Outsourcing - life after the contract

Just when you thought it was all nailed down...

The fanfare of a new outsourcing contract may have died down long ago. But the work is not all done just because the ink has dried on the paper, argues Paul Bentham.

UK public sector outsourcing has overrun by billions, according to a recent study by the European Strategy Services Unit. Blowing the budget, delays and terminations are rife.

The report revealed that 105 projects had overrun costs of more than £9bn, with an average over-expenditure of 30.5 per cent. With the recent news that the Department for Work and Pensions (DWP) has axed its £59m IT contract with Siemens - a contract that meant Siemens would have overseen the £110bn in payments made to 17 million people each year - the issue of public sector outsourcing contracts has again arisen.

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As the European Strategy Services Unit report demonstrates, the hard work begins once the outsourcing contract has been signed. Negotiating the post-contractual legal minefield is half the battle.

It is quite rare for a public sector organisation to terminate an IT contract but it is not so rare for public sector contracts to go wrong. Why is this? There are many reasons and they centre mostly on life beyond the contract.

While advice abounds on how to approach and set up outsourcing deals in the first place - choosing the right supplier, procurement process, due diligence and so on - we rarely think about life beyond the contract. The all-too-common assumption is that once the contract has been signed, the hard work is over.

But factors that emerge once the ink is dry have just as great a bearing on whether the outsourcing will succeed or fail. With the level of failures and the amount of overspending in public sector outsourcing, it seems that advice and guidance on how to manage outsourcing beyond the contract is long overdue.

Once the contract is signed, there are potential pressure points that can determine the success or otherwise of the outsourcing contract. These risk-laden areas are:

• The handover
• The transition
• Continuity
• Change management
• Termination and exit

Throughout each of these stages, there are certain risks that must be carefully monitored. One is the tendency of the parties to move away from the contract from day one. Another is the possibility of contractors taking cost or resource out of the project to increase their profit margins or to service other customers.

Because most end-user organisations have a changing rather than a fixed set of requirements, there are a whole host of issues that organisations need to broach to mitigate their post-contract risks.

One of the fundamental post-signing work streams should be to ensure that the contract is effectively managed. While it might be tempting to put the contract in the bottom drawer and forget about it, organisations must keep referring to the contract and amend it to reflect changes required to the project as it progresses.

This constant checking, referral and change is needed to achieve the outsourcing objectives and to keep the contract properly aligned with those objectives.

Only by doing this will it be possible to drive performance by the supplier in line with those objectives or, if things go wrong, make a clean break and terminate the contract without undue expense. The contract is a roadmap but it is not set in stone and following it will only go some way to making public sector outsourcing more successful. Most importantly the contract must be effectively managed.

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Controlled communications between the public sector organisation and the outsourcing partner are inherently important. A single-voice communications strategy from the end user is vital since it will prevent the mixed messages that can confuse and frustrate the supplier.

Constant communication between parties will ensure that everyone is fully informed. A disciplined approach to contract management is required using a proper change control procedure. This approach is the only way to stop the integrity of the contract being compromised and is critical to obtaining value for money in any outsourcing.

Lawyers are well known for their love of documentation and it is not without reason. There are myriad issues relating to document management and retention that are vitally important for public sector organisations to bear in mind.

Record everything - take comprehensive notes of conversations and meetings and appoint a transcriber for big meetings. These notes should then be shared with all parties so everyone is aware of and remembers what was said. Practices like this are vital should a dispute ever arise.

Keeping clear notes from meetings is important, and the need to preserve these, or indeed any other documentation, is vital. Every business needs a storage strategy in place for evidence. This evidence may take the form of hard copies, electronic documents, handwritten notes, videos and software. These should be kept in both a physical file and a computer file for electronic evidence.

When disputes do arise, there are a few steps that can be taken to calm the waters. The ability to sense when a potential legal dispute is imminent is vital to allow you to follow escalation procedures as early as possible. If the situation appears to be escalating, parties are advised to think about the without-prejudice rule, which encourages litigants to settle disputes out of court.

The rule states that any negotiations taking place as a genuine attempt to settle the claim cannot be brought to the court's attention in subsequent litigation. Another way to deal with the situation is to be reasonable when corresponding with the other party. p>

Unreasonable demands are bound to lead to a rapid escalation of troubles whereas a more measured statement will bring all parties into conflict resolution mode.

Termination is usually the last resort and is often an expensive and unrealistic option especially if the integrity of the contract has been compromised with unhelpful variations or waivers of legal rights.

Public sector organisations would do well to remember that the post contractual landscape is a veritable minefield. But managing the contract through proper change control procedures, to keep it aligned with the project, will help organisations obtain value for money and steer a clear path through that minefield.

Paul Bentham is the public sector expert and partner in the technology and outsourcing group at law firm Addleshaw Goddard.