ARTICLE
5 September 2024

Enhancing Supplier Management: Increased Monitoring And Step-In Rights

LP
Logan & Partners

Contributor

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In a previous article, we explored strategies for managing and resolving issues with suppliers in outsourcing agreements (here). The essence lies in fostering open communication, adhering to the contract...
United States Employment and HR

In a previous article, we explored strategies for managing and resolving issues with suppliers in outsourcing agreements (here). The essence lies in fostering open communication, adhering to the contract, and consistently evaluating the supplier's performance against the agreed standards. This article delves into two specific actions a customer can take when the supplier fails to meet contractual obligations: Increased Monitoring and Step-In Rights. It's crucial to address these options in the contract to ensure the customer's right to enforce them.

Increased Monitoring

Typically, during standard reporting and oversight, customers maintain regular check-ins and receive progress updates to assess the supplier's performance against contractual standards, such as the service levels. However, when this routine monitoring falls short, the customer may opt for increased monitoring (Increased Monitoring). Increased Monitoring involves placing customer personnel on-site at the supplier's location to directly observe and oversee the services being delivered.

The objective of Increased Monitoring is to enable the customer to conduct a thorough root cause analysis of the issues that standard monitoring may not reveal. By being on-site, the customer can gain deeper insights into the problems affecting service delivery. Following this analysis, the customer will discuss their recommendations with the supplier, who is then expected to implement the necessary changes.

When initiating Increased Monitoring, the customer should inform the supplier in advance to address any pertinent issues, such as problems to be analyzed and the start date. The monitoring should be conducted in a way that minimizes disruption to the supplier's operations. Both parties can be responsible for their own costs during this period.

During the Increased Monitoring phase, the supplier should be required to cooperate fully with the customer, including making personnel available for meetings and providing all necessary reports, documentation, and information to facilitate customer's monitoring.

Increased Monitoring would continue until the supplier can convincingly demonstrate to the customer that it can:

  • Meet or exceed the required performance standards (e.g., critical service levels or specific productivity commitments);
  • Resolve any material breaches that significantly impact the services; or
  • Successfully implement a mutually agreed remediation plan for the failed services.

Step-In Rights

In some cases, on-site monitoring alone may not suffice. If the customer believes that the supplier's failure to meet certain standards could have a significant adverse impact on their business (or that of their affiliates), or if the customer reasonably suspects that such a failure is imminent, they may invoke step-in rights (Step-In Rights). This allows the customer to "step into" the role of the supplier, either directly or by engaging a third party (Step-In Third Party), to take necessary actions to remedy the situation.

Before exercising Step-In Rights, the customer should notify the supplier, ideally providing at least seven days' notice. This allows the supplier to resolve the issue. If the supplier fails to satisfy the customer within this period that the problem is solved, the customer can proceed with exercising their rights.

While Step-In Rights are being exercised, the supplier must:

  • Fully cooperate with the customer and any Step-In Third Party;
  • Suspend the performance of the affected services as requested by the customer, while continuing other services;
  • Grant necessary licenses and provide access to systems, personnel, intellectual property, premises, equipment, documents, and other resources required for the exercise of Step-In Rights;
  • Reimburse the customer for any costs incurred during this period, provided that the costs for third-party services are in line with market rates unless procured in an emergency at higher rates.

During the Step-In period, service levels and KPIs related to the affected services are suspended, and the supplier is not entitled to fees for the services subject to the Step-In Rights.

It is important to note that Step-In Rights are intended as a temporary measure. During customer's exercise of Step-In Rights, the supplier should propose solutions to demonstrate its capability to fulfill the contract and remedy service failures. If the supplier can convince the customer that the issues have been or can be remedied, the customer can promptly cease exercising Step-In Rights and lift the suspension of the supplier's services. If the supplier cannot perform the services satisfactorily within a specified timeframe or show its proposal to do so (e.g., up to 90 days), the customer may terminate the affected services entirely, with no further liability to the supplier regarding those services.

Conclusion

In outsourcing agreements, the ability to address underperformance is critical to maintaining the integrity of the services provided and protecting the customer's business interests. Increased Monitoring and Step-In Rights are essential tools that offer the customer direct involvement and control when the supplier fails to meet contractual obligations. By including these provisions in the contract and clearly defining the processes and expectations, customers can ensure they have the necessary mechanisms to address issues effectively and minimize risks. While these measures are intended to be temporary, they provide a vital safeguard that can help restore service quality or, if needed, facilitate a smooth transition away from an underperforming supplier. Ultimately, these rights empower customers to uphold the standards of their outsourcing arrangements and ensure that their business operations remain uninterrupted and secure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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