United States: Outsourcing Contract Management

In a typical outsourcing engagement, a customer will spend months of effort and substantial expense putting together and negotiating a comprehensive service agreement, often including hundreds or even thousands of pages of detailed schedules and exhibits. By the time the deal closes, it may be tempting to return to business as usual while the service provider proceeds with its transition and commences work. But managing a service provider is fundamentally different from managing the employees that the service provider replaced, and filing that service agreement away in a drawer can be an expensive mistake. Successful outsourcing relationships take real work to achieve, and knowing how to implement the terms of the service agreement can provide some valuable tools to help make that relationship work.

This article will discuss how to use the negotiated terms of an ITO or BPO services agreement to help develop a robust relationship that realizes the benefits of outsourcing through realistic application of the contract terms. The goal is not to insist on the strict enforcement of every provision (because no contract can anticipate every contingency that will arise over the term of a multi-year engagement), or to deprive the service provider of earning any profit (because a service provider who is not making a profit has little or no incentive to want the customer to be happy enough to renew at the end of the term). Instead, the purpose of this article is to discuss how using the standard provisions that appear in many outsourcing contracts can promote meaningful communications so that the service provider understands the customer’s needs and priorities to help provide the services and support that the customer wants.

For all the effort the transaction teams put into detailed statements of work and service level agreements, the reality is that the customer’s true business needs may begin to diverge from the needs addressed in the negotiated documents as soon as the documents have been executed. Even with the most comprehensive contract and favorable terms, there will soon come a time when the customer will be asking the service provider for support that is not mandated in the contract. Where before sweeping changes may have been possible by directing employees, the customer must now deal with a service provider under pressure to find new efficiencies and improve its profit margin. In this new dynamic, the customer must learn to find ways to align its interests with the service provider so that efforts can be focused on their common goals.

The service agreement should support this dynamic by creating a governance structure that facilitates productive discussions and offering leverage and incentives to promote the customer’s goals. For example, both the service provider and the customer should have experienced executives with meaningful authority and long-term responsibility for making important joint decisions that arise on a day-to-day basis. By using the same points of contact over months or years, the executives can develop a thorough understanding of both parties’ interests and possess a "historical" context when new issues arise. The executives also should know the agreement and, ideally, know how it was negotiated and what issues the parties ultimately decided not to address. Through knowledge of each parties’ rights and responsibilities under the agreement, the executives have a context in which to negotiate and can use consistent, negotiated processes to resolve issues whenever possible.

Knowing the parties’ contractual rights and responsibilities also permits bartering when the agreement does not resolve the issue and leverage is necessary. Customers are sometimes faced with broad rights that support a desired outcome, although the process described in the agreement may not be the most efficient solution for either party. Rather than simply waive enforcement of such broad rights, it might be more effective to use the broad language as a starting point and negotiate a more appropriate process from that starting point.

Finally, in a long-term relationship, it is important to remember what the parties have agreed to (and what they have not been able to agree to) in the past. Setting a tone of reasonableness in negotiations can encourage reasonable behavior in the future. And a successful compromise reached in the past may be an effective model for a new compromise when a new issue arises later.

As all of the above makes clear, the role of the customer’s contract manager is critical to the overall success of the outsourcing engagement. The contract manager should understand the contract terms and work with the customer’s internal legal department to make sure that the customer is able to use the tools that the contract provides. The contract manager should observe contract formalities and exercise the discipline to maintain a comprehensive record of communications to preserve the customer’s rights and avoid unnecessarily re-negotiating issues that have previously been resolved. Customers in new engagements can easily underestimate the time and effort that goes into effective contract management, especially during the critical transition period. In many instances, it is appropriate to have one or more experienced administrators dedicated on a full-time basis to tracking communications, including committee meetings, reviewing and maintaining the procedures manual and otherwise monitoring operations for compliance with the terms of the contract.

The fact that the service provider may provide staff to perform many of these functions and such efforts might seem duplicative, but these tasks are critical to effective governance and should be performed within the customer’s organization by employees who are dedicated to protecting the customer’s interests. Ultimately, it will be in the best interests of both the customer and the service provider for the customer’s own organization to understand the contract that was negotiated, as well as the relationship that evolves from that contract, and to manage the outsourcing agreement in a way that protects the customer’s interests through using the existing contractual provisions, as well as updating those provisions so that the agreement remains pertinent throughout the duration of the outsourcing relationship.

The sheer volume of notices and consents required in an outsourcing agreement can be intimidating, and might at first seem impossible to manage. But following these contract formalities over time, and maintaining a written record of notices, consents, waivers, acknowledgements and similar events can help provide a context for future negotiations and sometimes resolve similar issues when they arise much later.

In this regard, the best practice is to maintain a single, written correspondence record where official communications are collected and made accessible. This record may be an electronic file, especially if email is used for these communications. On the simpler end, some organizations prefer the basic three-ring binder with correspondence kept in hard copy.

Maintaining contract formalities can be especially challenging when the original, pre-outsourcing organization was particularly informal. Where before outsourcing, the organization might have chosen to avoid formal policies and written communications as an unnecessary encumbrance, or might have viewed such measures as an aspiration for the future, after outsourcing, these formalities take on new importance and customers should step up and impose the formalities for that relationship.

Maintaining a strong governance organization also helps this process. While the temptation might be to keep the leanest possible governance organization to maximize the outsourcing cost savings, a customer can realize significant benefits from a strong governance organization that gets the outsourcing off on the right foot by maintaining strict discipline in communications. An understaffed governance organization in the early months of an engagement can miss these fundamental objectives and leave the customer without that valuable context later on.

Another important formality is to create and maintain contemporaneous minutes of the governance meetings that occur between the customer and service provider. Contemporaneous minutes reflect the most precise memories and, when they have been reviewed and approved by both the customer and service provider, provide valuable evidence of discussions years after they occurred. If the service provider is responsible for preparation of the minutes, ensure that the minutes are delivered promptly after each meeting and completely and accurately describe the topics of discussion. Each member of the governance team should compare the proposed minutes to contemporaneous notes.

Even for informal meetings, contemporaneous notes of a conversation are valuable, even if never shared with the service provider. A few written notes can trigger recollections of the discussion and highlight concerns that will be valuable in future negotiations, and even provide background about those discussions for new governance team members, particularly if the individual who participated in the original discussion leaves the governance organization. For significant discussions, it can be worthwhile to send a copy of the summary to the participant from the service provider’s organization and ask for confirmation, or even simply an acknowledgement of receipt.

Keeping a written record does not necessarily mean keeping a paper record: electronic documents are effective evidence of communications. An electronic file of e-mails and other documents (even scanned images of paper notes) is convenient, easy to maintain and (in most instances) searchable. On the other hand, some customers prefer paper documentation and have success with three-ring binders with printed copies, which can be easier to manage and to refer to in the future. Either approach can work well—what matters is that the record is maintained diligently and updated continuously.

E-mail can be a particularly valuable tool that both facilitates effective communication and creates a record for future reference. In most contracts, communications that should be sent "in writing" may be sent as e-mails. And even after important verbal communications, a follow-up e-mail helps ensure that the message is received and understood, as well as creating a written record. When keeping electronic records as documentation of these communications, customers should take care to appropriately backup such records into permanent storage to avoid losing critical documentation.

The legal terminology of a complex, heavily negotiated contract can be intimidating, even for experienced lawyers. But the rights the customer negotiated for are locked in that language, so it is important to put the necessary time and effort into educating the governance team on the details of the customer’s rights and obligations. Ideally, key governance positions should be filled by individuals who participated in the original negotiations and who are familiar with the topics that were negotiated in detail. More importantly, the governance team should work closely with the customer’s internal legal department to ensure that protections that were successfully negotiated into the agreement are not lost through subsequent decisions made without knowledge of the contract’s provisions.

Governance team members who are not familiar with the details of the outsourcing contract may assume that a new situation that arises is not addressed in the agreement, or may not understand how the contract addresses a situation. The most effective approach to avoiding these pitfalls is to maintain effective communication between the customer’s governance team and the legal department. If the governance team waits until an actual conflict arises before involving counsel, it may be too late to resolve the issue using less drastic measures built into the contract.

When the contract does not address an important issue, or if the contract provisions do not provide a realistic solution to a problem, the best practice is to amend the agreement so that future issues will be addressed. Periodic review of the agreement and its schedules can help the parties to identify aspects of the relationship that have changed over time and develop a better mutual understanding of their rights and responsibilities. And just as the exercise of preparing an RFP or contract schedules can help a company to better understand its own organization, periodic review and updating of the contract documents over the term of the agreement can facilitate a better understanding of the outsourced relationship.

A difficulty with a poorly managed amendment process occurs when the parties lack a detailed understanding of the specific provisions of the contract that they intend to amend. Vaguely worded amendments that do not address specific provisions of the original contract can legally erase existing language of which the parties may not have been aware, or that they may not have properly understood. Any amendment to a contract schedule requires an understanding of how that schedule is referred to in the agreement, so that a well-intended update does not lead to unintended consequences.

This article describes some of the issues central to a customer’s successful management of an outsourcing transaction. Depending on the individual relationship and business needs, customers will need to adapt these concepts for their specific situations. With such adaptation, a well-developed contract management process is an important tool for customers to use to maximize the value they receive from an outsourcing relationship.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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