Renegotiation tips and tricks
<b> A:. What can cause service agreements to fail?</b>
Like all agreements, service and outsourcing agreements (in this article, generic references to “agreements” apply equally to both outsourcing and service agreements) may fail to meet either party’s requirements and thereby fail to operate as initially anticipated. The failure of an agreement may be caused by a variety of factors including:
the occurrence of market-driven changes (such as increased regulation),
changes to the state of certain markets (something particularly relevant to technology and business process agreements),
changes to the customer’s circumstances/requirements,
the merger or acquisition of the customer with/by another entity and/or the growth or decline of the customer’s business which leads to changes in the customer’s requirements and the need for more or less services from the supplier, or
the fact that, five to ten years ago, agreements were negotiated without taking into account the need for flexibility to the same extent to which it is now more standard to do so.
Let us turn to look at some of these reasons in a bit more detail:
<b> Changes in the Market:</b>
Market conditions are constantly changing, particularly in the technology and banking sectors. Service offerings that were once considered “hard to get” and may only have been able to be provided by a supplier through large cost increases are now considered to be relatively standard in other words, so-called “industry norms”.
<b> Accountability: </b>
The service levels, as originally drafted, may be unclear, difficult to measure, out of touch with the customer’s current requirements or may not allow an accurate assessment of how effectively the services are being provided and operating day-to-day. In addition, the supplier’s “incentives” to perform (service debits and service credits or bonus/malus schemes, as these incentives are usually labelled) may, on reflection, be disproportionate to the levels of performance required. The most effective remedy in such cases is usually a fresh re-evaluation of the metrics surrounding the calculation of the service levels, service debits and service credits.
The frequency with which information is provided under the agreement, and the level of the information provided, is another factor that should be considered. The reporting requirements (including the type of frequency of reports required) as previously agreed may no longer produce sufficient information for the customer’s requirements and this may be impacting upon the customer’s internal governance requirements and obligations.
<b> Changes in the customer’s business:</b>
Corporate acquisitions or disposals that have taken place since the conclusion of the agreement may have changed the customer’s business so that the customer now requires the supplier to provide more or less services, or even a different type of service altogether (either in addition to or in place of an existing service(s)).
Alternatively, as a consequence of a corporate acquisition or disposal it may now be feasible for the customer to consolidate the provision of services from multiple suppliers to a single supplier.
<b> B. What are the signs that an agreement is failing?</b>
There are certain signs that should alert the parties to the fact that the agreement is clearly failing; these include:
regular payments of service credits,
milestones being regularly missed,
increased frequency of discussions between the parties regarding the supplier’s performance levels and a realisation that the supplier is not performing at the expected level,
opportunities to terminate the agreement arising,
the parties’ general dissatisfaction.
All of the above should lead the parties to acknowledge that the agreement is not functioning as envisaged and that steps need to be taken in order to maintain a productive relationship between the parties.
<b> C. What can be done to remedy the situation?</b>
A party’s first decision should rarely be to walk away from a relationship into which it has invested large amounts of time and money. Often, it is only possible to discover after implementation that the supplier’s solution is simply not the right solution for the customer, or that the current terms and conditions of the agreement mean that the envisaged integration or interface with the customer’s legacy systems or those provided by other suppliers (as in a “networked” outsourcing involving multiple suppliers) cannot be effectively achieved.
In such instances the agreement is likely to require renegotiation, but before entering into such negotiations the parties should carefully consider their next steps to ensure that the agreement’s failings can be remedied effectively and at minimal cost to the parties.
<b> Make a list </b>
The first step in any renegotiation (or anticipated renegotiation) is to create a list setting out your (or your client’s) objectives and high level aims for what the renegotiation is intended to achieve.
The contents of the list will depend on certain factors and variables, such as:
Whether the agreement is one which has been susceptible to previous changes,
How long the agreement has been running prior to the renegotiation,
Any relevant circumstances (for example, the parties may have realised that the agreement cannot work as intended, or at all, or the customer may have acquired or sold companies within its group),
The degree of drafting maturity contained in the agreement (for example, whether the document has a change control procedure which has previously been successfully used and would thereby reduce the number of changes which may be required during the renegotiation)
There is no defined set of reasons for engaging in a renegotiation and, as such, there is no fixed set of aims or goals which this list should include.
<b> Draft the Renegotiation Blueprint – What, Why, When and What If </b>
Once the list of what the renegotiation needs to achieve has been agreed with the other side involved, the next step is to draw up a joint plan for the renegotiation. The plan may simply be in the form of a letter detailing the parties’ intentions and understandings or drafted as a memorandum of understanding. Whatever form it takes, the plan should detail:
those topics and areas to be renegotiated (it is often useful, particularly in large agreements, to include cross-references to all the relevant clauses to be to considered during the renegotiation) (WHAT needs to be renegotiated)
a high-level summary of the issues which have arisen in respect of each of the topics and areas and which have given rise to the need to undertake the renegotiations (WHY the renegotiations need to take place)
the agenda for the renegotiations and, where possible, details of when certain discussions are planned to occur (WHEN the renegotiations will take place)
what processes will be followed or what position will be taken if the parties fail to reach agreement on an issue (WHAT IF we cannot reach agreement).
The parties must recognise and acknowledge between them that the planning detailed in the plan should include a certain amount of flexibility.
Negotiations on some provisions may inevitably have impacts on other aspects of the agreement that neither party was able to foresee and that consequently necessitate the need to adjust the planning. However, by having a high degree of granularity and structure at an early stage in the renegotiation process, the parties will be able to focus on the task ahead of them and will be provided with an indication of the size of the task at hand and the issues that must be addressed.
Although more detailed daily or weekly plans can (and indeed should) be developed over time, it is useful to have a framework and structure into which the parties can slot those more detailed plans as and when they are developed.
<i> by Alan Meneghetti and Tom Blackwell (Clyde & Co LLP) </i>