Starbucks Terminates HRO Contract with Convergys; Liverpool Victoria Replaces EDS with Atos Origin; Deutsche Post Kills Huge HP Outsourcing Deal. These are a few headlines about outsourcing deal terminations. The reasons were the same as they were a decade ago — cost overruns, governance failure and delivery failure.
In 2005, a research report released by Deloitte Consulting clearly stated that the year 2004 saw a significant rise in distrust in outsourcing relationships and more customers opted for deal terminations — 44 percent chose deal termination over litigation, re-negotiation and other remedies that involved mutual understanding. The trend has improved a bit as both customers and service providers have matured. The recent report released by Deloitte, “Why Settle for Less,” reveals that 70 percent of the respondents — in all 300 global players — reported being satisfied with the outsourcing setup, yet a disturbing 39 percent revealed to have terminated at least one contract and moved to other service providers.
Europe too is getting matured in handling outsourcing relationships. While evaluating the U.K. IT-services deals, Pierre Audoin Consultants, the U.K.-based consultancy, revealed that just 13 percent of the U.K.-based companies that updated their outsourcing deals during the first seven months of 2008 terminated the initial deal to move on to a new provider.
There have been numerous articles that compare outsourcing relationships with marriage, and to extend the analogy, outsourcing contracts have started resembling the infamous pre-nups. The trend is that service providers and customers now more strongly believe in deciding beforehand about the exit strategies and the payouts, even before signing the deal. Definitely, the cynicism is infectious and what happens in a marriage is making way into business too.
Disputes to Disagreements
Legally, the term dispute has a strong connotation attached to it. “They are never disputes, they are disagreements. I have had customers wanting to terminate the deal due to change in the business needs and the contract did not provide for any regulations in such a situation. Sometimes the disagreements arise due to mismanagement of change management,” said William Bierce, Partner, Bierce & Kenerson, a law firm.
Change management and governance failure are reported to be the top reasons for break up between the provider and customer. Problems relating to delivery failure or cost overruns can still be sorted out through discussions, where as the case of governance and change management that challenges the very essence of the contract takes a hit. “In some cases the initial contract is scrapped and a brand new contract is drafted. While in the other the scope of the contract, SLAs and cost changes are incorporated,” said Stephen Nordahl, Partner, Global Technology Transactions Group, Milbank, Tweed, Hadley & McCloy. “Here at Milbank, we have two sorts of disputes, small-d-disputes and capital-D-disputes. If it is the latter, then we know it’s been on for a while and the two parties failed to reach an agreement, so they seek the help of a third party; whereas in the former case they probably might need to incorporate some changes in the contract due to the changing business needs,” added Nordahl.
The study by Deloitte also shows that contract termination is not the first thought that crosses the mind of the customer and provider. “Sixty-one percent of the respondents reported that in case of issues during the first year of the contract, the matters were immediately escalated to senior management, with 15 percent reporting five or more such escalations. Fifty-three percent continued to have to escalate in the second year. Clearly, outsourcing is working financially for most of the respondents, but their relationships with their providers have not been without problems, with escalations being a common practice and terminations and cancellations viewed as real possibilities,” states the study.
Initiation of Disagreement and Termination
The customer and the service provider could both initiate a disagreement and seek legal recourse, but often it is the customer who usually does so. This trend could change. “In the past, customers had more powers, and were usually the ones to find faults and raise arguments. However, the last few years have seen a change in the trend and a lot of providers have also come up with issues of non-cooperation or lack of sufficient information to deliver the services adequately,” said Bierce of Bierce & Kenerson.
It is a general belief that the power of contract termination lies in the hands of the customer. The fact is to some extent true, but lately the trend is that even providers have voiced out their disagreement with the customer. It is more of a reputation issue for the service provider whenever a contract terminates. So the providers prefer re-negotiation to termination or litigation.
“I would say it is mutual. Whenever there is a situation of discomfort in a contract, both of them — customer as well as service provider — feel it and sometimes say it together, while most of the times one of them have to initiate it. So it is the matter of timing,” added Nordahl of Milbank.
“Being a provider, we have had also raised disagreements at times. But termination is usually not our opted choice. And the situation for termination does not come in to discussion until the matter of disagreement reaches out to the senior management on both the sides. From the service providers point of view, disagreements are normal as they sometimes help in improving the relationship but termination just leaves a bad taste for both the provider and the customer,” said Kirill Degtiarenko, BDC Executive Director, IBA Group, a service provider.
