By: David Hudanish

Contract Law 101. Every first-year law student learns an established tenet of contract law: a contract memorializes the "meeting of the minds" of the parties to the contract. That is, the contract contains provisions reflecting the agreements reached by the parties during the negotiation process. For instance, if I offer to sell my car to you and you accept my offer, we would enter into a contract containing provisions reflecting the "meeting of our minds."

Contract Law 101. Every first-year law student learns an established tenet of contract law: a contract memorializes the meeting of the minds of the parties to the contract. That is, the contract contains provisions reflecting the agreements reached by the parties during the negotiation process. For instance, if I offer to sell my car to you and you accept my offer, we would enter into a contract containing provisions reflecting the meeting of our minds. The contract would contain at a minimum: the price for the car and the method of payment; the condition in which the car must be delivered; the time and location for delivery of the car; and the remedies if one of us breaches the contract. To perform the contract, I would deliver the car as and when indicated in the contract, and you would pay the price in the manner indicated in the contract. Assuming neither of us breaches the contract, you and I will not have to interact again. So it goes for the relationship established by many contracts--sales of houses, equipment, stock, and even companies. Not so for outsourcing contracts.

Marriage and Outsourcing--From This Day Forward

Outsourcing transactions by their very nature are different--they create forward-looking relationships between the parties. Relationships that are dependent on future interactions between the parties. Relationships that are performed over what is generally a significant period of time. Just as relationships between married people require work--frequent and clear communication, for instance--so too do relationships between the parties to outsourcing contracts. In outsourcing transactions, the process of working on relationships is typically called governance.

One size does not fit all. Outsourcing transactions range from relatively small single-process domestic transactions that do not involve transformational activities to large multiprocess, multinational transactions that involve transformation of customers existing processes or development of new processes. Simply put, each outsourcing transaction is unique. As a consequence, when it comes to governing outsourcing transactions, there is no one-size-fits-all model. Customers need to establish a process that reflects their culture, resources, and budget, as well as the specific aspects of their outsourcing transactions. There may be no one governance model that fits all, but there are best practices that apply to governance regardless of an outsourcing transactions size or type. Establishing a good governance process is essential to the success of an outsourcing transaction.

Pre-contract signing. In many instances governance is not considered until very late in the negotiation process or, even worse, after the contract is signed. Good governance, by contrast, starts well before the contract is signed--it starts during the negotiation process. The following are examples of steps each party can take to build a solid foundation for good governance.

1. The customer and service provider should appoint their contract executives (sometimes referred to as contract administrators or account executives) early in the negotiation process and should ensure that they are a part of the negotiation process. This will enable them to be knowledgeable about the trade-offs and compromises each side makes during negotiations and will provide them insight into the intent behind the words in the contract, should questions of interpretation and intent arise in the future.
2. The customer and service provider should collaboratively identify all subject matter expertise needed for the transaction. Areas in which subject matter experts are often used include: legal; human resources (especially if employees are transferring as part of the outsourcing); tax; finance and accounting; operations; security; privacy; insurance and risk management. The people that each party uses to assist in these areas should not only support the negotiation process, but should also be part of the initial governance structure as they too will have historical knowledge of the intent behind the words in the contract.
3. The parties should establish a formal governance structure, and such structure should be memorialized in the contract (usually as an attachment). The structure should reflect the customers internal management style and procedures, as well as the specific aspects of the transaction. Depending on the complexity of the transaction, the customer and service provider may wish to create several levels of governance committees, with each committee reporting any unresolved items up to the next level. Each committee should be organized and empowered to act with regard to specific circumstances. An example of a three-level structure is:
   Operational Committee: monitors transition / transformation activities; reviews issues arising related to the provision of services, the volume of services, or the quality of services; addresses issues relating to operational and technical aspects of the services. Any matters that are not resolved by this committee may be referred to the Contract Management Committee.
   Contract Management Committee: reviews all invoices and other financial aspects of the relationship; reviews all requests for changes to the contract; addresses any disputes relating to the contract. Any matters that are not resolved by this committee may be referred to the Executive Committee.
   Executive Committee: attempts to resolve all issues referred to it. On a quarterly basis reviews overall status of relationship. Any matters that are not resolved by this committee may be referred to senior executives for ultimate resolution.


4. Finally, the customer and service provider should create a comprehensive list (Contract Implementation Plan) of all post-contract deliverables and activities, in each case detailing the deliverable/activity, party responsible, time line, and consequences of failure.

Post-contract signing

So you just inked your outsourcing contract. You planned ahead and undertook the steps described above. Now what? Start governing! The following practical steps will assist you in keeping your outsourcing transaction--and your relationship--on track.

Review and update the Contact Implementation Plan regularly and address issues immediately.

Monitor all transition/transformation activities and address issues immediately.

Governance committees should meet as scheduled and thoroughly review all maters within their authority.

At the end of each calendar month, the invoice, service level reports, and operational reports should be reviewed.

All formal communications between the parties, as well as all modifications to the contract, should be reviewed and approved by the lawyers assigned to the contract.

Far too often customers and services providers pay little attention to governance until they are faced with one or more major issues. By that time, the issues may be very difficult to resolve and the relationship may have been irreparably damaged. Good governance serves as an early detection system helping to spot issues before they become major issues. Good governance also serves as a conscience of the contract helping to resolve issues in a manner consistent with the intent of the parties--their meeting of the minds.

The complex nature of outsourcing relationships necessitates a forward-looking contract that by definition cannot address all possible future eventualities with specificity. For instance, outsourcing contracts cant predict impacts of changes in a customers business, changes in the marketplace, or changes in processes or technologies. However, a well-drafted outsourcing contract that includes robust governance provisions combined with a commitment by the customer and service provider to follow rigorously the governance process can anticipate such changes and establish a governance process to address such changes. A well-defined and strictly followed governance process significantly increases the likelihood that changes are identified in a timely fashion and addressed in a comprehensive manner consistent with the underlying intent of the parties. In this regard, good governance can be described as the meetings of the minds meetings that begin during contract negotiation and continue throughout the relationship.

© Copyright 2006 FSO knowledge exchange