Founding partner Andy Palfrey shares some of his thoughts and perspectives regardIng one of the most feared words in outsourcing... Surprise

After enduring the pain of booking with a well-known budget airline, including the mandatory option and what appears to be a website designed to confuse and obfuscate, we felt the need to share a few thoughts about the joy of surprises in outsourcing contracts after three “£39 flights” ended up costing well over £500.

Experience of numerous transactions, sourcing get well programmes and the like provides us with the evidence that despite the best efforts of all parties, surprises are inevitable. And those surprises vary massively in nature, scale and impact. But most (although not all) can be avoided and importantly, can be avoided whilst you still have leverage on your side.

Trouble often starts during the contract development process. Experience shows that organisations often underinvest in the effort needed to ensure all parties fully understand the collective challenges, requirements, obligations and goals. Critically important assumptions remain unqualified or undocumented and collaboration and clarity are dispensed for the sake of speed and cost. The deal gets signed, champagne corks pop and the niggling doubts are forgotten by both client and supplier organisations as they focus on getting ready for service commencement.

Whilst not an exact science, the unexpected surprises often start appearing around the anniversary of the deal. The initial 12 months is often heavily focused on transition and transformation and many of the initial deal team remain close to the client. But after this period, resources often move on as project activities come to a natural conclusion and BAU commences. And it’s invariably these BAU teams that experience the initial surprises and the subsequent fear, uncertainty and doubt that they have insufficient resources to address.

Whilst surprises manifest themselves in countless ways, from increases in cost and effort, to reductions in performance or service level attainment, the unifying fact is that they are rarely welcomed. Typically, the client organisation identifies elements critical to the service are not included “as standard” by the supplier. Similarly, suppliers discover that assumptions regarding the client environment are rendered false, although being frank, our experience is that suppliers are much more thorough with their pre-contract due diligence.

Once the issue surfaces, both parties find themselves engrossed in debate, or more likely argument, regarding items that often seem trivial to one party yet critical to the other. Change requests get created, which are invariably viewed as unfair and/or expensive, with arguments ensuing on the finer details. The contract soon becomes a weapon rather than a management tool and both sides scramble for the clause that may help them save face. But the reality is that the damage is already done and as the resentment sets in, the focus moves towards damage limitation as opposed to value creation. The relationship breaks down and trust is lost.

Thankfully, many of these issues, which occur all too frequently, can be avoided. Experience has shown that the following points can make a fundamental difference to the overall level of value attained from your engagement:

  • Ensure your sourcing plan is realistic: make sure that there’s suitable time in the plan for collaboration and that the right resources are available. No-one will give you credit for a bad deal signed on time.
  • Collaborate, collaborate, collaborate: ensure your sourcing programme has sufficient time for all parties to engage, review and challenge. Talk openly and volunteer issues rather than hoping they’ll be overlooked (p.s. they always get uncovered, usually at the worst possible time.) Ask questions, even the ones you may feel embarrassed to ask, and capture the answers.
  • Document every assumption – then try to remove them: From the outset, solicit assumptions regularly from all parties and track them. Focus on rigorously testing and qualifying, with a view to removing them where possible. There should be very few assumptions that can’t be qualified, but for those few that do remain, ensure that they are captured comprehensively and include all relevant information. This ensures that should the assumption prove to be false at a future date, the context is clear and a suitably fair and equitable approach can be developed.
  • Read twice, sign once: once you get to what appears to be a contract that is ready to be signed, make sure all relevant parties have read it, properly. This of course assumes that there will have been multiple rounds of review during the drafting process – but the process of reading the final draft to spot any anomalies is invaluable. We all too often hear “but that’s not what we meant” or “we agreed it, but it’s not in the contract” and frankly there are few options here but to plead stupidity or beg forgiveness.
  • Ensure the contract is well understood: it is vital that all those who interface with the contracted services understand the relevant parts of the contract to ensure maximum value is derived. Consider developing a clear “dummies guide” to bring the contract to life in layman’s terms and hold regular training sessions to ensure it is well communicated.
  • Track and manage execution of the services: frequently we find that suppliers fail to deliver against certain parts of the contract, especially the areas that are less “day to day” in nature. A good example is the development and maintenance of up-to-date exit plans. Finding out that a supplier hasn’t developed one for the last three years when being audited is not a good thing. And whilst arguably it’s the supplier’s fault, the client that lets this situation arise is almost as guilty. And likely to get into deeper, hotter water much more rapidly.
  • Govern to the max: One of our pet hates is the governance schedule that was hastily cut and paste from a previous deal and has little ability to help govern this particular relationship. Just because “Schedule X – Governance” exists, there’s no guarantee it’ll work. Make sure that as part of the contracting process, suitable time is invested in creating this important part of the contract. And once the contract is signed, make sure that governance is given sufficient focus and attention so it never becomes an afterthought.
  • Invest in your relationship: we’re firm believers of the old adage that “you get what you give”. Our simple view is that the governance schedule should be viewed as the minimum that should be done and that there are myriad options to enhance and grow the relationship between client and supplier. Workshops, team building sessions, secondment and social events work wonders at growing the emotional capital that will prove invaluable in the (hopefully rare) event that a surprise does manifest itself.

So, as is often the case, the simple and obvious can make a real difference and a short period of focus and attention can pay long term dividends. Whilst you probably won’t avoid all surprises, being diligent and taking a few simple, pragmatic steps will leave you in a far less vulnerable position and with a healthy relationship that continues to enable you to achieve your vision, strategy and objectives.