The first driverless cars in the UK are now being tested on the streets. “Cognitive robot” Amelia is proving to be a more popular service interface with residents of the London Borough of Enfield than her human predecessors. Technology that was once the preserve of science fiction is now becoming a daily reality. The future is here, ahead of time.
This is good news for the outsourcing industry surely? The business world is facing an unprecedented rate of technological change, impacting not only the way businesses manufacture products, deliver services and engage with their customers, but also the entire competitive landscape, with new technology-driven competitors coming to the fore. All companies need to consider themselves technology companies and embracing outsourcing is one of the best ways that companies can respond, to leapfrog competitors and succeed in an increasingly squeezed market.
Conversely however, this level of disruptive change brings risk to the outsourcing community as well. As the market has matured over the last two decades, lessons have been learned as much from outsourcing contracts that went wrong, as from those that exemplified success, with a constant theme in many of the big-ticket outsourcing disputes we have seen over that time, has been the failure of outsourcing contacts to adequately contemplate the seismic changes affecting businesses, including technological change, in their original drafting.
When a major technological development occurs during the lifetime of an outsourcing contract, inevitably major tensions can arise between the parties: the client company will understandably want the right to require that the provider invest in the new technology, as they see their competitors catching up and overtaking them. By contrast, the provider may wish to preserve the status quo in order to maximise returns, as any investment costs money and will of course impact margins. A further complication comes with the very nature of outsourcing contracts: the services that suppliers provide are "business critical", often designed to bring ‘transformational change’ to the client, which means the provider is deeply embedded in a client’s business, so contacts can be extremely hard to unravel when something goes wrong, without impacting business continuity.
With the pace of change accelerating and the inherent uncertainty as to how matters will develop, how best can a client protect itself when entering in to an outsourcing contract?
- First and foremost, it must be accepted that material change will occur during the life cycle of an outsourcing contract.
- Do take time to think about what should happen in the event of a future market development and consider incorporating a technology "road map", reflecting you and your provider's shared view of how matters are expected to develop through the term.
- However, don't become wedded to a particular solution or technology - focus more on outcomes, rather than the method of delivery.
- Preserve flexibility: avoid excessively long contract terms (three to five years is now the norm), where possible avoid minimum revenue commitments and don’t agree to giving a provider exclusivity – reserve the right to bring in additional/substitute providers into the environment in due course.
- Recognise the benefits of multi-vendor environments (and the opportunity to contract with a variety of providers, chosen by reference to their particular skill and expertise).
- Accept that a multi-vendor environment will require to be properly managed – if that is not your core competence, consider appointing a third-party provider to manage the environment in its entirety.
- Technological change should also create opportunities to benefit from new pricing models. By way of example, consider which element of the services should have charges based on consumption-based pricing.
- Include appropriate provisions within the contract, to encourage your provider(s) to keep you informed of technological advances, the latest market developments and the opportunities for your business to innovate.
- Ensure the change control mechanism is fit for purpose and consider including "agreed costs" standards and or equivalent provisions, so as to ensure predictability as regards the cost of change.
- Acknowledge that the pace of technological change in the modern world means it is impossible to anticipate every situation that could arise during the term of a contract, even in the best drafted agreements. So a key element in any contract must be how disagreements are going to be resolved.
- Invest time and effort in establishing a mutually beneficial "partnership" with your provider(s). Ideally, seek to achieve a "win win" culture, recognising that even the best draft contract will not address all relevant matters and you may be reliant on the goodwill of your provider, in order to achieve maximum flexibility.
The ongoing technological revolution brings enormous opportunities, but significant challenges too. With careful planning and smart contract drafting, client companies and providers alike can protect their positions, minimising the downsides and maximising opportunity.
About the Author Peter Dickinson is a Partner and Co-Head of the Business Technology Sourcing Practice at international law firm Mayer Brown. Peter specialises in advising on large-scale multi-jurisdictional outsourcing projects.