7 tips for managing an IT outsourcing contract

Without dedicated and ongoing governance, carefully negotiated and documented rights in an outsourcing contract run the risk of not being enforced, and the relationship that develops may look nothing like what you envisioned.

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All customer employees interacting with the service provider should be instructed to notify the designated customer representative if they think the service provider may have breached the contract. The designated representative can check with legal counsel to decide whether to send a breach notice. Without this written record, an IT organization can lose its rights to terminate for cause, for example. “A judge, jury, or arbitrator might well conclude that if a breach was not important enough to merit a written request to cure it shortly after the breach occurred, the particular breach should not later be considered alone or with other breaches as a sufficient basis to terminate the agreement,” Peterson says.

5. Never do the provider’s work before demanding the provider do it

When a project is faltering — the provider is missing milestones or a system is underperforming, the customer may be tempted to jump in to get the job done. However, if a customer takes action without warning the service provider in writing that it intends to do so and charge for the resources, the customer is likely to be stuck with the bill.

IT leaders should never assign their personnel to perform work that ought to be completed by the service provider without sending a notice of breach and providing an opportunity for the service provider to fix the problem. “That’s just fair,” says Kriss. “And fair is what matters in the context of dispute resolution.” The notice should state that if the supplier does not improve performance by a specified date, the customer will take steps to address the problem and will charge the provider or reduce its payment to cover the cost. Providing an estimate of those costs will support the case for reimbursement if the dispute is ever litigated.

6. Look for win-wins

An IT service provider at some point is likely to offer a waiver on a credit due for a breach and, in many cases, that is an opportunity for the relationship manager to trade that waiver for some future assurances. They might trade a performance credit waiver for a larger assurance on a future milestone or a root cause analysis of the breach and demonstration that the issue has been fixed. This approach “increases the change of successful outcomes, and you build a relationship built on trust and mutual understanding,” Peterson says.

7. Talk to legal counsels early—and often

If it isn’t clear already, creating a clear and written record of the engagement is important to preserving an IT organization’s contract rights. And “lawyers have an eye and ear for evidence and how documents will play in front of a judge or jury,” says Kriss. “They can be very helpful in essentially creating evidence helpful to the resolution of the matter through settlement or dispute resolution.”

Lawyers can find rights that are not apparent on the face of the contract and help the customer resolve issues. It may make sense to call a lawyer when there is a potential dispute involving a breach of the contract, when the provider asks for new charges for what appears to be in-scope work, or when modifying the master agreement, for example.

Clarity is the goal of contract governance

The goal of contract governance is to provide greater clarity. “With greater clarity comes greater certainty as to how a dispute will be resolved,” says Kriss. “That clarity increases the likelihood the parties will be able to resolve it and avoid litigation. If for some reason the cant, the record will be clear and reduces the cost of dispute resolution.”

These suggested governance practices are relatively easy to implement, says Peterson, and, if thoughtfully implemented, should not antagonize the service provider but rather reduce misunderstandings and keep the relationship on track.

This story, "7 tips for managing an IT outsourcing contract" was originally published by CIO.

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