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.

post contract in outsourcing Is post contract verification in an outsourcing is good?
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.


Comments

4 Responses to “Is post-contract verification in an outsourcing is good?”

  1. Good Info on January 30th, 2010 4:05 pm

    Companies must not only do post contract verification once the project is outsourced, they must continuously mange the outsource vendor as a part of their project governance. If not the outsource project may not succeed.

  2. Johnny Daugaard on February 1st, 2010 2:52 am

    A contract as complex as an outsourcing agreement must be re-evaluated frequently. Both the customer and the vendor changes, and to fixate a contract right in the middle may constrain both parties to en extend, where the co-operation ends up in the statistics as part of the +65% of all outsourcing contracts, which are not meeting the parties’ expectations.

    This is not the same as saying that everything is up for negotiation. Price wise there are two types of contracts:
    – Fixed price contracts, where the price (fixed or increasing/decreasing annually) is pre-determined
    – Dynamic contracts, where the price will be determined regularly based on benchmarking

    Further there are contracts focusing on the delivery based on SLA’s and there are contracts, where the customers have a material impact on “production” methods and change strategies, where SLA’s does not make that much sense.

    This is the environment, where especially the advisors, i.e. consultants, procurement people, legal advisors pursuing to prove their value to the business unit manage to pollute the co-operation environment. None of these advisors have as a key success factor to contribute to a contract, which supports a good and fruitful partnership. They all contribute with issues, which are of constraining nature.

    Consultants, legal advisors, and procurement people tend to look at an outsourcing contract building on technical details on standard products, where the business unit is much more focused on finding solutions, which meet their strategic goals – a bottom up approach vs a top down approach. The conflict is obvious and the reason why contracts a re-negotiated just as obvious.

    The customer receives exactly what he agreed to in the contract – this is just not what he really wanted.

    A little corner in this paradigm is post contract verification. Post contract verification is the only way to mitigate all the wrong assumptions made during the negotiations. Post contract verification is the only way to create an environment, where both the customer and the vendor will seek to do their utmost to live up to the original intents.

    … and in this environment there is a serious possibility that both parties realize that they are not able to provide the basics for a trusted partnership.

  3. Guy Choquette on February 2nd, 2010 5:36 pm

    Interesting comments and post. Our organization understands post-contract verification and it’s relevance to DD. We offer our clients the ability to understand or services simply by how it’s presented. Our costs are formulated not only by our suite of services but also included is what we would call the cost matrix for top talent. Unlike most RPO there is a traditional “This for that” service if you will. Our true value at Smarthire.ca is through our DD. and the talent that we attract and retain. The matrix is predictable, reliable, and repeatable. This gives our clients comfort, and overall, the ability to plan in both financial and time driven areas.

  4. Relationship starts after post-contract on February 2nd, 2010 9:38 pm

    Great post and good comments. I absolutely agree both of previous comments. The real relationship between customer and vendor starts only after each party signs the contract. The project governance team which has members from both customer and vendor must manage the relationship through post-contract. This helps to fix the issues and problems as it arises in the project.

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