Terminating Your Vendor Relationship? 10 Steps to Protect Your Organisation, Job and Reputation
Byon July 31, 2013
The statistics are overwhelming; nearly 50% of strategic vendor relationships end in failure.
If matters have come to a head and no matter what you’ve tried, your strategic vendor is simply unable to achieve the business outcomes you expected, then you may have no other option but to terminate your vendor relationship. Your own common sense will tell you, you should never consider terminating an outsourcing relationship early. There are usually mechanisms to rebuild both performance and trust. Sometimes, it might even need an independent pair of eyes to find the underlying cause of the non-performance and to help you work out how these might get addressed, without the need to terminate.
Where you believe there is genuinely no hope of rebuilding a strategic vendor relationship, this article illustrates the 10 key steps that will help to protect not just your job and your sanity, but your organisation too when terminating your vendor relationship. There’s a white paper that goes into significantly more detail into these individual steps; the page numbers below cross refer to this paper. A brief summary of these steps is set out below:
Are you sure you need to terminate? (pages 6-8)
Terminating and exiting a strategic vendor agreement is a major undertaking with significant risks, both financially and operationally. It’s not something to undertake lightly or because emotions are running high. You might not be aware but as a service user, you are under a legal obligation to be sure that you have done everything you reasonably can to fix the relationship before you terminate. In fact, if matters go to court, you are likely to be penalised on costs if you haven’t made reasonable efforts. Renegotiating the relationship could also be an effective – and less risky – course of action.
Making the case for termination – benefits versus risks (pages 9-13)
Terminating the contract must be treated as a significant project in its own right, which means it requires a business case before you go ahead. Your business case must assess the strengths, weaknesses, opportunities and threats of terminating. Only if this analysis stacks up should you proceed.
Work out what will replace the services you’re terminating (pages 14-16)
When a strategic vendor agreement goes wrong, the stress and emotional strain can dominate your thoughts. However, unless you find a new way of getting the service delivered (whether in-house, via an alternative strategic partner or a combination of both) and undertake appropriate due diligence on it, then there is no guarantee that you will be better off once you’ve exited the relationship. One of the best uses of your time ahead of termination is therefore to consider what ‘good looks like’ for the service delivery once you’ve terminated, whether that also involves bringing the services in-house or transitioning to another vendor. In either case, you need to begin preparation and have completed your due diligence before you terminate, to smooth the handover process and minimise the risk.
Plan your exit (pages 17-20)
Getting out of a relationship is as much of a project as is getting in, but with potentially more operational and financial risks. A well-considered exit plan allows you to identify what you will need to make a successful transition. There are many issues that often get missed during the exit process, so a proper plan will ensure you cover these off too, minimising the potential for disruption. You can use the business plan created in step 3 to measure the progress of your exit and ensure everything is proceeding as intended.
Prepare your evidence (pages 21-24)
If you are terminating because of a lack of sustained non-performance from your vendor, to make the termination process as smooth as possible, you will need evidence that your vendor has failed to achieve the business outcomes you expected. In preparing this evidence, it’s vital that you focus on the right elements. A key part of this is your vendor’s ‘expert’ responsibilities (see ‘Strategic Vendor Responsibilities’ white paper for a more comprehensive view). The main point to note is that if, during procurement, you relied on your vendor’s expert advice as to how they could improve service delivery and/or reduce service costs, then the vendor has clear contractual obligations towards you as part of its ‘expert responsibilities’, even if these are not expressly detailed within the contract terms.
Sanity check your evidence (pages 25-26)
Once you’ve gathered your evidence, the next step is to evaluate whether it shows what you thought it would and that it’s strong enough to proceed. Evidence is often imperfect. At the end of this stage you should know whether or not it shows, on balance, that the vendor delivered to your expected business outcomes (not necessarily just to their contractual KPIs, which may not align with your business outcomes). You will also be clear whether you have interpreted vital elements of your evidence correctly, such as your vendor’s expert responsibilities and how they should be benchmarked against what is reasonable.
The safest and most cost-effective way to check your evidence is to have someone independent undertake a ‘critical friend’ challenge, so they can advise you of what works, what doesn’t and where your focus of evidence should be, according to the business outcomes you are trying to achieve.
Choosing the right forum for your termination (pages 27-30)
When you decide to terminate your agreement, there are a number of different forums you can use for doing so – negotiations, mediation, expert determination, arbitration or litigation. Each has advantages and disadvantages, depending on what you are trying to achieve. Selecting the right forum can significantly reduce your costs and speed up the process. There is little point proceeding directly to litigation if a less formal and lower cost process can achieve your goals.
Negotiating the termination and exit with your vendor (pages 31-33)
Negotiating a termination and exit of a strategic relationship is challenging and emotions often run high on both sides. However, there are steps you can follow which will smooth the process and increase your chances of a successful outcome. In particular, if your vendor has breached both its express contractual KPIs and its expert responsibilities, and you have had the evidence independently validated, then the negotiation process will be much swifter.
Setting out your arguments clearly, with solid and independently validated evidence, will help your vendor to understand that it will cost them more to resist the termination and exit than it will to comply, agree and support the process. Always be sure to align your termination and exit negotiation strategy with the written contract terms, and always seek independent and qualified advice in respect of formal termination. Damages for adopting the wrong termination and exit procedure can be penal.
Managing the exit process (pages 34-36)
Once you have formally terminated the relationship, you need to treat the exit process as a key project in its own right. As with any project, it must have resources allocated to it, external and internal support, key milestones, objectives, payment profiles and performance targets to be met. You must also make sure that you manage the exit process in the right way, so your actions don’t inadvertently remove your vendor’s expert responsibilities. Governance and performance management are critical to a successful termination and exit process. Make sure you give it the time and attention it needs.
Hiring lawyers and technical experts; why you should; why you shouldn’t (pages 37-40)
Many organisations need independent support when terminating a contract, to avoid the potential financial damages that a vendor can claim if the contract is terminated incorrectly. It is therefore vital to choose the right lawyer and technical expert, instruct them properly and to manage their output, so you get the outcomes you want and achieve value for money.
The right lawyer or technical expert can add considerable value by keeping the focus of your evidence right, speeding up the process and minimising all costs (including their own). They will help you to avoid mistakes that will undermine your position and give you the support and independent perspective you need to successfully pursue your case.
By preparing correct and focused evidence, you can expect a smoother and more efficient termination and exit from a strategic vendor relationship. Important too – that by acting in the right way, you keep your job and the respect of your peers around you.
Ideally (in hindsight – but useful for future relationships), you should have agreed a clear exit plan while the contract’s terms and conditions were in the development stage (during the first 90 days of due diligence with the vendor at the outset of the agreement) and while both parties to the relationship were cordial. This should then have been updated through a ‘re-shaping’ process every six months or so, to reflect current working practices and innovations in the service delivery. By planning for the worst and putting actions together to achieve the best, organisations can be prepared to manage and lead an effective termination and exit strategy.