Once the ink is dry on a signed outsourcing contract, the real work begins for the customer and the service provider. Before the customer can start to realize any savings, efficiencies or service improvements, the parties must first complete the critical task of transitioning from the customer to the service provider the day to day responsibility for performing in-scope functions. This transition process can take several weeks or even months.
Each party has a strong incentive to complete the transition on time. Ordinarily, the customer wants to start reaping the benefits of the outsourcing as quickly as possible. Likewise, the service provider wants be in a position to start charging full freight fees for steady-state services as soon as the transition is complete. In addition, appropriately structured contracts often include an additional incentive for timely performance by the service provider: monetary credits to the customer if transition milestones are not completed on time.
Competing with this need for speed (or, at the very least, on time completion) is the customer’s desire to mitigate the operational risks associated with any transition. Complexities abound, especially if the transition involves multiple service towers and geographies, a transfer of personnel and assets, and a physical change in the location from which services are performed. The stakes are high for both parties. In the worse case scenario for the customer, a hasty transition can result in an interruption or degradation of a critical business activity.
Outsourcing contracts typically set out the rules of the game to address these competing interests. The contractual burden to perform the transition usually falls primarily on the service provider (often with contract schedules that set out a litany of service provider obligations and milestones). In contrast, the customer usually has oversight rights to monitor, participate in and even suspend transition activities, and to make go/no go decisions before functions can be switched over. The parties usually set out their respective operational responsibilities in a detailed transition plan.
Typically, however, the contract rules and operational plans do not squarely address the challenge of how to manage the transition on a day to day basis in a way that balances the desire for speed with the operational risks. Over the course of several weeks or months, the parties must work together collaboratively to coordinate transition activities and jointly make and execute on seemingly countless decisions. While disagreements are inevitable, resolving them through the contractual dispute resolution mechanisms is neither efficient nor, in most cases, necessary.
One approach to address gaps in consensus more effectively is to adhere to (and incorporate in the contract) a “two in the box” model for the daily management of the transition. Under this model, the parties share in some a measure of management responsibility for the transition. The “two in the box” approach might include the following key attributes:
- Appoint Transition Leads – Each party appoints a transition lead. The transition leads have joint operational accountability for the outcome of the transition.
- Document and follow a Transition Charter – The parties agree on a transition governance document or charter that includes the guiding principles, rules of engagement, operating procedures, project organization, and escalation procedures designed specifically to facilitate the successful execution of the transition.
- Joint Management – Day to day decisions with respect to the conduct of the transition will be made jointly by the transition leads.
There are limits, however, to the collaborative accountability of the “two in the box” approach. For example, what happens if there is a genuine stalemate? Perhaps with a few exceptions, if a disagreement arises between the parties on any aspect of the transition, the customer’s transition lead should make the final decision. However, the customer’s final word may not carry the day in two primary areas:
- High Impact Decisions – Where the disagreement relates to non-performance by the service provider – particularly where it may lead to a default by, or monetary exposure to, the service provider (e.g., where the customer may be entitled to terminate the agreement or receive a monetary credit). In these circumstances, if the escalation procedures do not yield a resolution, the contractual dispute resolution protocols should apply.
- Notice of Major Issue – Where the service provider advises the customer that a customer decision could impact schedule or price in a material way (or is outside what the service provider believes is its contractual responsibility). Under these circumstances, the parties should leverage the transition-specific escalation protocols to reach an agreement (which may or may not result in a change in price or schedule, for example). If no consensus is reached, then the parties would then refer the matter to the contractual dispute resolution process. If, however, a consensus is reached (and documented) then the service provider cannot later assert an excuse from performance (or expect a change in price or schedule) arising out of the agreed solution. Absent advance notice by the service provider along these lines, the customer’s final word will carry the day and the service provider will have no excuse from performance and no basis for schedule or price adjustment.
Under this structure, the service provider cannot unilaterally rush the transition (or avoid its obligations) in a way that exposes the customer to an inappropriate level of risk. Nor can the customer unilaterally delay the transition to mitigate risks without potential contractual consequences. This approach also has the benefit of setting out in the contract an interaction model that reflects how the parties are likely to (or should) work together in reality. Although no model will solve for every scenario, a “two in a box” approach can fill an operational gap that often exists in outsourcing agreements.