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Outsource magazine: thought-leadership and outsourcing strategy | August 22, 2017

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The Legal View: Contracting for Innovation

The Legal View: Contracting for Innovation
Outsource Magazine

There is an old joke that lawyers write at length because they still think they’re being paid by the length of the legal conveyance. Stitched on the back of junior barristers’ gowns worn in England there is a quaint little purse. It is thought that, when barristers moved past their clients, they would slip an honorarium into that purse, leaving the barrister unsullied by the touch of money. In both cases, it’s probably true that lawyers were once paid like that.  But no longer.

What is generally true, however, is that those lawyers trained in the English tradition write longer and more detailed contracts than their counterparts in Europe and other civil law (meaning based on Roman law) jurisdictions.  Why? We do not have commercial codes like the modern civil law systems that import various terms and understandings into their contracts. Also, our own domestic legislation is not interpreted purposively, as in most civil law systems – Parliament is usually taken to have meant what it said in its legislation. So there are rules in statutes, and therefore ways around those rules, unless Parliament can be shown (in very limited situations) to have meant otherwise. So English lawyers are used to working with rules and exceptions to rules – quite literally.

With very few exceptions, English common law allows commercial parties to contract for anything in any way they please. But things start going wrong when the parties haven’t been clear – or clear enough – in expressing their intentions in their contracts. At this point, our courts will, if asked, intervene to try to find out what the parties intended and in effect impose their interpretation of the contract. So most English commercial lawyers have nightmares about missing something in a contract, making a drafting error, or not being clear enough in contract drafting – causing dreaded ambiguities or loopholes.

What does any of this have to do with innovation? Well, for a start, I challenge any reader to explain clearly what “innovation” means in the context of any outsourcing. “Innovation” means different things to different people, especially in outsourcing. And it certainly means different things to customers and their providers. When customers say they want innovation from their outsourcing providers, they need to be very clear what they mean by it.  For some, it may mean no more than technology refresh, continuous improvement or process re-engineering or transformation. Even then, customers have to be clear:

  • that, whatever the innovation is, it must be important enough in their business case to outsource, otherwise it simply becomes a distraction and a waste of valuable negotiating time – sometimes with the risk of losing provider goodwill. Let’s be clear about this: there are very few modern outsourcing contracts where the main driver is innovation.
  • in their own minds what they mean by technology refresh, continuous improvement or transformation – or any other kind of innovation.
  • about the specific inputs or outputs required of their providers to achieve such innovation – in other words, what is it, precisely, that you expect your providers to deliver in innovation?
  • in translating their requirements into clear and unambiguous contract terms that should result in predictable behaviours from their providers and legally enforceable contract terms.

Let’s call these “the Four Certainties”.

Once you leave behind the old staples of technology refresh, continuous improvement or transformation and embark on more advanced, ambitious, business-critical or more customised, ideas for outsourcing innovation as discussed elsewhere in this issue, sticking to the Four Certainties becomes even more important.

For providers (and actually for their customers), it is obviously important to be able to plan and price their services. Not surprisingly, their first instinct is to plan and price for what the customer has asked in the RFP, which is usually translated into contract terms. If it isn’t clearly within the scope of services, KPIs or other contractual obligations, providers are not generally bound to, and usually don’t feel obliged to, supply it within the agreed contract pricing or pricing models. That’s why, with good reason, providers detest contractual obligations to “fill in the gaps”.  (Lawyers like to use the word “interstices” – look it up.) This is where the contract requires the provider to do – often under the guise of delivering the usual service “in accordance with Good Industry Practice” – whatever the customer has forgotten or has not been bothered to specify in enough detail in the service requirements or service levels.

When a contract is not clear about scope or content of service, and the provider doesn’t have to fill in the gaps, the parties usually have to go through contractual change management to achieve the customer’s desired effect. And that usually means additional cost plus other irritations like having to assess the impact of the change on contracted-for, in-scope services. Assuming the provider can deliver the innovation in the first place.

So if innovation is important enough to expect and compel your provider to provide it, you the customer had better follow the Four Certainties. And this is where the lawyers come in. We are generally pretty good at translating your ideas and requirements into legally effective contract terms. Sometimes our drafting is a bit clunky and not easy to understand: challenge us, if you think so. If we get it wrong, that’s our problem.

But please communicate your need for innovation to us. Give us background to understand why you want it, and how you want it delivered. (If you have a presentation summarising the Four Certainties, that would be even more helpful.) We may challenge your thinking in its contractual, legal, commercial, or even operational and technological impacts. That’s what we should be there to do. However we and you get there, it is important that what emerges is a translation in the contract of your outsourcing innovation needs that is comprehensive, clear and unambiguous, leaving nothing to chance (unless it is too minor to trouble with). Innovation should then be predictable and contractually enforceable. That’s what you want, isn’t it?

At this point, some know-it-all with an outsourcing degree from the University of Life usually says: “Then you put the contract away and get on with the business of outsourcing.” After all you’ve been through? Really? That’s for another time.

This article was first published in Outsource #36 (Summer 2014).

About the Author

Mark Lewis 150Mark Lewis is Partner, Head Commercial Practice, Head Outsourcing Sector, and Co-Chair India Group for Berwin Leighton Paisner, working with customer and provider organisations in IT and outsourcing transactions of all types.

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