In Part I we we discussed the starting point of your outsourcing project and how you go about selecting service providers to issue RFPs to and in Part II we discussed proposal evaluation. Today we will discuss the contract, and the dispute resolution process in particular, and remind you to check out the full series on outsourcing risk management by Alsbridge, as printed by SourcingMag.com, that this series is partially based on.

So What Needs to Be In the Contract?

Lots and lots of legalese, of course, and I highly recommend you check out Stephen’s Guth Vendor Management Office Blog and the books and downloads he has indexed on his site (including The Contract Negotiation Handbook and Implementing a Vendor Management Office) before you start. That being said, there are two critical sections that must be in every outsourcing contract, and that must be carefully thought out and specified in detail before the contract is signed if you really want to alleviate potential risks, and they are dispute resolution and service level agreements.

So What Do You Need With Respect to Dispute Resolution?

Remember, if there is a disagreement between two parties, the time to figure out how to discuss and resolve it equitably is not in the midst of the disagreement. That’s why the rules for boxing matches are set in advance rather than discussed after one fighter has already tried to bite the other’s ear off. Making the process as defined and clinical as possible will remove tension from disagreements, especially when things must be escalated and your counterpart is angling for your ear. Be sure that each of the following questions are answered in your agreement before the agreement is signed.

• What is the process for raising an issue?
  This must be spelled out, or the other party can claim that they were not aware of an issue, and hence under no obligation to take any action.
• How long does each side get to investigate and formulate a reply?
  
  The party being notified of an issue must have a set timeframe in which they have to formulate a reply, otherwise, they can stall indefinitely with “we’re looking into it”.
• If the issue is not resolved, who meets?
  
  The project managers? Subject matter experts? Mangers? Executives?
• When?
  
  The meetings to resolve issues, and resulting disputes, can be ad-hoc or regularly scheduled, but there must be a maximum timeframe that can elapse without a meeting being when there is an issue to resolve or there is nothing to prevent one party from stalling the other indefinitely.
• Does the timeline vary based on issue size?
  
  If one party discovers the issue to be larger than originally thought, is an additional fixed time allotted for further investigation or resolution?
• When does an issue become a dispute?
  After an unsuccessful meeting? After 7 days without resolution? This must be clearly defined.
• What clear authority does each party have to negotiate?
  
  This must be clearly defined so that the right people are at the table for issue, and dispute, resolution meetings. Otherwise, the other party can claim that their representative had no authority to negotiate on their behalf and stall a negotiation indefinitely. The contract should also stipulate what authority project managers have to resolve issues and disputes. For example, sometimes a few extra hours of work on behalf of one party or the other, even if they have to be off-the-record, can go a long way to resolving problems and building a rapport that is invaluable to team success. For example, if a project was supposed to take eight weeks, but at the end of eight weeks, three days of work is left, is it really worth a dispute? Or can the project managers for each party decide to just “split the difference” to get it done and move on.
• How long do the authorities have to get to the table?
  
  If a dispute arises, how long do parties with the authority to resolve it have to get to the table.
• If no agreement is reached, when can the issue be escalated?
  
  There’s always a good chance that a dispute will arise that cannot resolved amicably between the parties at the table in a reasonable timeframe, so it must be crystal clear when a party can request that the problem be escalated within their counterpart’s organization.
• What triggers arbitration or legal action?
  
  Although everyone hopes it won’t happen, some disputes will not be resolved even when the CEOs make it to the table. Therefore, the agreement must clearly spell out when a party can request arbitration or resort to legal action if it was clearly damaged by an action, or inaction, of the other party.

The next post in the series will discuss service level agreements.