Outsourcing Contracts: The Top 10 Clauses that Service Providers Try to Manipulate

By Allan Watton on August 20, 2012

Outsourcing Contracts: The Top 10 Clauses that Service Providers Try to ManipulateIt is a sad fact that most outsourcing and service commissioning agreements falter or fail. There are a multitude of reasons as to why we see so many poorly performing partnerships – from mistakes made before a partner is even chosen, to a poor prioritisation of workflow leading to business outcomes being neglected.

However, one issue in particular that sticks out is poorly negotiated contracts. Whether it’s a misguided willingness to make hefty compromises in the hope of quickly outsourcing a troublesome service, or a simple lack of expertise in knowing what is right for your organisation, a contract that is weighted in favour of the service provider will typically result in a fractured partnership.

And unfortunately, we have found that some service providers will seek to manipulate a contract to take advantage of a partnership – not in an “all is fair in love and war” commercial sense, but in a way that could reasonably be seen as unreasonable and/or onerous. We have become very familiar with such tactics, and today, I would like to share with you the top ten clauses that service providers try to manipulate to their unfair advantage.

1. Exit Management

Service providers will often claim that you should bear the cost of transferring the service from their hands to yours, or to another provider. They might present a number of arguments as to why this is reasonable, but in reality, the question of who should bear the cost of exit management comes down to two simple questions:

  1. Do you want to take the service away because they are not delivering on set goals? They should pay.
  2. Do you want to take the service away due to internal change (e.g. a shift in priorities)? You should pay.

Clearly the above questions can be difficult to answer, but no outsourcing contract should contain a blanket “buyer pays” clause.

2. Agreed Cooperation

When something goes wrong within a service partnership, your provider may be quick to blame your internal team for not adequately supporting them. If at any point you don’t do as they ask, they may use it as an excuse for not being able to meet the goals of the partnership.

However, the real question is this – should you actually be doing what they are asking of you? The key to answering this question is to ensure that your roles and responsibilities are clearly delineated in the contract according to the advice you have received from your service provider. That being the case, you can reasonably claim that the contract reflects a fair and equitable balance of roles and responsibilities.

3. Quote Based Upon Standard Contract Terms

Most quotes you receive from prospective service providers will state that the price is based upon standard contract terms. Such terms typically exclude all of the advice and requirements you expect to achieve, which effectively renders the quote obsolete.

The key is to make it clear to all potential bidders that there are certain Heads of Terms that must be incorporated into the contract. Additionally, advise them that any bids based upon standard contract terms without any amendment to incorporate the key elements you want will be discounted from the bidding evaluation.

4. KPI Bonus Payouts

When negotiating Service Level Agreements (SLAs), many service providers will argue that if credits are potentially to be taken away, bonus credits should be awarded for “over-performance”. They will typically seek KPIs based upon transactional outcomes, which is not what you want.

Instead, focus on KPIs that are business/outcome led – this will ensure that you only award your partner when they have taken clear steps to meeting your targets.

5. No Right of Set-Off / Suspension of Service

A service provider may look to ensure that you have no right of set-off (i.e. no right to withhold payment) should they underperform. In theory, this means that you must continue to pay the service provider, then sue them after the event for damages.

By means of further protection, some service providers will try to include a provision that if you do not pay them (even in the event of a bona fide dispute), they are entitled to suspend or even withdraw services under the agreement.

It is understandable why a service provider would seek to protect themselves against set-off, but by the same token, you want to protect yourself against a clear lack of performance. As such, you should insist that in the case of a bona fide dispute, you can set-off monies owed to the provider in the event of poor performance. Additionally, you should ensure that no clause permitting suspension of services is included within the contract.

6. Excluding Their Advice and Your Requirements

Entire Agreement clauses attempt to exclude all of the emails, discussions, documents and assurances relating to a proposed service provider partnership. This effectively means that when you contract with them, you have excluded all of the reasons why you chose to work with them in the first place.

The key to avoiding this is to ensure that all of the information you have relied upon are attached to the contract bundle when you execute it. This includes emails, brochures, web materials, meeting notes, your terms of reference for pre-contractual scoping, the vendor’s scoping response, requirements, and so forth.

Finally, ensure that you have constructed the schedules correctly, and that they take precedence over the terms of the contract.

7. Excluding Your Costs When the Project Goes Wrong

As with the right of set-off above, it is reasonable for service providers to limit their liability on projects. The key is in ensuring that any limitation of liability is both reasonable and fair. A limit of the price paid is, for most major projects, not equitable.

Therefore, it is vital under such circumstances that you have a genuine pre-estimate of losses calculated in the event that the project doesn’t deliver your expected outcomes in specific areas. Then you can be confident that the losses you incur are reasonable, and that the provider understands what that limit of liability is. Then they can make their own risk assessment.

8. Service Credits as a Sole and Exclusive Remedy

Any service provider contract should be constructed appropriately to reward good performance, and disincentivise poor performance.

Such disincentivisation is often represented by service credits. However, if the contract is worded in such a way that service credits are the sole and exclusive remedy in the case of consistent under-performance, and those service credits are capped at a low percentage of the contract value, its value as a means of disincentivisation is diminished drastically. Therefore, service credits should never be defined as as the sole and exclusive remedy.

9. Agree to Agree

When it comes to points of contention in contract negotiation, a service provider will often suggest that the clause in question be “put to one side” so that it does not hold up the signing of the agreement, on the basis that the details will be ironed out a later date.

In reality, you should be able to spot the inherent danger under such circumstances. If the issue cannot easily be resolved in the first instance, there is no reason to suppose it will be easily resolved in the future. Furthermore, you will not be able to hold the service provider accountable for issues relating to a clause that you never formally agreed. Always avoid any “agree to agree” arrangements.

10. Early Termination

Almost any provider will argue that if you terminate a contract prematurely for convenience (as opposed to poor performance), they should be due compensation for costs incurred, such as additional employees, inconvenience, bid costs, employment liabilities, and so on.

Whilst this is perfectly reasonable, it is vital that you agree these costs during the bid process. “Reasonable costs” leaves too much room for dispute. Instead, put the vendor to proof that its early termination costs are demonstrable and can be evidenced rather than “asserted”. Then make sure that the costs are scheduled in the contract.

Creative Commons photo courtesy of Victor1558

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