Are you up to scratch? Managing Outsourcing Contracts In Challenging Times September 2009

Transcription

1 Are you up to scratch? Managing Outsourcing Contracts In Challenging Times September 2009

2 Foreword. Good contract management is more important than ever. In the current challenging economic market, many customers are taking a fresh look at their outsourcing contracts and, in some cases, trying to exit or renegotiate them. Taking this sort of decisive action is fraught with risk if the contract has not been properly managed. We therefore asked Pierre Audoin Consultants to survey senior contract managers from 50 top multi-national organisations to see how some of these issues are being addressed in practice. Overall, the picture is very positive. Most of these organisations take a rigorous approach to contract management by investing in the contract management process, utilising change control procedures and keeping track of correspondence. However, in many cases there is still room for improvement. An analysis of the results is set out below and full details of the survey are at the back of this report, together with comments from the respondents which provide additional insight. I hope you are able to take the time to read it and ask yourself if your approach to contract management is up to scratch. Marly Didizian Global Co-Head of the IT & Business Services Sector Partner, Linklaters September Linklaters PAC Survey 3

3 Contract Management Cost and Team Contract Management Tools Pierre Audoin Consultants surveyed 50 Overview of findings. Survey Methodology. senior IT executives at top multi-national or public sector organisations. Each organisation had a world wide turnover in excess of US$500m. Good contract management requires investment to monitor the other party s performance, handle change, resolve disputes and ultimately build a strong workable relationship. Our survey found that the average spend on contract management was about 4 per cent of total contract value. This was slightly lower than we expected with other studies over the past few years indicating a figure closer to 6 per cent. However, many respondents invest much more with almost 15 per cent investing more than 10 per cent of contract value in management. Investment is only half the picture and it is equally important to get the right team on board. A classic failing is not having continuity between those negotiating a contract and those who have to manage it in practice. This can lead to the negotiation team accepting positions that may not work in practice and the management team failing to take advantage of, or even understand, hard won contractual terms. The responses to our survey indicate that most organisations now have this problem under control with over three quarters claiming there is a lot of continuity between these teams. Service Levels and Service Credits Service levels continue to be one of the key management tools by providing both ongoing reporting on the supplier s performance and driving good service delivery through the imposition of service credits. Unsurprisingly, 94 per cent of respondents use both service levels and service credits in their contracts. However, nearly a fifth did not apply service credits in practice; a potentially surprising figure but one that reflects our experience of customers who are happy not to enforce formal financial sanctions against their suppliers so long as they are satisfied with the overall service delivery. The respondents use a range of other contract management tools. These include: regular customer satisfaction surveys, information on staff turnover, reports on innovation in the industry, split of work completed onshore and offshore, and regular reporting on costs and project delivery. Poor record keeping is a common bugbear in any contractual dispute or renegotiation, particularly if a formal change control process has not be used and, instead, amendments and variations have been agreed orally or by . Trying to analyse and assess a mass of informal or unwritten correspondence is an uncertain, expensive and often thankless task. Fortunately, most respondents are alert to this issue and 88 per cent claim to use a change control procedure for all substantive changes under their contracts. However, you can have too much of a good thing, and a balance needs to be struck between formality and flexibility. In a number of cases, particularly in the public sector, the change control process is applied inappropriately. As one respondent put it: There seem to be no short-cuts, regardless of the scale of the change required e.g. even for an infinitesimal change, [I] often find the supplier saying that they need approval from lawyers/ accountants in America. The majority of respondents use technology to help with this process, for example employing specialist software to keep track of key dates and deadlines or specific software to store correspondence and documentation about their contracts. Financial services companies were particularly good in this area with 90 per cent having formal systems to hold correspondence and documentation. Contact Meetings Good communication is a vital part of good contract management. As one respondent put it: There is often a difference of opinion on what we want and what the supplier thinks we want. It is not surprising that 100 per cent of the respondents held regular formal meetings with their counterparts and almost all kept formal minutes of those meetings. Those minutes provide an important evidential record of each party s performance under the contract, so most respondents had a formal process for approving the minutes, either requiring sign off by the senior management team or sign off at the next meeting. However, this was not universal and, in some cases, unapproved minutes were simply circulated by . This can cause real problems in any subsequent dispute if those minutes do not accurately represent the current state of affairs. Conclusion. These executives all had management or oversight of large outsourcing contracts (> 10m p.a.). On average they managed 20 large outsourcing or service contracts, with one individual managing over 250 such contracts. The breakdown of respondents by sector is set out in the table below The outsourcing market has matured considerably over the last decade. Customers have built on their early experiences to outsource more of their functions under more advanced contractual structures. But signing a deal is only the start of the journey. As one respondent put it: The negotiations don t stop once the contract has been signed - they begin. This is particularly the case in the current volatile market conditions - many respondents cited the need for contracts to be flexible enough to adapt to new market conditions, new business requirements and new strategic aims. Financial Services Manufacturing Media & Telecoms Transport & Utilities Public Retail Services Are customers prepared for these changes? The survey does identify some shortcomings. For example, of those surveyed: > 6 per cent do not keep formal minutes of meetings; > 12 per cent do not use a formal change control procedure; > 22 per cent do not have any formal procedures for storing s and other correspondence; and > 26 per cent say there is little or no continuity between their contract negotiation team and contract management team. However, this is the exception rather than the rule and, overall, the survey indicates an increasingly confident and professional approach to contract management. 4 Linklaters PAC Survey 5

4 Contract Management Cost and Team Service Levels and Service Credits How much continuity is there between your contract negotiation team and contract management team? Do you have a lawyer involved in your contract management team on a day to day basis? How frequently does the contract management team refer to the underlying contract? Do you have service levels and service credits in your contracts? If yes, are the service levels measured and reported on in practice? If yes, are service credits applied in practice? A lot A little ne 26 How much resource/overhead do you dedicate to contract management? Is there an increased overhead in managing multi-sourced contracts? 56 4 Frequently Occasionally Never What other management information do you use in addition to service level performance? We receive staff churn analysis as we want to be certain that there is not a high level of staff turnover on the supplier team that is supporting us Global Airline Operator We tend to ask our suppliers for information about the industry about trends in terms of innovation - projects that they are working on where they can bring new ideas to our relationship A lot A little ne Business Services Provider We look at areas such as volume, cost, resourcing and key events for the months. Retail and Investment Banking Group I provide a status report to my management every month which includes customer feedback surveys, and a review of the split being performed onshore & offshore. Global Truck Manufacturer 6 Linklaters PAC Survey 7

5 Contract Management Tools Do you operate a formal change control procedure for your contracts? How do you store s and other documents? If yes, do you require that all change control notices are approved by legal? Do you have a formal procedure to store copies of all s and other correspondence relating to your contracts? We store it on our e-procurement systems. Global Agricultural Business All contracts are stored in a locked cabinet in the UK and there is one copy with the contract manager, one copy in the cabinet and one copy with myself. 88 Oilfield Engineering Provider 82 Basically none of the s are deleted. All the documentations are digitised. Major Electronics Manufacturer 43 We hold a supplier relationship management file, where all relevant/appropriate correspondence is kept. This is separate to contract information itself. Pre-contract correspondence is not kept interested in what they have, not how they got there. Local Government Agency How do you keep track of key dates and deadlines? Specific software General office software Manual PAC Survey 9

6 Contract Meetings Do you have formal meetings with the supplier/customer? If yes, do you keep minutes? If yes, who prepares them? How do you sign off the minutes? All the senior management figures involved in contract management on both sides have to sign it. Major Electronics Manufacturer Suppliers send us the copies of the minutes and we review them and in the next review meeting we would formally sign them off. 23 Business Services Provider Customer Supplier Alternate 28 Depends on the value. We all have certain financial competence that we can sign off and if it goes beyond that then we need to go to the board. So there is a defined procedure for this. Global Chemicals Manufacturer It s an agenda item for the next meeting. First agenda item is to agree to the minutes of the previous meeting. Global Truck Manufacturer How frequently are issues escalated beyond the front line contract management team? We have no formal sign off procedure. We just send an . Major Logistics Company Frequently Occasionally Never 10 Linklaters PAC Survey 11

7 Contract Relationship Issues Do you have a good relationship with your suppliers/customers? Have you found contract management a problem in practice? What major problems arise out of contract management? Flexibility is a challenge. It is difficult to change or terminate contracts or elements of contracts in order to meet our new business requirements Major Insurance Provider We have found that we need to tighten everything down and make sure we record details of every action relating to the contract. You need to focus on ensuring that everything is signed off and detailed and have everything clearly documented. This takes time. Global Truck Manufacturer Inability to apply what was fought for in contracts to the management of the contract itself. Major Telecoms Operator What major problems do you have with your relationship? The time difference has been a problem. Some of the outsourcing agents are located in other countries, which can make communication a challenge. Global Investment Bank Change management is the key problem. There seem to be no short-cuts, regardless of the scale of the change required e.g. even for an infinitesimal change, [we] often find the supplier saying that they need approval from lawyers/accountants in America... Local Government Agency The key problem is attrition of key supplier decision makers. [We] may agree a framework of action, it is then documented as best as possible (but documentation is never perfect). However, if that person then leaves, and e.g. the supplier becomes subject to different pressures, they may want to re-interpret what had been previously agreed. Major Supermarket Communication and a lack of management resources on our side are the two challenges that we have. Global Airline Operator Changing market conditions and how they impact our strategic aims. Global Chemicals Manufacturer There is often a difference of opinion on what we want and what the supplier thinks we want. Central Government Agency 12 Linklaters PAC Survey 13

8 About. Linklaters Technology, Media and Telecoms group regularly advises customers and suppliers on outsourcing, IT projects and a range of other commercial transactions in both the private and public sectors. Linklaters regularly works on the most complex, cutting-edge and high profile commercial deals and is ranked Tier 1 for Information Technology and Telecoms (including outsourcing) in The Legal 500. About Pierre Audoin Consultants. Pierre Audoin Consultants (PAC) is the leading market research and strategic planning firm for the Software and IT Services Industry (SITSI ). We advise IT companies on developing successful endto-end growth strategies in Europe and in the U.S. through planning, development, implementation, and ongoing support. With over 30 years of experience in the IT industry, we have established key contacts with our clients and developed solid, longstanding relationships with them through numerous face-to-face interviews. For more information, please visit: If you have any questions, please contact Linklaters at: If you have any questions, please contact PAC at: John Crozier Partner, London Christian Hey Partner, Frankfurt Nick Mayes Senior Consultant PAC UK Jean-Christophe Bodhuin Managing Director PAC UK Tel: (+44) john.crozier@linklaters.com Tel: (+49) christian.hey@linklaters.com Tel: (+44) n.mayes@pac-online.com Tel: (+44) jc.bodhuin@pac-online.com Richard Cumbley Partner, London Elisabet Lundgren Partner, Stockholm Tel: (+44) richard.cumbley@linklaters.com Tel: (+46) elisabet.lundgren@linklaters.com Marly Didizian Partner, London Marianne Schaffner Partner, Paris Tel: (+44) marly.didizian@linklaters.com Tel: (+33) marianne.schaffner@linklaters.com Stéphanie Faber Partner, Paris Tanguy Van Overstraeten Partner, Brussels Tel: (+33) stephanie.faber@linklaters.com Tel: (+32) tanguy.van_overstraeten@linklaters.com The team knows its stuff, works hard and understands the commerciality of a project Chambers UK 2008, Information Technology 14 Linklaters PAC Survey 15

9 linklaters.com This report is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of the contacts listed in the report. The term partner in relation to is used to refer to a member of or an employee or consultant of or any of its affiliated firms or entities with equivalent standing and qualifications /08.09