When Roads Are Rocky: Dispute Resolution in Outsourcing Relationships

The valley of despair in an outsourcing relationship is when vendor managers consult with their legal counsels.  Disputes that go “contractual” (the vendor management version of “nuclear”) can irreparably damage a relationship. Your job as a vendor manager or vendor account manager is to ensure the client-vendor relationship never sours.  However, what do you do when it does?

Today, we take a deeper look at dispute resolution.

Before we offer our advice on resolving disputes, it is important to plan for disputes.  As nonsensical as that sounds, an experienced vendor manager knows that disputes will arise and that they must be resolved.  As a result, it is important that your contract have reasonable dispute resolution language that allows for gradual escalation of issues.

Contracts that simply stipulate that conflicts must be resolved in a court of law simply do so under the principle that parties are encouraged to meet and confer in order to avoid the cost of legal action.  Lawyers essentially create a nuclear option which forces reasonable companies to avoid legal action at all cost by resolving the dispute.

The problem with this approach is that the process of resolving the dispute prior to taking legal action is not defined.  This ambiguity means that vendor managers and vendors do not have a process.  Lacking process, all sorts of tactics are used to resolve the dispute - and many of them are counterproductive to resolving the dispute.  The primary example of this is withholding payment, a typical vendor management strategy.  Withholding an entire payment when only a portion of the payment is in dispute doesn’t make sense.  However, vendor managers take this action in order to get the vendor’s attention.  More often than not, this puts the client into breach of their payment obligations.  Some companies use committee meetings to resolve disputes, forcing each party to formally present their arguments in front of a committee.

If the dispute remains unresolved, some contracts call for third party mediation.  The third party could be a consultant, professional mediator, or, in some cases, involvement from within the companies’ own executive ranks (enlisting a “disinterested” executive).  Identifying those resources in advance is essential, as many companies have difficulty agreeing on a third party.  The time period of this step should include the time necessary to onboard the third party.  The resolution at this step is usually non-binding - meaning that both parties can further escalate the dispute.  Costs should be equally split or apportioned based on the resolution (losers pay).

Beyond these informal dispute resolution methods, vendor managers enter into the world of formal arbitration and legal action.  As we are not lawyers, we cannot offer legal advice.  Each approach has pros and cons that your legal counsel can discuss with you.  However, be sure to agree on court of law, arbitration standards, and notification requirements.  These are the nuclear options…ones which vendor managers should try to avoid at all cost.

Now that your contract contains provisions to govern dispute resolution, vendor managers need to apply a few simple principles:

• Attempt to resolve the dispute with the vendor before entering into the dispute resolution process, but limit the time frame for doing so.  Give yourself a couple of weeks to resolve the resolution
• Only enter dispute resolution if you truly have a good faith argument.  Clients that use dispute resolution to delay payments, irritate vendors, or to create negotiation leverage in tangential areas actually create a bigger relationship problem.
• Formally announce that you are triggering dispute resolution requirements and remind the vendor that they are obligated to follow them.  Do not be ashamed by the fact you are using the contractual dispute resolution process - or allow other people in your company to use alternative means of resolution.
• Follow the dispute resolution process exactly as required by your contract.  Realize that delays in the process places strain on the relationship for a longer period of time.  Your goal is to resolve the dispute and move on to healthier conversations.
• Ensure your internal team is aware of the dispute and notify your legal counsel, procurement, and other company executives.  Attention to an issue can bring about resolution on its own.
• Adhere to your other obligations.  Just because you dispute a service level penalty does not mean that you can withhold unrelated payments (unless you’ve negotiated such a clause!).
• When the dispute is resolved, work to repair the relationship damage caused by the dispute.  Visit the vendor, shake hands, go to dinner, and talk about the future.  Put the dispute behind you and focus on ensuring the vendor performs.

Do you use other dispute resolution methods?  Do you have other principles you try to instill in your vendor management team?  Share your thoughts below or send us a note.