ICT Outsourcing Contracts: The Top 10 Problem Areas to Watch Out For

By Richard Kerr on

Outsourcing ContractsProblems can creep into the strongest of strategic partnerships. One minute productivity levels seem to be running in line with targets, the next something has changed – key staff are no longer available, innovation retreats into the background and service starts to slip. Misunderstandings, miscommunications, political agendas and personality misalignment can all result in a problematic or failing/failed relationship. But if there is one thing that we see time and again as the most common cause of dispute, and most costly to come back from, it’s a written contract that is poorly aligned to the business outcomes it is meant to drive. As a result, it has often been poorly negotiated.

When I say ‘poorly negotiated’ I don’t always mean that there has been a lack of care taken in the development of a fair and equitable legal document – though of course this happens as well. Sometimes a poorly negotiated contract can be one that does not consider the future position of its parties clearly enough, is not set up to adapt to their changing needs, or where some manipulation has occurred to unfairly weight responsibility in one direction or the other.

Contracts that are unfairly imbalanced, financially or responsibility-wise, can cause behaviours that are detrimental to the success of the project, so here are a few of the clauses where such imbalance can occur and where the unscrupulous may look to adapt the relationship in their favour:

1. The importance of cooperation in agreements

It is in everyone’s best interest for clarity to be built into every fibre of your contractual agreement. Communication must be clear and concise and everyone should understand precisely what their role in the relationship is. Once your strategic relationship gets underway there may be a million and one reasons why one side may wish to point the finger of blame at the other when things go wrong. In order to avoid everything grinding to a halt while the legal chaps get to work clear, responsibilities and a ‘fix first, argue later’ approach built into the contract will make things so much easier in the long run. It may also be beneficial to consider the creation of a ‘relationship charter’ which enshrines the core principles of the relationship for all to refer to in tough times.

2. Be wary of a proposal from your provider based upon their ‘standard contract terms’

Pre-contractual representations from your ‘expert’ suppliers/providers are likely to be an important part of your decision-making process. What they say they can do, and their responsibility to be honest, clear and complete in their discussions with you throughout your relationship with them, even before you sign anything, is the basis upon which you often make your decision to proceed with them. It’s what helps to build the trust between you.

So why would you consider signing this away? Many proposals from strategic service providers come with the caveat that the price is based upon ‘standard contract terms’. These terms, more often than not seek to limit liability by excluding all verbal and written advice and assurances provided to you, meaning you need a stronger reliance on their ‘implied expert responsibilities’ should things go wrong.

Make clear from the very start that if bidders for your project wish to be considered, they must be prepared to contract for the advice they are providing to you. After all, you are not asking them to contract for something they haven’t already promised either verbally or in emails they have provided to you. Then include all pertinent information from those emails, brochures, conversations, websites, scoping and so on as part of your contract. This is to ensure that the contract terms have context around them in the event aspects of the terms turn out to be ambiguous and could be interpreted in ways other than what both of you intended.

3. Watch out for ‘standard terms’ that slip in during the relationship

When you receive paperwork from your strategic partner always watch out for the fine print. Order forms can contain references to ‘standard terms’ that could theoretically kick in at an action point – when you wish to make a change to the contract, buy something new or implement a project, for instance. While your contractual agreement may take precedence over theirs, it is far better to avoid the possibility of misunderstandings degrading into a ‘battle of the forms’ legal debate by simply ensuring that those with legal hats on review all documentation before it is accepted/signed.

4. Service Level Agreement/Operating Level Agreement expectation misalignment and bonus credits

While it is absolutely appropriate to look to create the right environment for encouraging productivity and innovation through bonus payment incentives for those that surpass expectations, the service level agreements that determine your definition of what’s expected need to be carefully aligned and negotiated to ensure the right behaviours are driven between you both. Incorrect alignment of bonuses and credits often drive unintended behaviours that do not help you achieve your business outcomes.

This can be a delicate operation which, if not done correctly, could result in you having to pay out bonus credits to underperforming suppliers, or worse still, to be stuck with an exclusive remedy of service credits for underperformance that are worth nowhere near the cost of the service failure. Lesson learned: thoroughly review your service level agreements, make sure they will drive the right behaviours to achieve your business outcomes and watch out for ‘exclusive remedies’.

5. Your right to withhold payment in cases of a bona fide dispute

As well as the exclusions you need to watch out for, there may be the odd inclusion too that should be wheedled out and dealt with in an appropriate manner. Clauses that prevent you from holding your strategic partner to account – by withholding payments/the right to set-off – for poor performance could cause you problems.

This must be fairly applied as your partner has every right to protect themselves from being unfairly penalised, as have you. It’s all in the wording and behaviours, and you’ll need to make sure that everyone agrees not only on what service levels and KPIs are expected, but how to define when penalties should come into play.

Note that withholding payment is usually a bit of a ‘blunt instrument’ to improve the performance of your vendor. However, in the event all else has failed to improve performance, then this is an option that is not only open to you, but one that it is important you exercise.

English law usually takes ‘behaviours’ as its precedent over and above the written contract terms, thus, by ‘ignoring’ poor performance and continuing to pay, you are signalling, contractually, that performance is not an issue and you start to become liable to pay for poor services in any event. There are ways to protect yourself against this situation by modifying your behaviour when dealing with this type of situation. We will cover this in a future article.

6. Why don’t we just ‘agree to agree’?

No, please don’t. Always be as precise as possible in your contractual agreements. Ambiguity leads to confusion, confusion leads to conflict, and conflict can lead you to the ‘dark side’ of contractual relationships. While ‘agreeing to agree’ later on by leaving unresolved issues in your contract may seem like an acceptable trade-off for a swifter start to a project, always try to avoid doing so where possible.

And, if it is absolutely necessary to do so ensure that at least the timeline to completing this missing information is enshrined in a contractually binding pathway alongside an effective dispute resolution provision should you not be able to do so.

Note that there is some recent case law that indicates courts are taking a more holistic view of the ‘spirit’ of a contract so that you can rely more heavily on certain aspects of ‘agreements to agree’. However, this is a recent development, so it is much better to avoid the misunderstanding in the first instance, save yourself a lot of uncertainty and expense, and clarify as much as you can upfront with appropriate timescales to avoid future issues arising.

7. The problem with limited liability

Most clauses that one side or another will look to slide into the agreement with as little a fanfare as possible are those that limit liability. It is quite right for both sides to worry about the fairness of these clauses, which is why it is imperative that you are able to quantify potential losses that could result in the event of a project that does not deliver on your expectations. Clarity at this stage will be good all round.

8. Testing and acceptance

Contracts should have clear provisions around satisfactory quality, fitness for purpose testing and acceptance and the duties on the provider to have tested their deliverables to prove quality and fitness for purpose prior to UAT (User Acceptance Testing). Often the project documents will seek to overwrite these provisions and push responsibility for testing, quality and fitness onto the client. Keep a close eye on that – it fundamentally alters the rules of the game. Again, you can put reliance on ‘implied expert responsibilities’ of your vendor to realign the balance in a fairer way, but better to avoid this if possible and be clear in the beginning.

9. Should all changes be chargeable?

What can you do if your change control process has become unmanageable? Should every change be chargeable or is there an argument that some are within the scope of the agreement and others are so small a change as to not warrant a charge. Ensure that your agreement is clear on what is and is not chargeable or fees could start to escalate out of control.

If it is a case where your vendor simply hasn’t completed appropriate due diligence on your expectations and, therefore, hasn’t provided a critical friend challenge on your requirements, it is likely a number of misunderstandings may have been lost in translation. However, note that your vendor, if it represented itself as a specialist in its field, cannot use the excuse that you didn’t tell it something as a reason to charge more.

The question is, given the vendor’s expertise, whether it asked you the appropriate questions at the outset to ensure (a) it fully understood your requirements, (b) picked up any additional reasonable requirements you didn’t document because you thought those additional requirements ‘were obvious and would have been included in any event’ and (c) sanity checked your own thinking to make sure what you had documented was correctly aligned to your business objectives.

The important point here is that if the vendor did not undertake appropriate due diligence on your requirements/expectations, then it will usually become responsible to remedy any misunderstandings at its own cost rather than yours. Recent case law has helped to clarify the position on this.

Hence, having an appropriate pre-contractual due diligence process undertaken by your vendor that (a) clarifies your understanding of what you are aiming to achieve, and (b) challenges your expectations and requirements, means that your vendor has the time and visibility to provide you with much better advice from its experience to ensure you have a fit for purpose solution before you sign on the dotted line. In this manner, all material changes are identified ‘upfront’ through the diligence process and, therefore, lack of clarity over future chargeable changes is very much minimised.

10. Buyer bears the cost of exit

Beware of any clauses that look to require you to bear the costs of transferring services in-house or to another provider. Often these include blanket responsibility for these costs no matter the circumstances, and in some circumstances, this of course is not a suitable way forward, especially in the event you are terminating for poor performance rather than ‘convenience’.

If you simply wish to move your services away from your strategic partner because your own priorities have changed or for reasons of convenience, then the likelihood is that you will be responsible for the costs of doing so. And it would be fair for this to be the case – providing those costs are reasonably calculated and not just an assumption of profits to the end of the contract.

However, what if the vendor is not living up to its SLA? What if productivity has slipped below acceptable levels and despite repeated attempts you have not been able to recover the situation?

In these circumstances you may wish to exit early and have a reasonable case for demanding that the vendor pays for the exit and transition costs. And, at the end of the term of your contract you should have a clear and fair path to walk laid out in your contractual terms for who pays for what.

Ambiguity at this stage can cause tension and as the conclusion of a contract is something that both parties will be preparing for well in advance, this is likely to affect the relationship sometime before its expected end.

Problematic Outsourcing CTA