Is post-contract verification in an outsourcing is good?
January 27, 2010
Post-contract verification is basically a process for adjusting the price for the services based on the results of due diligence taking place after contract signature rather than before. This carries all the obvious risks and uncertainties about price renegotiation at a time when bargaining power has shifted from the customer to the service provider. So why have customers agreed to adopt this approach? The following may provide some explanation:
- Timetable: Absence of a major due diligence process prior to contract signature allows the deal to be done quicker. This may fit in with a customer’s urgent plans (for example, the need to show “drastic cost reduction”, or to get a service provider on board quickly to fix technology concerns such as Euro-compliance).
- Over-confidence: The belief that there are not any problems (such as unknown costs or unreliable internally benchmarked service levels) that would be found in due diligence.
- Talked into it: The so-called “golf course” deal where the service provider’s expert salesman convinces the chief executive of the customer that all problems can be solved by simply handing things over as soon as possible.
It is not surprising that these deals are now showing problems. Some of the news headlines about outsourcing deals being cancelled, restructured, renegotiated or being fought over are the products of post-contract verifications forcing the parties to see their deals differently. Unfortunate facts about costs, quality, scope, assets and employees have threatened major assumptions about achievable pricing and service levels in those deals.
It is interesting that the downsides of post-contract verification in these deals are coming back to bite both parties, not just the customers. Whilst the process may permit the service provider to re-negotiate the price, it rarely leaves them with a happy customer. Starting off with a dispute or, at a minimum, contentious re-negotiation, with the resultant damage to the relationship of trust which it is vital to establish does neither party any good.
The market is providing confirmation of what people suspected: post-contract verification can be a recipe for disaster for both sides of the deal. At best, it may only defer issues that need to be faced and tackled. Post-contract verification should be avoided if at all possible or, at the very least, minimized and carried out within a definite, pre-agreed timeframe.