How to resolve outsourcing feuds

You're wedded to an outsourcing agreement - but now things aren't going to plan. What to do? Addleshaw Goddard's Mark Amsden explains the best ways to work things out with your 'significant other'.

Last autumn IT services company Accenture called time on the £12.4bn NHS IT project, terminating £2bn worth of contracts it was working on to deliver new patient and GP systems. The decision surely wasn't taken lightly but Accenture was suffering financial losses - the company had suffered a reported 67 per cent profits drop after losses incurred on the contract.

Such disputes in outsourcing are not uncommon - there have been any number of problematic deals over the years.

Outsourcing disputes cost a great deal of time and money and are generally a loss maker for all concerned. It isn't only cost - it can also seriously damage reputations and brands, and cause shareholders to lose confidence from the perception that organisations are unable to handle outsourcing arrangements effectively.

So how do disputes arise in the first place?

Invariably the fundamental problem is down to money. Often the end user company will be inclined to negotiate very tight terms and conditions, whilst the supplier underbids to win the business. An outsourcing partnership based upon the agreement of unrealistic delivery terms for a price which leaves little profit for the supplier, is a relationship that is almost destined to fail.

This combined with the fact that no outsourcing project is cut and dried at the requirements stage and will almost certainly involve change of some sort means that conflict is bound to arise. Understandably, the customer will try to hold the supplier to the bargain, whilst the supplier will need to do everything it can to stay in - or get into - the black. These entrenched positions will ensure the two sides stay at loggerheads, until the dispute can be resolved.

These unshakable attitudes towards outsourcing can be seriously detrimental to the success of the project. Both organisations and their suppliers need to be aware they need to have a flexible, positive approach where there is give and take on both sides. The cost and inconvenience of changing supplier or 'insourcing' the business process or IT system means it is highly preferable to do as much as possible to make these relationships work.

So how can such conflicts and disputes be successfully avoided or else resolved once they start?

Especially in the case of long-term contracts, the parties need to pay careful heed to dispute resolution clauses in order to keep the relationship on an even keel and make the project a success. Here are four keys to dispute resolution:

Communication: The starting point is to use a mechanism that requires the parties to talk to each other. A proper process for escalation is essential. Irrespective of polarised views, people are generally more amenable to seeing the other side's point of view when they meet face to face. Communication restricted to letter or email is a recipe for bravado and threat.

Adjudication: The next is the use of adjudication - a form of rough justice whereby a dispute is resolved quickly, outside the courts. There is no reason why the outsourcing contract cannot specify a number of adjudicators in specialist fields, each of whom has confirmed at the outset their willingness to accept an appointment as an adjudicator if asked. The contract can then provide that particular disputes be referred to one of the panel of specialist adjudicators, who have been pre-agreed.

The adjudication can proceed quickly. Decisions are often made within six to eight weeks of appointment, before the matter has festered between the parties. The decision is binding, unless overturned by some higher authority such as a court or arbitration if the parties take it that far. It is a method of dispute-resolution used widely in the construction industry and there is no reason why it should not apply to all outsourcing contracts.

Adjudication can also iron out disputes over the scope and interpretation of requirements in IT contracts. The contract needs to be capable of dealing with all issues, no matter how large or small. (Continued on next page... )