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.
Outsourcing vendor management is not any easy discipline to learn. In fact, as compared to project management, vendor management is terribly difficult to understand and learn. Immature certifying bodies, generally limited outsourcing experience, dissimilar outsourced operations, internal personalities, and the social politics of outsourcing all create an environment ripe for limited vendor management standardization. What should you expect when you are climbing the steep learning curve?
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Maybe you’re a Michael Porter stalwart and have changed your definition of what is core versus non-core. Or maybe the “we can do it better ourself” crowd has won management attention. Or maybe vendor performance shortcomings or vendor consolidation strategies require a change of vendors. Or maybe you’re negotiating a contract and you’ve finally recognized that post-deal transition issues are real.Regardless, you’ve come to the critical point in time when terminating a vendor relationship has become a possibility. Here are a few thoughts we’d like to share with you:
Understand the Vendor’s Economics - Terminating a program before the planned end of contract term affects the vendor in the following ways: stranded capital assets (hardware, software, and facilities) that need to be depreciated sooner than anticipated, severance payments required by local laws can affect profitability, and vendor layoffs can negatively affect the vendor’s ability to hire in a local market (or break covenants with local officials). Agents cannot be simply switched to other clients without training costs, and certain SOX rules may affect how accounting treatments are applied. The result may even be a Wall Street issue. So, terminations are not without cost to the vendors, but knowing this shouldn’t always affect your decision…empathy is better than sympathy.
Know Your Termination Responsibilities - Contracts typically require a particular notice period prior to termination and, sometimes, a termination fee to be paid to the vendor. Do not be surprised by either, and be absolutely certain you know exactly how much you’re going to pay. We’ve seen emotional clients so angry with vendors that they immediately start talking about termination, only to find that they didn’t budget for the termination fee. Don’t shirk your responsibilities, either. Outsourcing is a very small world, and your reputation proceeds you…and it can turn out to bite you in the future.
Know Your Transition Plan and Budget - While we’re talking money, be cognizant that transitioning to a new vendor or to an in-house organization can be expensive. Either entity can be hit with capital expenses associate to facility, hardware, and software requirements, and their are training costs and learning curves to understand. Believe it or not, transitioning work takes more effort than outsourcing it. The reason is simple: you’re not managing day-to-day operations and it’s difficult to compel vendors to hand over the keys, regardless of the contract language lawyers have authored. In addition, every transition brings new re-engineering opportunities, which can cost more time and money. The best termination notices are accompanied with 99% complete and very detailed transition project plans. However, be open to tweaking them if flexibility will reduce risk and cost.
Know Your Alternative Well - It goes without saying that you should have an alternative, but the best companies spend oodles of time fully understanding the future state alternative(s). It would be foolhardy to simply terminate with the assumption that another vendor could pick-up the work. Vendors are not all the same. Sure, revenue is revenue, but good vendors understand how to scale programs and know the local job markets well enough to sometimes turn-away work. Those who should spend the most time are owners of large scale programs (300+ seats) or high value processes. Few programs can snap 300 agents into seats within 60 days…and wise business owners should be wary of promises to the contrary.
Use a Communication Plan - Terminating a vendor can go unnoticed, or it can become a media circus. You have internal stakeholders, Board Members, vendors, regulatory agencies, internal employee perspectives, and media entities to consider. Remember one of the fundamental axioms of communication - One cannot not communicate. Your decision (whether intentional or not) to not communicate, speaks volumes. You never, ever want the wave of media calls to greet you in the morning and not have a plan. Invest in a comprehensive, detailed communication plan before you terminate.
Be Flexible - Although your executives may already have made-up their minds, vendors often understand terminations and want to successfully manage the transitions. We seen flexibility pay handsomely - one termination notice would have affected 300 vendor FTEs and carried a significant fee. The vendor offered to reduce the fee if the termination could be delayed by a mere two months in order for the FTEs to join another client’s program beginning later. That’s a great win-win.
Expect the Best, Plan for the Worst - We’re all professionals, and we know what our bosses and companies expect from us. However, sometimes emotions get in the way…or agents need to make decisions to guarantee financial stability. Remember that terminating a program can have an effect on local job market conditions and agents may leave earlier than anticipated in order to get a new job elsewhere. Attrition is the bane of transition plans, as the old vendor cannot hire, and the new vendor/internal organization rarely can ramp-up fast enough to handle unanticipated attrition. They key is to anticipate attrition and plan for it.
Let’s begin by saying that beginners really shouldn’t negotiate outsourcing contracts. Outsourcing contracts are among the most complicated deals to negotiate. The negotiating team must account for transition plans, disposition of assets and people, scope control, service levels, indemnification, liabilities, complex pricing schedules filled with escalators and descalators, governance, etc. It’s similar to a divestiture deal - except that you cannot escape the results as easily. Wall Street divestitures are handled by mega-legal firms…so, the odds are that your company doesn’t have the right level of experience.
The most interesting dynamic is that the vendors have negotiated many more deals than customer has - and they’ve managed many relationships, so they know where the risks are and what your pressure points are. Most operations people spend the bulk of their time managing internal functions and politics. Maybe you have experience buying cars or homes. Outsourcing deals are nothing like this type of transaction. If possible, find an outsourcing pro to assist with negotiations. What follows are considerations if you are budget strapped and fool-hardy 
Know What You Have and Fear Material Changes - The number one issue buyers should manage is being sufficiently self-aware to know what you know - and to know what you don’t know. There are so many processes, procedures, and exceptions in today’s operations areas, its difficult to know them all. In addition, there are areas where good performance is challenging, season volumes ebb and flow, and your customers’ needs are the exception to the rule. It could take 2-3 months to document everything. Do it and do it well. There are two reasons for this. First, experienced vendors know that their customers always have skeletons in their closets and that they cannot come hat in hand begging for price increases for each one. So, they inflate pricing to give themselves contingency. The less risk vendors have to take, the lower the price you will need to pay.
Second, any major change to an assumption (e.g., systems that won’t work internationally, customers who refuse to allow you to process their transactions overseas) will become a Material Change. Material Changes can carry significant price increase, and always open the door for vendors to renegotiate pricing. Throughout the duration of the contract, vendors will actively defend their profit margins by requiring price increases for any Material Change, such as wage inflation, system changes, new training requirements, etc. Think about it. You’re going to have to have a Material Change anyway, but why open the door for them early in the process when internal acceptance of outsourcing is at its weakest point?
Performance Expectations - Commonly referred to as Service Level Agreements, performance expectations can encapsulate day-to-day performance requirements of the program, as well as planned milestone achievements (e.g., on-time implementations, system conversions). Every performance expectation should be very well documented, quantifiably measured, and carry incentives/penalties for performance. The biggest mistake beginners make is to exclude key expectations. The second biggest mistake beginners make is define a performance expectation that cannot be measured.
A quick word on incentives and penalties: while you clearly cannot expect a vendor to lose 100% of a program’s revenue for every failure, don’t have too much sympathy for your vendors. Profit margins in this business are fat and you shouldn’t allow your vendors to think of your program as an annuity with guaranteed profit margins. That’s not how you view your business, and it shouldn’t be viewed differently by your vendors. Make your expectations clear up front, and don’t back down.
Give Vendors Incentives to Manage Your Risk - Contracts, in a large part, are about managing risks and rewards. If you’re handing over your call center business to a vendor, and they now have access to extremely confidential types of customer information, you are at risk. Vendors will attempt to limit their risk, typically to some portion or multiple of anticipated annual fees. However, what happens if a breach of confidentiality occurs, which results in a class action law suit? Such cases could have legal fees that equal your annual vendor invoice amounts alone, and carry penalties many times more than this. Who pays for this? This is why you need a good lawyer, experienced with outsourcing, to assist and advise you. Whatever you do, don’t take everything your potential vendor has to say at face value. Just like any politically biased journalist, the message contains a twist.
Vendors need to have sufficient skin in the game to put necessary controls in place to prevent a catastrophe. What incentive does a vendor serving a mega-international bank have if their liability is limited to $250,000? The cost of notifying your customers of a breach of confidentiality could exceed this many times over if you consider just postage and printing costs. What about potential lawsuits or regulatory fines?
Give Yourself An Out - Times change, people change, and businesses change. Experienced outsourcing professionals understand that relationships evolve and that deals must be sufficiently flexible to support change. One such consideration is termination for convenience. Again, vendors want predictable revenue and to protect their employees (and their companies’ reputations in the local job marketplaces and regulatory environments). However, don’t fall for guaranteed minimums or huge payments. Termination for convenience should always be priced at a sufficiently high price to avoid impulse decisions and to make the vendor reasonably whole, but keep in mind that the outsourcing business is growing fast, which allows vendor employees to be allocated to other projects, given sufficient notice and planning.
No matter what you negotiate, leave absolutely no ambiguity or placeholder. A specific amount of money and a required minimum notice provision should be included. I terminated one outsourcing relationship that was negotiated by an attorney many years prior, and the language didn’t define the specific amounts to be paid. Instead, it allowed the vendor to calculate the amount of unamortized investment it had made in the account. Pretty soon after our letter was received, the vendor provided a very, very lengthy list of investments (including sales incentives given to salespeople!). Of course we negotiated the outcome, but the situation could have been avoided altogether with some forethought.
This is a snippet of what beginner buyers should consider. As always, work closely with your legal counsel and consult with a professional if at all possible.
