordingly, disputes can offer a chance to review all current business, and re-negotiate the existing contract. What role does the existing contract therefore have in such a re-negotiation? The Future for Outsourcing Contracts There are at least three reasons why outsourcing relationships might have to rely increasingly on incomplete contracts. First, outsourcing deals are becoming more complex as their scope becomes larger in terms of the number of processes and geographical coverage. Complexity introduces greater difficulty in specifying terms in advance. A deal must therefore be flexible enough in terms of the scalability of the operation and continuous improvement of processes. However, in reality, if the scope of processes to be outsourced has not been clearly defined, or even if it is specified, user firms may demand a growing range of services without an agreed price. In such cases, lawyers would have to be called in to deal with a backlog of unresolved and unpaid transactions before a contract can be renewed. Without the willingness to resolve the backlog in the ‘spirit of the contract’ rather than the ‘letter of the contract’, multi-process outsourcing is not sustainable. Of course, in practice, such matters are dealt with in change control provisions and in the mechanism set up by the contract (or the mechanism that the parties in fact use during the lifetime of the contract) to deal with such disagreements.[5] Sometimes lawyers are involved, but more often they are not. Second, more deals are projected to be transformational and not merely transactional – end users are asking suppliers not only to provide services against a detailed process of delivery which is already known, but also to transform the existing processes to something better. By their very nature, transformational deals are more difficult to define with precision, mainly because benchmarking and baseline cost data are not easily available. The end users’ inability to cost a ‘black box’ of the multiple processes to be transformed is a deterrent to them putting all their eggs in one basket, lest they may become hostage to fortune. In the absence of a willingness to work closely without rigid contracts, this hold-up fear undermines the growth of transformational outsourcing. Third, because of the first two reasons, multi-process and transformational outsourcing deals must take longer to become financially viable. Generally, the cost of initial investment by a supplier becomes larger in relation to the scope of outsourced business processes and the degree to which the deal is intended to be transformational. Outsourcing deals normally take 18 months before they start generating revenue. Suppliers prefer a longer contract to facilitate a longer payback period thus spreading the larger cost of upfront investment. Some deals are as short as three years, but others are as long as 10-15 years, and much – including technology — can change in a decade. Thus, the longer the contract the more likely that both vendors and end users want to retain flexibility in contractual terms. If contracts are incomplete, careful thought needs to be given to what contractual terms should be included, and what should be left out in order to retain some flexibility in the relationship. What matters, therefore, for the successful functioning of outsourcing relationships is the mix of formal contract enforceable in a court and ‘relational contract’, ie an informal understanding which is not adjudicated by a court. What affects this mix of formal and relational contracts? And in what ways does the mix influence the success or failure of outsourcing relationships? Should lawyers have a sustained involvement from the beginning to the end of an outsourcing cycle? To what extent are they doing that already? And how should lawyers work with other advisors (including consultants) and commercial teams? Complete the Survey We ask you to participate in the online survey to put forward your view and perspectives on these (and other) questions. The survey will take you no more than 20 minutes to complete. The deadline for responding to the survey is 16 February. We hope that you agree that the issues raised in this study are of great importance to understanding the sustainability of the growth of outsourcing markets, and to the future of the legal profession. With a high response rate, we will be able to analyse the survey data with confidence, and to report back on the results in a future SCL article. Richard Stephens is Principal at LORS (Law Office of Richard Stephens). Mari Sako is Peninsular and Oriental Steam Navigation Company Professor of Management Studies at the Said Business School, University of Oxford. [1] A quick review of law firms’ Web sites will show that this word has the potential to suffer from overuse – just about every law firm and individual will use it of themselves. Turning things around, it is not as if anyone would offer their services as being ‘uncommercial’. The research proposed should provide some evidence and definition to support what lawyers are saying about themselves. [2] For an exception, see the Program on Negotiation at the [3] Roger Fisher and William Ury, Penguin Books, first published 1981. [4] Admittedly this is a subjective view, but it is the impression of the authors that the implications of the book have spread more widely into the contentious domain as a result of the greater use of mediation (which relies on the approach set out in the book) than into transactional work. In fact the book is not restricted to considering dispute situations and is aimed at negotiation in general. [5] The use of this term is deliberate and avoids the use of a word such as ‘dispute’.
Outsourcing Contracts: What Role Do (Should) Lawyers Play?
January 2, 2007
