Managing Risk: Covering Disputes in the Contract

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By Stephen Reed

After choosing your outsourcing partner it becomes time to establish the contractual framework that the relationship will function within. Your legal department and outsourcing consultant can (and should) draft a service agreement of exquisite detail; but, to be blunt, there is simply no way to cover every aspect of this new relationship. There will be scores of issues small and large that will need to be addressed throughout the life of this relationship.

The next best thing to having the answers pre-determined is to have good processes for handling those differences and changes. I have seen many, many service agreements that devote paragraphs to straightforward issues like building access but then treat change management and dispute resolution to one or two generic sentences like: "The parties will meet regularly to resolve any issue not covered within this agreement."

While people exchange wedding vows this vague and optimistic, an outsourcing agreement typically isn't "until death do you part". When I encounter agreements written like this, I'll have some questions for the client, and as we work our way through the list, the silences invariably get longer and more thoughtful. If there is a disagreement between the two parties, the time to figure out how to discuss and resolve it equitably is not in the midst of the disagreement. That's why the rules for boxing matches are set in advance rather than discussed after one fighter has already tried to bite the other's ear off. By making the process as defined and clinical as possible, it will remove tension from disagreements, especially when things must be escalated and your counterpart is angling for your ear.

Following are some questions to ask about how dispute resolution will function and to use the answers to flesh out the process:

Who meets?

Typically, the project managers for the outsourcing engagement from the client side and the provider side should be the first level of discussion. They are likely the most knowledgeable and have the closest working relationship. In addition, potential disputes should always follow a defined process to ensure consistency in communication as well as capture of information pertaining to the dispute.

How often?

This may seem obvious and the meetings can either be ad hoc or regularly scheduled. However, if left blank in the contract, what is to prevent one party or the other from indefinitely stalling?

How long does each side get to investigate and formulate a reply?

In a similar vein, a time limit for responses should be set.

Does that timeline vary based on the size of the issues?

It should. If you can quantify the impact of the issue/dispute, then try to set boundaries that minor items have a turnaround of three to five business days. Even better, specify a graduated process allowing for rapid acknowledgement of the dispute but more time to research.

What clear authority does each party have to negotiate?

There's nothing worse than spending an hour trying to explain your problem only to have the person on the other side of the table say, "Well, that's out of my pay grade…" Specify the limits of authority so that the right level of signoff/negotiating power is brought to the table the first time.

How long do they have to discuss?

"We'll get back to you" is not an acceptable response for either party. Specify turnaround times to ensure issues keep moving toward resolution.

What if they don't agree? How is it decided it's time to escalate?

What is the escalation chain? What documentation and/or information needs to be accumulated in order to escalate? Set cutoff time limits for each level of negotiation. Again, it removes emotion and hurt feelings from escalations and instead serves to make it a clinical process.

What if the people they escalate to don't agree?

At exactly what level does the buck stop? This isn't an area where you can "agree to disagree," so it is important to have a next step for resolution.

What exactly triggers arbitration?

Sooner or later, you will run out of people for escalation. While terrible to contemplate, it's easier to define the triggers and process for arbitration now -- at the start of the relationship when both parties are very eager to demonstrate goodwill and cooperate -- rather than after an issue has been raised so high as to potentially be a showstopper and everyone is becoming defensive and angling to “keep the sports car and leave the cat.”

Another key aspect of dispute resolution falls completely outside the contract. There will be a hundred little things that fall outside of any outsourcing contract, so one of the best things the new partners can do is to pick engagement leaders who have the ability to work well together and relate to each other. Contract managers will shudder when I say this, but "off-the-record" give and take can be a terrific aid to getting things done and for building rapport and trust. This could take several forms. For example, the outsourcing partner’s manager might allow a few more tech support hours over a weekend than the contract specifies, or the client might allow the service provider to use some leftover room on an existing PO for an ad hoc small project rather than forcing a new one to be generated. Two engagement managers who both genuinely want the project to succeed will increase the chances of outsourcing success far more than executives with axes to grind or points to score.

Disagreements are never pleasant, but it's important to recognize that they will happen. Having processes in place at the outset to handle the disputes in an efficient, consistent, and non-confrontational manner will shine light on finding a solution. Failing to do so will only generate heat from dealing with flaring emotions and blame. Think back to the famous Dragnet TV series and Sgt. Joe Friday's standard reply to angry citizens: "Just the facts, please, just the facts."

Useful Links:

Alsbridge:
http://www.alsbridge.com

Read Part 1, doing risk assessment in your outsourcing endeavors:
http://www.sourcingmag.com/home/home.aspx?i=02_10/31/2005_cn_765_5_00_00

Read Part 2, selecting service providers to bid:
http://www.sourcingmag.com/home/home.aspx?i=02_10/31/2005_cn_779_5_00_00

Read Part 3, evaluating service provider proposals:
http://www.sourcingmag.com/Home/home.aspx?i=02_11/14/2005_cn_806_5

Read Part 5, a guide to setting SLAs
http://www.sourcingmag.com/content/c051128a.asp

Read Part 6, managing outsourcing after the contract is signed
http://www.sourcingmag.com/content/c060221a.asp

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