Sourcing, outsourcing, global sourcing and offshoring: it’s a dynamic time in the sourcing sector. Business process outsourcing (BPO) has grown beyond the expectations of many; the contract re-letting market remains vigorous and Indian players are raising their game in a real challenge to US and European service providers.

However, amidst all the growth and change, the developing sophistication of sourcing relationships and the contracts that bind them, means that there is an increased probability of problems and discussions arising. When issues do occur, the first reaction is that many business disputes are characterised as being ‘commercial’, ‘technical’, ‘legal’ or similar. Invariably, however, there is almost always a more significant, but less obvious, malaise in the overall relationship. In these situations, the standard behaviour by managers when faced with a difference of opinion is to retreat to a position of strength and ‘prepare for war’.

This reaction, while being nature, is opposite to what is required to prevent the further damage being caused to the sourcing relationship, and the projects involved. First and foremost, healthy discussion, ‘active’ listening and the guts to go right back to basics of strategy, and criteria and goals are needed to avoid the risk of a small problem escalating into a catastrophic failure. This is where the art of mediation can be adopted and skilfully employed to help deal with any issues that could result in a complete and irretrievable relationship breakdown.

This article will explain what constitutes effective mediation, when best to employ this process and exactly how some leading Dutch businesses and organisations successfully have done so.

We were so happy….how did it come to this?

With the increasing implementation of multisource agreements (unlike the ‘mega integrated deals’ that were all the rage a few years ago) companies are becoming more careful with their contracts and are increasingly prepared to dispute the services, pricing and terms provided under their existing sourcing contracts. Obviously, the ideal scenario is to ensure that any service level agreements (SLAs), key performance indicators (KPIs) and required innovations, and are clear and obtainable at the time of the contract being signed.

But it is not always possible to accommodate for all eventualities in a written contract and the problems that can invade and destroy a previously happy sourcing relationship are manifold. For instance, the poor management of client expectations by the service provider is not unusual. Nor is dissatisfaction on both sides on how quickly the project is being progressed.

Occasionally, there is a desire from senior management to use the sourcing project, and issues around it, as an excuse to ‘refresh’ or transform the executive team in charge. Sometimes it is simply a case of poor communication on the part of both parties, or the actions of a service provider that has forgotten to provide some good, old fashioned customer service.

However, the first thing to understand about disputes is that a) they are inevitable in any relationship (and no less so than in a sourcing relationship) and b) it is possible to work through them before they escalate irreparably!

What are my options?

When a problem occurs in a sourcing relationship there are a number of options that are normally explored by a client and usually in the following order. This is assuming, of course, that normal service and escalation management procedures have failed to resolve key issues and that such options are required.

Invocation of contractual provisions: In the event that a settlement is not reached via normal management or escalation routes, one option available is to invoke contractual provisions that are relevant to the situation, including rights to price renegotiation, benchmarking, audit or even a (partial) termination. How long this will take is dependent on which actions are invoked, and how prepared the respective parties are at that point in time.

For example, benchmarking and audits can take anywhere between two to six months from notification to publication of findings. Price renegotiations will naturally depend on the stance taken by both parties and the audit result. The major risk associated with this is that the activities will be only be effective if both parties agree to act in accordance with the findings, and even then they might not be contractually binding.

Consensual mediation: This option allows both parties to seek mediation via a mutually agreed professional body, such as an independent sourcing advisor. In effect, this option bridges any provisions in the contract in which senior management are involved in dispute resolution, and those provisions covering some form of binding arbitration.

Formal Arbitration: Depending on the provisions in the contract, disputes that are unresolved through commercial negotiation or escalation to senior management are usually subject to referral to an external body for resolution through binding arbitration. Sometimes the body is defined within the contract for example the International Chamber of Commerce. Depending on the scope, complexity and number or issues submitted to the arbitration tribunal, this process can take anywhere from 9 to 24 months. The risk associated with formal arbitration can include high legal costs, an irrevocable damaging of client / service providers relations and of course a ruling against one of the parties.

Termination: Usually, this option is only invoked if all the preceding avenues have failed or if the relationship between the two parties has broken down irrevocably. This option presents two alternatives:

Full Termination

This entails termination (for either cause or convenience) of the entire contract with the service provider. All currently outsourced terminated services would then be transferred either to another external service provider, or back-in house. In instances where the relationship has failed, this is usually the likely route since partial termination may not achieve the client’s objectives. A full termination can extend into years if termination is effected for cause and the service provider brings litigation into play. A lack of cooperation from the service provider could also hinder progress and extend the above timeline.

Partial Termination

Partial termination entails termination (for either cause or convenience) of one or more service towers or one or more countries/regions. The terminated services could be transferred either to another external service provider or back in-house. The timescale will be dependent on the nature of the termination e.g. by service or by country/region; it usually takes between six – twelve months depending on the service, or three to six months depending on the size and scope of the country/region involved.

When to use mediation

Mediation is an art that is one of the most useful to employ in times of dispute, but also one of the least utilised options. The natural instincts (preparing for war) mentioned earlier mean that often it is overlooked as a viable option by both clients and service providers.

That said, mediation is not a suitable procedure for settling disputes in all cases. Where deliberate, bad-faith counterfeiting or piracy is involved, mediation is unlikely to be appropriate. Similarly, when a party is certain that it has a clear-cut case or where the objective is to obtain a neutral opinion on a question of genuine difference or to establish a precedent or be vindicated publicly on an issue in dispute, then again mediation may not be the appropriate procedure.

It should also be noted that the mediation option normally lies outside usual contractual obligations, and neither party is legally bound to accept mediation itself or any findings of the mediator. This is, of course, unless this requirement is legally incorporated as a part of the mediation process, and the older the contract, the less likely this is. Furthermore, as the participation in the exercise is voluntary, both parties need to have significant trust and confidence in the integrity and expertise of the chosen mediator.

Where mediation is suitable is when the dispute occurs between parties to a continuing contractual relationship (such as a sourcing contract) as it provides an opportunity for finding a solution by reference to business interests and not just to the strict legal rights and obligations of the parties. It is also totally confidential.

What does mediation actually involve?

Mediation can certainly seem a slightly less arduous option that formal arbitration or termination of a contract. It does, however, have its’ own singular course of action and will still need to be given the appropriate resource and attention to make it an effective use of time.

Such is the importance of this, EquaTerra makes it a policy to engage only with companies whose top management team are 100% committed to resolving any issues. For instance, both parties will need to be prepared to involve, not just the respective client or service provider teams, but also to make use of relevant resources such as administrative support, legal counsel and those who have the appropriate commercial or technical expertise, such as an independent mediation team.

Independent mediation team

The engagement and use of an independent mediation team, whose role it will be to act as the go-between, the independent third party and, on occasion, the negotiator, can greatly speed up the process and help avoid the blurring of lines between mediation and the early steps of an arbitration process.

Some legal help may be required to implement any resulting contractual changes, although mediation may more likely be limited to settling past issues, and not agreeing on future changes.

If you choose to use an independent third party then certain expectations will need to be met: you can expect a good objective mediator to always work openly and transparently on behalf of both organisations. They need to bring overall knowledge of the sector along with specialist understanding of the type of sourcing issues being debated. And they need to be experienced enough to communicate both the good and the bad with tact and timeliness.

Where to start?

Once you’ve agreed to engage in mediation to resolve the dispute then in-depth consideration also has to be given to the identification and agreement of issues to be mediated. Approaching a mediation session with broad or vague issues will slow down the whole process and increase any frustrations already being felt. The respective teams need to be very, very clear on what are the actual issues are; whether they perceive them to be the symptom or the cause; what are the results, (or lack of) and how it all ties back into what was initially agreed.

One the most effective ways to address this is to go back to the very roots of the sourcing strategy. Why was the sourcing project originally initiated? What criteria were put in place? What was the scope? In many cases, although a contract is signed there can be big differences in the interpretation of the project scope, what services have to be delivered and how the sourcing is managed overall.

In most cases, undertaking this exercise will immediately help identify whether the current issues experienced are due to a lack of ongoing project governance (communication) or the bigger structure of the deal.

By using this approach you avoid the risk of fuzzy discussions with board members about their ‘feelings’ about the service provider relationship, and can instead focus on the getting to the root of the problem quickly and clearly.

Next steps

Once the issues are made clear to all concerned, time needs to be spent in the preparation of relevant supporting documents. ‘He said – she said’ won’t help avoid things escalating to the next level. This preparation will also help clarify thoughts in advance of the presentation of each party’s case before the mediating body. This is often undertaken through a mix of interview, discussion and workshops.

Once these dialogues are complete, the formal mediation sessions are brought into play to allow all parties to discuss issues and negotiate a session in good faith, and with the overall aim of avoiding escalation of the issue to arbitration or contract termination. Trusting that the sessions are fruitful you should now be in a position to review the outcomes, and implement any changes and / or decide on next steps.

Overall, be prepared to put two to six months from initial exchanges to completion into the activity (sometimes less if the relevant information is already in place).

Conclusion

Most (large) sourcing relationships pass through difficult phases in which serious consideration is given to termination of the contract. However, while sometimes necessary, termination is often an unattractive option – it incurs costs, risks and often a lack of confidence that any replacement service will be materially better. Often, the corporate agenda is already sufficiently crowded without additional distraction. Regular contract and relationship maintenance is the best way of preventing escalation.

Few agreements last the full term unscathed, and it is better to anticipate the need through regular annual, or more frequent, updates rather than allow pressure to build up to crisis point., with all the associated business risk for all involved.

• Case studies

Well-known publishing house

This deal was made difficult because of soured relations between key players in both parties. It was further compounded by the client not having a clear IT strategy and the provider not being in a mature enough position to translate and meet the future needs of the client. The mediation activity in this instance involved analysis of the facts, followed by interviews and informal feedback to both parties. The client was also supported by advice on their future sourcing strategy. The outcome of the mediation exercise saw the existing service provider accepting the proposed changes and continuing with the contract. In return the client changed their project governance and both parties now ensure that ‘IT ‘strategy’ is firmly on the agenda.

Large banking organisation

There were doubts at a central work council level as to the necessity of the planned outsourcing project. A benchmarking exercise was undertaken and a recommendation made on the application of the project. The results were presented through mediation sessions between the board and works council. Further discussions resulted in a change in process, communication and approach to the project by the service provider.

Government ministry

The issues between this client and the service provider arose because of the original contract, which was extensive and very detailed and encumbered with a high number of KPIs. Added to this were changes to the service provider’s organisation which meant that the key managers responsible for the project were less visible. The client felt that there was no alignment between the sourcing strategy and the business and that there were reporting issues. The service provider felt that it was too difficult to conform to the ministry’s expectations. The independent mediators undertook a benchmark of the KPIs and pricing outlined within the contract. They also analysed some of the hard facts involved; undertook interviews and provided formal feedback to both parties in the form of position papers and action plans. Both parties were willing to accept the conclusions and this resulted in a mutual agreement to demonstrate more understanding of the other’s position; increased support in the implementation of agreed actions and a governance when working under pressure.