Offshore Outsourcing Contractual Conflicts Never Payoff.

Today’s Dallas News included an interesting article on the State of Texas’ seven-year, $863M IT offshore outsourcing contract with IBM.  What makes it interesting?  The doom and gloom comments by the esteemed outsourcing advisors, Equaterra and Sierra Systems Group.

“In the final analysis, the current relationship is not sustainable,” the advisors say.  Then they suggest that the offshore outsourcing contract be rewritten by February.

The State’s alleged problem? Last year, governor Rick Perry said IBM failed to perform, “…the crucial backup of data for more than 20 state agencies.”  He then suspended the outsourcing project.  This year, EquaTerra’s commented that “…for some agencies, once a week backup may be adequate. For other agencies, where they do large volumes of transactions … it’s not adequate.”

Let’s be serious.  This is backing up data, which is arguably one of the simpler outsourcing tasks to perform and probably not worth $863M annually to perform. It is a minor task, something that should, if properly managed, be included in regular daily, weekly, and monthly reviews with IBM.  Why are the parties heading toward litigation?  It should have been resolved years ago.  Especially on a public contract.

Equally interesting, is EquaTerra’s suggestion that the contract be renegotiated.  This is a massive contract that was publicly bid and folks want to renegotiate it? This is exactly what vendors love to do.  Outbid other vendors and allow the requirements of the customer to drive renegotiation when the vendor’s knowledge of the requirements and negotiation leverage is significantly greater.  Of course, advisory firms love to play a role in renegotiation, so maybe fees are of interest?

We know of one situation where the vendors bid in a competitive process on a commercial contract for data entry worth $4M annually, deciding to not charge implementation fees.  After winning the contract, the client then issued over 150 change orders in the first three months of the project.  Total charges for changes: $1.5M.  Total increase to cost per transaction rates initially negotiated: 15%.  The percentage of service levels achieved in the first 3 months? 0%.  In Texas’s case, Grant Thorton has suggested the State of Texas has saved a mere $500,000, compared to the goal of $24M of annual savings.

What’s the problem?  Undermanaging offshore outsourcing vendors results in underperformance.  Advisors seek contract renegotiation as a means of resolving non-performance of contractual obligations.  Undermanaging internal stakeholders results in erosion on offshore outsourcing ROI.

You’ll never mimic Texas’s problem if you get it right up front, manage the vendor effectively, and govern changes.

Related posts:

1. Offshore Outsourcing Management – What’s the Problem?
2. Offshore Outsourcing RFPs: Are They Encouraging Copy and Paste?
3. Vendor Management Differentiates in a Commoditized Offshore Outsourcing Industry

Managing Offshore Outsourcing Is More Than It Seems

Offshore outsourcing vendors would make it seem easy: after transitioning services to India, the Philippines, Argentina, Jamaica, Malaysia, or your location du jour, it’s all smooth sailing.  A few conference calls each week, an occasional traveling entourage of senior vendor personnel coming to your office, and web conferences.  A simple vendor management recipe.

For disaster.

If you think management of offshore outsourcing vendors can be done successfully on the cheap, you are wrong.  Imagine an internal business unit or department of 250 FTEs responsible for a mission critical business or IT process.  If you were managing it, how often would you walk the floors, have your management team lead operation and budget reviews face-to-face, or run team building events?  You use these management tools to be successful.

Now imagine that same unit located 8,000 miles away.  What doesn’t happen now?  All the above.  Are you successful?  No.  Are there differences in expectations?  Yes.

The problem with management of offshore outsourcing is that clients rarely visit the vendor, which results in significant communication issues.  Simply put, if you outsource to a vendor located offshore, you need to adopt these six management practices to ensure your vendor meets your expectations:

• Travel – Vendor management teams should visit offshore outsourcing locations no less frequently than quarterly.  More frequently is better.
• Travel with Purpose – Visits to offshore outsourcing locations should not be meet-and-greet events.  The purpose of the travel is to do the same work face-to-face. Visits should replace the same daily, weekly, monthly or quarterly meetings that would otherwise occur remotely on the same days.  In addition, add team building events, like lunches, dinners, drinks, or parties.  Give your vendor management team the opportunity to get-to-know the vendor’s leadership team and their day-to-day delivery teams.
• Send the Right Resources – Some clients reserve the right to travel to offshore outsourcing locations for senior executives, which is a bad business practice.  The lowest level day-to-day vendor management personnel should travel regularly, including vendor managers, quality auditors, trainers, and IT infrastructure teams.  Encourage internal audit teams to audit locations, too.
• Mix Up The Travelers – When clients send the same vendor management personnel to offshore outsourcing locations over and over again, they collect the same data and send the same messages.  Fresh faces with different perspectives contribute positively to your management capability. Alternate personnel so all vendor management personnel have the opportunity to visit.  If you send the same people, they become accustomed to the offshore outsourcing vendors, and their critical insights become compromised.
• Send the Senior Executives and Internal Customers – All too often, the first and last time senior executives and internal customers visit offshore locations is during vendor selection or during transition.  If senior executives or internal stakeholders change, the new people may have no first hand experience with your vendors.  The lack of recent first hand experience means that people will not have a good perspective on the reality of the vendor performance.  Send senior executives and customers on annual visits to take part in annual vendor performance reviews.
• Create an Annual Travel Plan – It is not just for budget purposes, its to ensure that the visits occur.  Too often, vacations, organizational changes, or industry events create reasons for travel to not occur.  In addition, last minute visits mean that the right vendor personnel may not be available.  Put the travel on the calendar and book reservations in advance.

Related posts:

1. Offshore Outsourcing RFPs: Are They Encouraging Copy and Paste?
2. Offshore Outsourcing Vendors, Customers, and Advisors: They Should Know Better
3. Offshore Outsourcing Vendor Governance Organizations

Jamaican hurricanes, Costa Rican volcanoes, Philippine political coups, Indian taxi strikes, Chinese government-operated firewalls, Canadian blizzards, and the legendary American backhoe operating behind your data center are dangers to your business when you outsource to offshore locations.

Realistically speaking, geologic, social, political and weather-related disasters his every city of every country. Granted, some events are more or less likely in certain locations, but the unexpected can strike you when you least expect it. What would you do? Do you have a business continuity plan or a disaster recovery plan?

Here’s a place to start:

• Consider the Impact, not the Event – Generally speaking there are four types of impacts that you need to plan for: loss of people, loss of facilities/building, loss of connectivity, and loss of applications. Any given event can cause one or more of these impacts. For example, a political coup could cause your operations team to have insufficient quantities of personnel (loss of people) and loss of connectivity (if the telecommunications company shuts down). Plan for the impacts, not the disaster.
• Consider Time Frame of Impact – An impact can last 5 minutes, 50 minutes, 5 days, 5 months, or be permanent. When an event creates an impact, your plan should provide clear direction based on the expected duration of the impact.
• Have Clear Procedures – A plan that says “open new center in a hotel conference room” is insufficiently detailed. The plan should have clear procedures for retraining, relocating personnel, reconnecting systems, and procuring goods/services necessary to recover. For example, relocation of personnel should have a clear plan for sources of transportation, roadmaps with specific routes to take, and temporary housing.
• Plan for Staged Recovery – Few serious impacts can be instantaneously resolved. For example, telecommunications circuits are generally recovered one at a time. People will return to work slowly.
• Consider Side Effects – A major weather disaster is typically followed by disease. So, while a hurricane is unlikely to cause a loss of people, the cholera, stomach diseases, or other health concerns could.

Finally, test your plan at least once per year by first calling a pre-planned meeting and role-playing resolution and actions. Later, call an emergency meeting when leaders are not prepared. Take notes on the actions (do not critique in the middle – let the disaster and recovery unfold). Afterwards, analyze the actions and provide feedback. Expect your business continuity and disaster recovery plans to improve each time your rehearse. Also, expect your business leaders and vendors to get better each time. Hopefully, the practice will pay off when the next emergency occurs.

Related posts:

1. Removing Key Vendor Personnel in Outsourcing Relationships
2. Offshore Outsourcing Management – What’s the Problem?
3. The Business of Outsourcing Certifications

Picture this: Your company has outsourced customer service for some products, but not all products.  You have a single vendor with over 1,000 seats dedicated to your operation.  These seats are located in several centers located in the USA (for reasons not important to this story).

Your vendor management team is made-up of a single person.  This person coordinates five different programs, handles contractual issues, reviews invoices, schedules training, manages quality, and sets the direction of the five programs.  Needless to say, this person is very busy and, quite honestly, overwhelmed.  No single person could perform this job.

One day, an internal customer service group who did not outsource their operations planned a team lunch to celebrate February birthdays.  However, 12pm-1pm is also the time when customer service team receives the highest call volumes.  As the team all wanted to celebrate together, they needed someone to cover the phones while they ate cake and ice cream.  Driven by hunger or the love of a celebration, the team made a fatal decision.

A few minutes before noon, after the cake and ice cream were set-up in a nearby conference room, the team’s workforce manager flipped a switch that redirected the calls to the vendor.  The phones went silent and the team rushed into conference room.  They sang happy birthday so loudly that other people in the building could hear them. They took the time to also observed a company tradition of sharing what they liked about each of their February birthday team members.  It was a great party.

Meanwhile, someplace else in the country, the vendors’ call center was completely inundated.  Service levels fell to 4%, abandonment reach 85%, and the workforce team was struggling to understand the reason for the high call volumes.  Worse yet, these weren’t their calls.  They had no training on these calls.  So, following standard procedure, once they recognized that a caller was in the wrong queue, the vendor’s agents would cold transfer the call into the right queue…which promptly routed the call back into the vendor’s queue.  Customers were irate.  The team director tried to call the vendor manager, but the vendor manager was in meetings and was unreachable.

Back at the client’s center, the happy agents returned to their desks and once everyone was ready, the workforce manager flipped the switch back.

Do you have a story to tell about vendor management gone bad?  Let us know.

Related posts:

1. In the Absence of Outsoucing Governance or Vendor Management
2. Vendor Managers Can Satisfy Internal Stakeholders
3. Offshore Outsourcing Vendor Governance Organizations

XYZ has two call center programs.  One is a major inbound customer service program and the other is a small (about 45 agents) complex inbound/outbound marketing programs that focus on driving customer loyalty and create a significant revenue lift.

XYZ’s marketing and customer service organizations feud regularly about vendor management.  Customer service insists on “owning” the vendor relationships and requires the marketing organization to liaise with the vendors through customer service’s vendor management team, which was insufficiently staffed and generally lacks vendor management experience.  This inadequacy led the marketing team to circumvent the customer service vendor management team and they began to manage the vendors directly.  The vendor management team became irate and the resulting seething rift between the two organizations was/is palpable.

Then came Christmas, the busiest 60 days of the year for XYZ.  The customer service vendor management team made a significant forecasting error and found themselves delivering a 3% service level over several weeks.  Yes, that meant that they answered 3% of calls in 45 seconds, which is terrible.  XYZ is a major company.  This was a nightmare.

Meanwhile, the marketing program was hitting on all cylinders.  It was creating a record ROI and the vendor and the vendor agents were ecstatic.  Attrition was a minuscule 10% annually.

This is when things got personal.  Jealous by the success of the marketing program, the customer service team ordered the vendor to immediately put all of the marketing program’s’ agents in the customer service queues.  They didn’t notify the marketing program.

We should point out for those less knowledgeable on the subject that a program that has thousands of seats is not going to create a meaningful lift in service level by adding a mere 45 agents.  This decision was almost entirely political, and was also poorly calculated.
In this case, XYZ sacrificed a successful marketing program and gained nothing, as all but 9 of the agents left within two weeks of joining the customer service queues.  Furthermore, XYZ squandered the returns they were creating in the marketing program – about $1M.

Funnier yet, the marketing program didn’t notice that their program had stopped until one week later…their success had less to do with their own vendor management capabilities than the vendor’s awesome execution.  Dumb luck?

Can’t we all get along?

Related posts:

1. Another Tale from “When You Don’t Have Vendor Management Governance”
2. Vendor Managers Can Satisfy Internal Stakeholders
3. Poll: How did you learn to be an effective vendor manager?

Marketing launched a new campaign. IT’s servers were slow. The telecommunication vendor’s T1 was hit by a backhoe. The competitor launched a misleading campaign. The weather shutdown deliveries in Chicago.

Well, have you noticed the change in tone after the call center or backoffice team was outsourced?

Customers don’t like foreign accents. The vendor cannot manage attrition. Prices are more expensive than they are [insert nearby city]. Quality is bad. The contract is the problem.

In a classic Dr. Jekyll/Mr. Hyde transformation, internal stakeholders apparently have no qualms with scorching the earth with “it’s the vendor’s fault” or “outsourcing was a bad idea” type comments. Frankly, its disingenuous and doesn’t contribute to the success that is so necessary for today’s competitive environment.

Believe it or not, vendor managers can satisfy internal stakeholders. They can create a productive, opportunity-seeking environment. Use best practices to paint accurate, compelling pictures of your vendor-managed operations.

Here’s how.

• Drive Vendor Performance – No other factor matters more than ensuring the vendor performs. Do everything possible to make the vendor successful – improve training, drive continuous improvement, take the time to thank vendor agents, and champion changes within your own company that remove obstacles and streamline the vendor operations.
• Quantitatively Measure Internal Stakeholder Satisfaction – Internal stakeholders are rarely quantitative – they are simply outstanding storytellers. How often have you heard, “A customer called me and complained about the vendor’s accents.” No operation is without flaws, however do not allow yourself to be fall prey to storytellers. Instead, actively create venues for stakeholder feedback using objective measures. On a quarterly basis or more frequently, ask your customer to rate their satisfaction. Track this. Trend this. Ask questions about the feedback. Use the feedback to improve the program. Never, ever sit on the feedback and allow the situation to fester and deteriorate.
• Promote, Sell, and Tell – Vendors do many, many great things. Take the opportunity on a semi-annual or quarterly basis to promote the vendors using newsletters that tell recent stories about performance highlights and overcome challenges. Never rest on your laurels! Although the business case may be 5 years old, create opportunities to sell the original business case again. Finally, tell people about your success and challenges in informal communications and meetings. Never, ever disparage your vendor, except when they clearly cannot perform. Even then, tell people about the opportunities other vendors could create if you replaced the incumbent.
• Baseline and Compare Results – Nothing creates momentum like comparing current costs and performance to historical baselines. Even if you forgot to baseline or if changes to the relationship/objectives are different, baseline the performance at that point in time and continue to track ongoing results.
• Conduct Internal Quarterly Reviews – Inundating internal stakeholders with newsletters, monthly results, and accomplishments in email is fine, but easy to miss. Meet with your stakeholders in a face-to-face meeting on a quarterly basis to review operations and achievements. Build great relationships and look for opportunities to realign objectives based on your stakeholders’ evolving environment. Invite your stakeholders to your quarterly vendor reviews.
• Be Opportunistic – If you have created success, there is always the opportunity to create more success by enlarging the pie. The best vendor management executives are entrepreneurial – always seeking for new challenges that their high performing stable of vendors can overcome.
• Never Hide Challenges – If performance wasn’t good, or the legendary backhoe really did interrupt service, communicate these challenges. More importantly, create a culture of root cause analysis and share those root causes with your stakeholders, along with the actions you’ve taken to improve future performance.

Do you do something different to create a positive relationship? Let us know!

Related posts:

1. In the Absence of Outsoucing Governance or Vendor Management
2. Another Tale from “When You Don’t Have Vendor Management Governance”
3. Poll: How did you learn to be an effective vendor manager?

The problem is that you’ve outsourced your operation and, while you’re still responsible for ensuring the vendor delivers, you did abdicate certain recruiting and hiring choices.

With that said, if you negotiated your contract thoughtfully, you have retained the right to remove certain vendor personnel from your account.  And isn’t that great…you can simply send a letter and the person of your ire will disappear forever.  In fact, it’s easier than terminating your own employee.  It’s also far more devastating.

Keep in mind that you should never have arrived at this point.  Here’s an ounce of prevention:

• Interview Key Resources – No matter how wonderful your vendor claims certain people are, you must interview these resources before accepting their appointment to key positions.  These interviews must occur face-to-face, even if the resource resides in another country.  Telephone interviews are insufficient.  Furthermore, depending on the role, more than one interviewer should speak with candidates.
• Use the RFP/Vendor Selection Process – Effective RFP processes require actual key personnel to present key topics and respond to questions.  These are opportunities to evaluate the potential key resources.
• Require a “Succession Plan” – Every key role should have a solid succession plan and developmental goals that must be achieved each year.  The reason is simple: after a couple of years, most account teams experience turnover or promotions to greater opportunities.  Vendors need a plan to ensure key roles are never vacated for long periods of time.
• Provide Regular Feedback – Your job isn’t to develop vendor employees or submit feedback on performance.  After all, the vendor’s performance should be directly correlated to SLA and milestone performance.  However, every key vendor resource should be required to participate in 360 degree performance feedback, including feedback from clients, at least semi-annually.

Despite preventative actions, sometimes things don’t work out.  However, clients should be careful about the use of formal removal procedures, except in clearly dire situations triggered by ethical issues or significant performance problems.  Rather, vendor managers should informally communicate concerns to senior vendor leaders and give these leaders opportunities to resolve issues behind the scenes.  Often times, problematic situations can be resolved through a vendor reorganization that shift roles or moves certain people onto other accounts.  In addition, it gives the vendor time to find qualified replacements.

When the time does to give formal notice, after multiple warnings have not been heeded, vendor managers should be firm and expect immediate removal.  The communication should be done discreetly to key senior resources in order to avoid impacts on vendor morale and performance.  The vendor may ask for more time and the client should listen to this feedback carefully.  Also, timing should be considered – do not remove certain resources at critical junctures, as the impacts could be devastating.  However, the client has every right allowable within the contract, and there are times when formal action needs to be taken.

Finally, the removal needs to be done tactfully.  No matter the situation, the client is impacting a person and his or her team members…and empathy is important.  How you handle the situation reflects on you and your company.  If your goal is to become a strategic client with your vendor, managing this situation carefully is an important step toward remaining in good favor with vendor agents and leaders.

Here’s another article on the same topic was written by Carter Santos

Have you removed key vendor resources?  How have you prevented this from occurring?  When the time came, how was the situation handled?  Share your stories with the ever growing readership here at 360 Degree Vendor Management.

Related posts:

1. When Roads Are Rocky: Dispute Resolution in Outsourcing Relationships
2. An Outsourcing Vendor’s Business Continuity and Disaster Recovery Plan
3. Onsite Vendor Management in a Global Outsourcing Environment

It wouldn’t be concerning if there wasn’t so much consolidation in the outsourcing industry.  It also wouldn’t be bad if  so many of the vendors weren’t private and therefore not subject to external audit and public disclosure scrutiny.  Finally, it wouldn’t be so critical if companies weren’t outsourcing key business processes – processes and technology support teams that take months or years to climb learning curves and stabilize.

However, the industry is consolidating, the vendors are private (or based in countries with accounting rules that are not as strict as US or European standards), and clients are outsourcing major business processes.  Imagine if you lost your entire application development or call center team overnight?  Scary, right?

The pundits of the total meltdown concept will point to business continuity planning or multi-vendor sourcing strategies.  No doubt, both of these items will ease the pain.  If you haven’t built a business continuity planning or considered a multi-vendor strategy, do it.  Now.

However, the ramp-up curve following a vendor meltdown takes time and customers will feel the impact.  Here are a few items that vendor managers should focus on:

• Create Communication Channels – Simply monitoring a company’s financial statements (assuming they are made public) is insufficient.  There are points of failure that are not disclosed publicly, such as organizational changes, changes in banking relationships, and investor changes (acquisitions, new partners/major shareholders, and divestitures).  Good vendor managers create informal communication channels with their vendors to obtain insight into potential future changes.  Furthermore, financial performance should be part of quarterly reviews (our suggestions for quarterly review are found here).  Remember: just because a company is private does not mean it cannot share financial results with you.  Require audited financial reports be provided on a quarterly basis, as well as disclosure of any material change to the ownership or financial standings of the company.
• Predicting Failure and Advance Notice – With few exceptions, financial failure is not sudden.  While SEC or other government regulatory groups’ rules may prohibit sharing information in advance of public earnings announcements or other irregular communications, financial failure can be predicted.  Use the Z-Score methodology.  Stephen Guth discusses the use and formula here.  Here is Wikipedia’s page.  Every quarter, the VMO should plot the Z-Score of its suppliers and track it, potentially using a rolling three quarter average to predict the next month’s performance.  Staying ahead of failure by predicting is critical to the success of your company and customers.
• Define Failure – One of the most common discussions in contract negotiations is termination for the vendor’s financial insolvency.  This discussion must end with a clear quantitative definition of insolvency.  This could be based on a financial ratio, revenues, sequential quarterly financial trends, liquidity, line of credit usage, or other triggers.  The worst triggers are Chapter 11 or 7 (especially 7) filings.  The reason is that once the company goes into bankruptcy procedures, your ability to obtain concessions for moving work to another vendor is limited.  Of course, just because a company triggers the clause, it doesn’t mean you need to terminate.  However, the financial health of your vendors results in sound operational results and reduced risk is easier to live with.  Sticking with financial failures out of loyalty to them creates unnecessary risk.  You have to fervently believe the company will turn the corner in a reasonable period of time.

Once failure has occurred or has been predicted, vendor managers must act quickly.

• Decide Internally Your Next Steps – Meet with internal customers, executives, and stakeholders.  Present the information, discuss the risks, and decide on next steps.  Do not let internal politics interfere with taking action.
• Failure Doesn’t Require Separation – All companies have bad quarters, years, or cycles.  Misery begets misery, as they say.  However, remember that termination is your last option. Vendors can turn the corner.  They can be purchased by their competitors or other investors.  With that said, during times of financial difficulty, expect the vendor to reduce administrative costs, cut investments, and not work as hard to retain staff.  The results could be delayed implementations, lower service levels due to lower morale and turnover, and possible technology glitches.  While service level credits will reduce the costs of poorly performing vendors’ services, they don’t fully offset the impact to your company or your customers.
• Meet with the Vendor (Frequently) – Meet with the vendor immediately and discuss the situation.  Seek additional information and ask the vendor’s CEO and CFO to participate in the meeting.  Understand what the vendor’s perspective is and ask them for their “Get Healthy” plan.  Review the plan.  Ask questions.  Draw your own conclusions and take next steps.  Remember, the actions you take, particularly if you’re a large client of the vendor, could complicate the vendor’s ability to manage operations, financial relationships, and people.  Coordinate efforts, but be deliberate.
• Plan B – In most large environments, a multi-vendor strategy provides clear alternatives to the financially struggling vendor.  Even in smaller environments, it pays to have a secondary vendor standing in the wings.  This is when parallel negotiations that end with a single winner help – because the loser has an almost fully negotiated contract that can be rapidly finalized.
• Termination – Have your bases covered.  Read our article on terminating an outsourcing relationship here.

Have you walked down lovers’ lane to discover financial instability rocking the foundation of your relationship?  How did you handle it?  Leave a comment and share your thoughts with others.

Related posts:

1. Vendor Managers Can Satisfy Internal Stakeholders
2. Managing Client and Vendor Satisfaction in Outsourcing Relationships
3. Impact of Foreign Currency Exchange Rates on Outsourcing

There’s a good conversation, with everyone agreeing that a good relationship is essential, but some divergence over the motives of clients and vendors (oops, guess what our opinion is?).

The thread of comments is definitely worth a read – and be sure to contribute your opinion.

Related posts:

1. Offshore Outsourcing Vendors, Customers, and Advisors: They Should Know Better
2. Paying Outsourcing Vendors
3. Outsourcing Contract Penalties: Do Vendors Respond to the Pain?

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.

Related posts:

1. Dispute Resolution Follow-Up
2. Removing Key Vendor Personnel in Outsourcing Relationships
3. Paying Outsourcing Vendors