6. Managing the Relationship: Typical Problems and Solutions – IT Outsourcing Contracts: A Legal and Practical Guide

Chapter 6. Managing the Relationship: Typical Problems and Solutions

This chapter outlines some of the key ‘bear traps’ to look out for once you have entered into an IT outsourcing contract, and describes how to try and pre-empt conflicts with your IT supplier.

Making changes to your IT outsourcing contract

Changes will normally be required in the outsourcing arrangement for various reasons, including the following:

  • Your organisation’s business needs might have changed.

  • Your organisation may want its IT support provided in a different (perhaps more cost-effective) way.

  • You may no longer need certain services.

In most IT outsourcing contracts, there is a change request procedure. Most contracts will require changes to be documented for cost, legal and audit purposes.

Problems can occur when making changes to your service and these can have a contractual implication. The most common problems include:

  • Cost increases. Costs can escalate as more and more changes are requested, particularly if the original specification was not exactly what you wanted, or if the original specification was incomplete. These cost increases can eat into the financial savings that you may have counted on, unless they can be offset in other ways.

  • Delays. Changes can mean delays to the implementation of the new IT service, which can put the whole implementation process back (and out of line with performance standards), as well as potentially having a knock-on effect to other parts of your business.

  • Disputes. Disputes and litigation can arise as a result of costs increasing and delays occurring, especially where (as is often the case) each party believes that the cost increases/delays are the other party’s fault.

If changes to your IT outsourcing arrangement affect the price of the service and/or the standards of the project; and eventually lead to a dispute, what can you do?

One option is court action, but the IT outsourcing contract normally provides other dispute resolution mechanisms. For example, escalation, where if the dispute cannot be resolved at a lower level within certain timescales, it is escalated all the way up to the chief executive officers.

Failing resolution, the parties could provide for (i) mediation – where the parties can discuss and deal with their issues in a confidential environment with a mediator, to try to facilitate a negotiated solution; and/or (ii) arbitration – where the parties can submit to an arbitration process, whereby the decision of the arbitrator is final and binding (unless an obvious error has been made).

If immediate court action is required (for example, if confidential information is disclosed, or your IP is infringed by your IT supplier), then your organisation may opt to take out an injunction. However, legal fees for injunctions can be high and there is no guarantee of success.[8] Note that other dispute mechanisms do exist, such as expert determination.

In order to avoid disputes, the next section looks at service standards and service level agreements within IT outsourcing contracts.

Service standards and service level agreements

Service level agreements lay out the service standards, key performance indicators and benchmarks for your outsourced IT service. They also include the requirement for your IT supplier to provide regular data about performance, so that you can monitor service standards.

If your IT outsourcing contract does not have a service level agreement, then it will be more difficult for you to establish and prove objectively that service standards are declining, inadequate or unsatisfactory.

The service level agreement will usually be included in a schedule to the outsourcing agreement and will set out the following:

  • Standards to be achieved. For example, the service level agreement might state that the IT availability must be 99% or more over any set period.

  • Breached standards. The service level agreement will document what will happen if service standards are not met. A common approach to this issue is for the IT supplier to issue the customer with service credits, which are:

    • Fixed amounts of money.

    • Pre-agreed as part of the IT outsourcing negotiations.

    • Aimed at compensating your organisation for any losses suffered because service standards do not meet pre-agreed levels.

    • Aimed at helping both parties avoid disputes, as the action to be taken in respect of under-performance is pre-agreed.

    • Linked directly to performance standards and their timescale.

For example, if a service standard (e.g. availability of IT) is below the pre-agreed level of 99%, then it may be agreed that £x is paid for every percentage point (or part thereof) that the service falls below 99%.

Likewise, if the service standard is to be met over a given period of time (e.g. a month or a quarter), then the service credit (if applicable) is paid over the same period.

Service credits are discussed in greater detail below, together with their relationship to service standards and monitoring.

Key issues to consider when developing your service level agreement

In the most effective service level agreements, there are typically between four and 10 service levels, or key performance indicators.

Too many service levels, or key performance indicators, (e.g. 20 plus) can create the following problems: measurement can be cumbersome and difficult to keep track of, data becomes difficult to understand and interpret without dedicated analytical support; significant extra work and resources will then need to be dedicated by the IT supplier to this task. This will either cost you more, or it will mean that the IT supplier must focus its resources on counting activities, rather than more directly on providing better services.

Service standards should be measured over a reasonable period of time (typically a month or a quarter) in order to measure trends (rather than blips). The IT supplier will typically only pay service credits for service standards which are not met over an agreed set period of a month, or a quarter (rather than being penalised for blips over a day or a week).

You may want the option to change service standards over the term of the contract, particularly if you wish to replace those standards which are met regularly (and which the IT supplier has got used to meeting) with others that are not met regularly. This approach will help you to ensure that your IT supplier is committed to constantly improving the service offered.

On the matter of service credits (which are pre-agreed sums of money for breaches of pre-agreed service levels), the service level agreement or outsourcing contract should make it clear that:

  • There should be no double counting of service credits (i.e. several separate service credits should not be payable for essentially the same service level standard breach). Service credits are aimed at helping both parties to manage the relationship on a day-to-day basis. However, they should not cap or limit your right to claim damages or losses regarding a major breach of the outsourcing contract, or the service level agreement (i.e. they should not form your exclusive remedy in respect of service breaches). As a customer, you will not want to be limited to claiming relatively small service credits, if and when major breaches of the IT outsourcing contract, or service level agreement, occur.

  • The service credits that your organisation can claim in any set period are capped (typically at around 5%–15% of the amount payable by your organisation to the supplier over that set period). This means that:

    • The IT supplier does not completely lose all of its profit for any set period, simply due to some service level breaches. This is important because, if your organisation has an IT supplier that is essentially not making any money out of your contract, then it is likely to be demotivated and may well focus its resources and best staff upon other more lucrative contracts with other customers.

  • You are not tempted to try to recover all, or a substantial amount, of monies payable to the IT supplier, by making service level standard complaints (for example, if you use the claiming of service credits as a way of obtaining an unofficial discount on services provided).

Your organisation should also consider IT supplier incentivisation clauses which incentivise the IT supplier to provide benefits to your organisation. For example, if the IT supplier can identify cost savings or efficiencies, then you might share those cost savings. If these are particularly beneficial, you may reward the IT supplier by continuing to spend your organisation’s share of the cost savings with them. If you don’t consider this, then the IT supplier has no incentive at all to point out cost savings to you, since it will simply lose money by doing so.

Specific bonus payments which are received directly by certain staff at the IT supplier, for particularly good performance on your organisation’s IT outsourcing contract, are another incentivisation clause.

Summary

This chapter has focused on the key processes available to manage your relationship with your IT supplier, in particular: service level agreements (including key performance indicators), and the use of service credits.

Ultimately, it is down to your organisation as the customer, to decide where and how you want your IT supplier to focus time and resources. You may wish to consider the benefits you are seeking by setting key performance indicators.

Finally, there may be ‘softer’ ways of ensuring that high quality and responsiveness is maintained; for example, by focusing on the quality of the relationship or regularity of meetings between you and your IT supplier, and considering incentivisation schemes which increase goodwill and mutual trust, and benefit both your organisation and the IT supplier.



[8] See Vertex Data Science Limited v Powergen Retail Limited (2006) EWHC 1340 (Comm) where an injunction was not granted in an outsourcing dispute.