All too often outsourcing lawyers find themselves asked to advise clients in a situation where a relationship has broken down, or is in imminent danger of breaking down, their client feels hugely let down by the other party to the transaction and yet, when all is said and done, it is hard to say where there is any significant breach of contract. This situation is particularly acute when viewed from the perspective of a recipient of services whose needs from the contract or relationship are generally considerably greater than the needs of a supplier. This article explores some possible causes of this and outlines some ideas for mechanisms which can be used to ‘treat’ those causes and reduce these risks. It suggests that underlying problems with a relationship can often be traced back to uncertainty as to the ultimate purpose of the transaction, over-expectations as to what can actually be contracted for and a lack of expectation management as the negotiations result in an agreement that differs from the original aspiration.
From the outset, it should be said that these possible mechanisms are not uniquely or exclusively ‘contractual’ in nature, far from it, and from that perspective could be said to be outside of the lawyer’s usual realm of experience. It is suggested though that they are ideas worth consideration by lawyers for three reasons. First, as part of providing the rounded commercial advice which we aspire to give our clients. Second, we are the ones to whom clients turn when problems emerge – and some of these ideas will maximise a client’s leverage should problems emerge down the road since they may result in a greater alignment between a client’s expectations and the final contractual arrangements. Third, the discussions and considerations which some of these ideas require would introduce a greater awareness prior to signing of a contract of exactly what potential problems can – and cannot – be managed via contractual obligations and mechanisms.
Before it begins
Somewhere deep down within any potential customer of outsourced services there will be a ‘business case’ for entering into the relationship.
Often, not always, it is recorded formally. Sometimes (too often?) it is embedded in a series of powerpoint slides with cryptic statements which may not distinguish between ‘essentials’ and ‘aspirations’ and may not distinguish between what is ‘intended’ to emerge and what has been agreed by the counterparty. These are regularly suffused by ‘sales’ promises from a potential supplier who is assisting a potential customer to develop their internal thinking around whether to consider a transaction. All too rarely is there a clear statement of the overriding reason for the transaction – is it to save costs come what may? is it to address concerns about long-term access to key skill sets? is it to achieve a certain payment profile for the services?
The potential details of a business case are beyond this article and are indeed generally outside of the lawyer’s ability to advise (though the experience gained from advising on a range of transactions over a range of time can often enable a lawyer to offer insights into the likelihood of the elements of the business case being achieved). However it is suggested that obtaining a copy of it – in whatever form it is – is no bad place to begin the quest to prevent a mismatch between expectations and delivery.
If it is not easy for a client to produce the rationale for a transaction or, where not already recorded in writing, to explain in a reasonable level of detail the business logic behind the proposed deal then there are already some warning signs for the long-term success of the relationship. It is rare for inchoate expectations to be met – it is far too common for them to crystallise down the road as ‘well whatever I was expecting I can tell you now it wasn’t this’. Working with a client to help ensure that the expectations and rationale can be clearly stated (even if some elements are highly aspirational and hard to quantify) is the beginning of identifying how these can be contracted for – and that is the beginning of a client being able to start to manage the resulting contract to achieve them.
A load of hot air?
One of the ‘types’ of items which can be found regularly within business cases is what can best be described as a ‘soft’ statement with a (usually) hard number against it. Let me venture an example: ‘Access to improved technologies will enable wider savings within the organisation of £10 million’ – the detail of how this might be achieved being left for a different project team on a different day to discuss. As long as the nature of these kinds of statements is appreciated there is nothing wrong with a client’s business case containing elements which are aspirational and which are difficult to ‘prove’ have been achieved by the negotiation and in the delivery of the deal; recognising this can be the start of working out whether it is possible to develop and record contractual mechanisms that enable a client to monitor whether these elements of the business case are being achieved.
If these kinds of ‘soft’ statements are not recognised for what they are, the danger is that within a year or two the desired benefits are forgotten; they are either not realised or, if realised, are no longer associated with the transaction and as a result any assessment of the transaction and the extent to which the original expectations have been realised is incomplete or unfair. If they are recognised and understood, there is then at least the potential to identify if they have occurred and ensure that any view of the transaction as a whole is a full and fair view.
What do you share?
Many negotiations are characterised by a reluctance to share too much ‘private’ information with the other party and a business case is instinctively seen by many customers as, in this sense, ‘private’. It is suggested that there is every reason for the business case (in an appropriate form I hasten to add) to be shared with the supplier and for buy-in from the supplier at a senior level to it to be obtained prior to the negotiations proceeding too far. If the key expectations on which the success of the long-term relationship are to be judged cannot be shared then it is difficult to see how a supplier can be expected to try to meet those expectations. An outsourcing contract is an early element in the development of a relationship rather than the concluding step; a clear set of shared expectations is an important element in developing a contract which can make achievement of those expectations more likely.
A final reason (this may be described as cynical or it may be described as experience) for sharing and agreeing a business case is that the reality is that members of the supplier’s team can often be found ‘helping’ the customer’s team to develop the rationale for the transaction by identifying items for inclusion within it. In many cases these items are of the ‘softer’ variety described above – and in many cases this behaviour emerges in situations where the rationale for the transaction is on a knife-edge (making it more vulnerable to a future perception of failure), since, if the rationale is rock solid, there is far less need to include such ‘soft’ items within the business case.
Against that background it is suggested that there is every reason for achieving formal agreement to the resulting document and then expecting the contract to contain mechanisms that promote delivery of those items.
What do you do about it in the contract?
Having identified and, possibly, shared and agreed the business case, next comes the interesting task of working out how these objectives can be ‘translated’ into the contract. There is no single answer to this question and it will depend upon what the objective is. Hard, financial objectives may be capable of being addressed simply by the negotiation and documentation of an appropriate price and pricings structure. Other hard objectives (eg access to skilled resource) may be addressed via express contractual obligations – a contractual promise does not guarantee contractual delivery but at the very least encourages it and provides mechanisms to address failure to deliver.
Softer objectives of the type described above (‘continuous improvement’ in the sense of development of ‘new ideas’ is probably also in this category) often go to the heart of the customer’s expectations and yet at the same time are very difficult to ‘impose’ upon a supplier in any meaningful way. The purpose of understanding what these objectives are is not to expect that a supplier will be able to promise to achieve these in every case but to see what can sensibly be contracted for. If these kinds of objectives represent a shared understanding (rather than a ‘secret requirement’) then – rather than a contract being silent as to the issue – it may contain frameworks which require regular reporting by a supplier on how those softer items are being facilitated or achieved and how the results can be quantified. That is clearly different from a hard obligation to perform a specific task but in some cases it will be all that is appropriate. It is though certainly better than nothing. From a customer’s perspective it is no bad thing for a supplier to be required to show how it is making good on its promises and on the items it agreed were appropriate for the business case. Less obviously, from a supplier’s perspective, it is also no bad thing for the good of the relationship to show these kinds of softer objectives are being achieved – without a mechanism for doing so it is easy for this to be forgotten by a customer and for no value to be given to this when the customer asks itself what it is getting out of the transaction.
There will be some elements of the business case which are not something for which the supplier can or should be held directly responsible. Identifying this as a result of the contract negotiations nevertheless remains a valuable process for two reasons. First, it may challenge a customer to realise that its business case is not as strong as it seemed – a hoped for saving really cannot be relied upon with any certainty. Better to realise that before rather than after signing. Second, it is better for the long term health of the relationship for a customer’s expectations to be set realistically rather than unrealistically – since that reduces the likelihood of a supplier being perceived to have failed whilst having performed entirely or substantially in accordance with the contract. That is not to say that in some cases these issues might not still be relevant to a damages claim should a supplier not deliver something to which they are contractually committed (in which case clear sharing of the business case will certainly reduce subsequent arguments over foreseeability) but that is not necessarily the same as this being a direct contractual commitment. Opportunities for concrete, specific savings elsewhere within a customer’s business, which are for the customer itself to deliver but which, as a prerequisite, require the supplier to perform its own obligations, might fall into this category.
Keeping it up to date
The military aphorism that no plan survives the first encounter with the enemy is (without advocating a confrontational approach in this context) equally true of a negotiation. As negotiations progress it is often the case that not everything which was hoped for is obtained and/or those things are obtained but at the price of a concession elsewhere which reduces their value. This is another area where expectations often become misaligned with later adverse consequences for the relationship.
There is a very human tendency for the negotiation team to feel they have got something which is ‘good enough’ or the ‘best in all the circumstances’ and, though the individual business sponsor may be content, not to ensure that the business which ‘owns’ the business case has fully understood and, just as important, emotionally accepted the final position. The danger here is that the underlying business, usually at a (very) senior level of management which was not directly involved with the negotiations, is left with a set of expectations that were arguably unrealistic to begin with and which certainly don’t correspond to the contractual commitments.
As a result there is serious potential for, on the one hand, the supplier delivering in line with the contract and, on the other, the most significant individuals within the customer organisation feeling that the supplier is failing. As, a result the overall relationship may fail.
One possible approach here, which can be implemented only where a customer team has been given a clear business case from which to work, is a simple internal report back to the business prior to signing of how the contract reflects the original business case. That report can highlight areas where the supplier is contractually committed to achieving the business case, areas where they are not, monitoring and reporting mechanisms of the type discussed above and, finally, aspects of the business case which it is entirely up to the customer itself to deliver.
Again, less obviously, this may be something which a supplier wishes to ensure actually takes place. The natural instinct is that it is not helpful to the conclusion of a contract to assist a customer to appreciate where it has not achieved its original objectives. However, it is naïve to think a deal will be signed if it is too far from the original objectives (has no-one really noticed?!). Clarity over how the transaction diverges from – as well as how it meets – senior management’s expectations may not remove every problem down the road but at the very least may avoid some of the worst feelings of ‘failure’ and dissatisfaction. The opposite approach – a ‘sales’ pitch to achieve internal sign-off – is ultimately in no-one’s interests because it simply creates a more difficult environment for the supplier to succeed.
Conclusion
Would a methodical approach, fully identifying the business case, assessing item by item the extent to which it can be contracted for and ensuring full comprehension by senior management of all divergences from that business case, result in all problems which a relationship encounters disappearing for ever? No, there are still plenty of other things that can go wrong.
Might it be the start of a closer relationship between the parties’ expectations, the final contractual framework and the basis on which the relationship will truly be judged to have succeeded or failed? Maybe. And, perhaps more surprisingly, the resulting narrowing of the gap between contractual commitments and relationship expectations might be more to the advantage of suppliers too than one would expect at first sight.
Richard Hawtin is a London based partner of Baker & McKenzie, specialising in outsourcing and technology contracts.
