In the world of IT and telecom services, deals occasionally break down. When this happens, the customer-supplier relationship is sorely strained. Working through these challenges while also handling day-to-day vendor management is time consuming, often with negligible performance improvements, which only exacerbates customer dissatisfaction. This article highlights common causes of these failed relationships and discusses approaches and strategies that can help fix broken deals.
Why deals fail
While the root cause of failed IT service agreements is always context-specific, there are some usual suspects. Structuring your transaction and managing your provider to avoid these pitfalls substantially reduces the likelihood your deal will break down.
- Poor service delivery – The provider is either incapable of performing the scope of services or lacks the skills or resource capacity to meet the customer’s quality and performance requirements.
- Cost overruns – The provider performs the scope of services but its charges are far higher than the customer expected.
- False key assumptions – Both parties structure their deals based on a set of assumptions used to forecast service consumption and costs over the life of the contemplated transaction. If actual service delivery and consumption deviate considerably from the initial assumptions, either party or both parties may perceive the other is at fault or should bear a greater responsibility for the financial consequences of the mistake.
- Inattentive vendor management – Good contracts provide frameworks that help ensure the parties provide the deal the consideration they promised and put in place mechanisms for each party to promote compliance. But the customer must use these tools consistently, and sometimes aggressively, to preserve the benefits of its negotiated arrangement. After the honeymoon period that follows a successful implementation, customers may get lulled into neglecting their vendor oversight duties, which allows bad habits and practices to take root.
- Change in business requirements – Agility and flexibility have become essential success criteria for most enterprises. Technology, financial and service delivery requirements can change dramatically over a three- to five-year contract term. Some deals fail because the customer’s requirements evolve beyond the confines of the original arrangement and the underlying contract is unable to accommodate the change.
- A bad deal – Some agreements produce service performance or financial outcomes that were (or should have been) reasonably anticipated at the time they were signed but over the term at least one party begins to believe the deal is underperforming and must be corrected for it to be commercially viable.
- Critical implementation failures – Each major transition to a new supplier or technology is risky and unexpected delays or missed milestones are common. These failures can badly hobble the customer’s expected benefits or increase the supplier’s unrecoverable costs to the point of unprofitability. Critical implementation failures of this kind can put a transaction on a fast track to collapse.
Many multi-year technology service agreements experience one or more of these problems at some point during their lifecycle. When deals truly break down, the problems are so profound that the customer’s business is materially hampered or the cost overruns noticeably affect the overall IT budget. This drives the customer to work around the issues by, for example, attempting to control user behavior to reduce service consumption or drawing on its internal resources to perform some of the supplier’s services. But these workarounds usually compound the problems and increase pressure to terminate the underlying agreement.
When your deal gets to the point that you’d prefer to prematurely terminate it (and undergo the expense, effort and disruption of changing service providers) rather than suffer further with your incumbent provider, then your deal is broken and requires a focused workout strategy. Because exiting most IT and telecom deals before the expiration of their contract terms can be difficult and expensive, enterprises wrestling with a deal on the verge of collapse should contemplate an alternative strategy before locking in on an early termination. The preferred outcome in most cases would be to turn the deal around by negotiating changes, improvements and corrections to address the major pain points.
Groundwork for negotiating a resolution
Thorough preparation is critical to achieve the best outcome. The workout strategy should be grounded in an objective evaluation of the circumstances with a full understanding of the current state, including historic performance levels, financial and business impacts of the provider’s failures, your relevant remedies, responsibilities, and potential liability exposure under the contract.
Document the provider’s failings
Where the dispute is related to a service provider’s non-performance, you must precisely document the specifics of the non-performance. There are always ample anecdotal examples of the service provider’s failings, but anecdotes are not helpful when you need to extract concessions or improvements from your supplier that will have cost or revenue impacts or give rise to new contractual obligations. Original and contemporaneous source data with unequivocal examples are necessary, ideally in the form of written reports, communications or other documents shared with or produced by your provider. The objective is to gather and organize indisputable written records to present to your provider that support specific claims of its failures or contract breaches.
Service level reporting and data can be useful where the reporting shows that your provider is not meeting its contractual guarantees. But it’s not unusual for service level performance to mask the real issues, and for the provider to be ostensibly meeting the service level guarantees even when the customer is suffering from poor performance. In fact, service level data collection, measurement and reporting by the provider can be one of the core matters in dispute.
Evaluate your contract
At an early stage in the process, you should diligently review the relevant terms and conditions in your contract. A primary leverage point in workout negotiations are the remedies available to either party under the current state or the likely future alternatives. The contract analysis should be objective (seek to uncover facts, both good and bad) and be viewed dispassionately as a critical early input to informed decision making that will shape your desired (and commercially feasible) outcome.
Informed by the facts and evidence gathered about the provider’s performance, review the contract to identify the specific contractual obligations your service provider is not meeting or performing and your available contract remedies. A material failure by your provider that triggers termination for cause rights, along with other strong remedies like de-scoping services or reducing your financial commitments, can provide powerful ammunition for negotiations.
Equally important is assessing your own contract compliance, your possible contribution to the provider’s stumbles, and whether any mitigating factors indicate the root cause of any of the key problems was outside the provider’s control and responsibility.
The contract will most likely also set out formal dispute processes and remedy procedures that vary based on the failure or item in dispute. Understanding and adhering to these dispute mechanisms and remedy procedures help maximize your leverage to execute a successful workout strategy.
Here are some things to look out for in your contract review:
- Withholding disputed payments may require notice of the amounts being disputed and may expedite the dispute process.
- Before termination for cause rights vest, most contracts require the defaulting party to receive notice and period of time to cure the breach (often 30 days from notice).
- Service level-based remedies are often time-bound, which means remedies for service level misses may expire unless they are asserted within a certain number of days.
- Informal escalation of the dispute through increasing layers of management may be required before any other formal remedies can be invoked.
- The contract may establish specific dispute proceedings like mandatory arbitration and the geographic location of any formal dispute proceedings.
- Commercial contracts frequently limit or disclaim certain types of damage recovery (e.g., lost profits or lost savings). Knowing whether and how much of the damages you’ve suffered are recoverable under the contract is essential to sizing up your leverage.
Unfortunately, your contract may be less help than you hoped. When called in to help rescue failing deals, we commonly encounter poorly drafted contracts that present ambiguous rights and obligations, contain limited detail regarding the services the provider is meant to deliver, or worse, establish terms and conditions unduly favorable to the provider. Incompleteness or inadequacy of the contract is a leading cause of seemingly irreconcilable differences. Both sides may have widely divergent views of the contractual obligations that govern the items in dispute.
In outsourcing and managed services arrangements in particular, imprecise statements of work and bundled charges can really hurt the customer’s position. Even when service delivery shortcomings appear obvious to the customer, it can be difficult to demonstrate that a provider is violating its contractual obligations when the statement of work content is vague or superficial. Under these circumstances, it will be hard to hold the provider accountable for the performance of certain specific tasks that the customer reasonably expected to be within the base scope of work but the provider asserts is out of scope.
Where the contract is very one-sided in favor of the provider, it’s best to steer clear of tenuous contract arguments to avoid losing credibility and instead focus the provider’s attention on other points of leverage like potential loss of existing and future business. A weak contract need not doom your workout strategy, but knowing its limitations helps set your expectations on the likely outcomes and inform your negotiation strategy.
Assess the commercials
The cause of many disputes or breakdowns are commercial in nature – where the customer is incurring higher costs than it expected or the provider asserts the customer is not meeting certain minimum spend or similar commercial commitments. Success in this context demands a deep understanding of the pricing elements, key service usage and spend data, and potential options to exploit the commercial flexibility available under the contract.
When a gap between your spend and contracted revenue or usage commitments is a sticking point, you will need to calculate with precision the difference in your actual contributory spend or consumption and the commitments and know the consequences of any gaps. You can’t rely on the provider’s tracking reports alone. They can be as error-filled as their invoices. Below are some key steps.
Once you’ve confirmed there is gap, dig deeper to determine its cause (e.g. lower than expected usage, slower than expected migration to the service provider’s service, or unanticipated business downturn). Depending on the cause of the shortfall, your contract may give you the right to lower your commitment level. Next, you should forecast whether, and when, the gap between your spending and the revenue or usage commitment will be closed. If you’re unable to close the gap or eliminate it with contract triggers, calculate the charges, penalties or other consequences of missing the spend commitment (e.g., payment of shortfall charges pegged to a percentage of the difference between the actual spend and commitment, increased unit prices, a right for the provider to initiate a renegotiation of the pricing, or loss or reduction in overarching deal credits).
When cost overruns are a major source of pain and suffering, you should uncover the specific service elements or prices that are causing costs to be higher than expected, and then determine the steps you can take to reduce consumption of these services as an interim step. As a longer-term correction, consider moving the expensive services to an alternative (cheaper) provider or replacing them with lower-cost substitute services from your provider. Depending on your agreement and service bundle and the commercial flexibility the contract provides, there may be other cost-reducing options available.
Relationships with large IT suppliers are routinely complex and multifaceted. By developing a full understanding of the total spend and portfolio of services, you can identify pockets of negotiation leverage. When performing this analysis, attempt to build the leverage case from the provider’s perspective. The provider will undertake an equivalent analysis of its relationship with you, the customer, as a standard practice, including identifying whether they are a customer of your company’s products and services.
Prepare your request
To resolve your dispute and put your deal back on track, you must put forward a set of precise terms and concessions you want from your provider. Those requests should be guided by the results of the preparation work discussed above. For instance:
- Specific performance improvements (e.g., meeting key or new service level guarantees on a sustained basis within so many months).
- Additional functions or services that you require your provider to perform.
- Commercial changes to the agreement, including improved costs, reduced or waived spend commitments, or reduced or waived costs already incurred.
- Changes to existing governance processes and procedures to resolve operational and contractual issues more effectively.
- New or more comprehensive reporting and escalations to promote better transparency (e.g., on performance metrics or pricing).
A well-crafted request must be in writing, preferably in the form of a letter from an executive sponsor or other involved senior leader. It should be presented to an executive at the provider organization who is at a comparable level. The letter should list with particularity each item you’re requesting and also describe the contractual support you’re relying on.
In your letter, assert the relevant contractual rights you are invoking (e.g., if you are presenting the issues as a formal contractual dispute, with a specific response period) and cite contractual obligations that are not being met by the provider. As applicable, include what you are willing to offer in exchange for resolving the dispute and reformulating the contractual relationship. If, for example, the issues are related to your failure to meet growth or spend commitments, the letter should offer something of value to your provider, like a contract extension or partial payment of any shortfall-related payments that are due.
The communication should emphasize the benefits of reaching a mutually agreeable outcome and carefully allude to the consequences of not resolving the matter amicably. Striking a firm resolve to use your available remedies while also demonstrating a desire and willingness to resolve the issues reasonably in light of the facts and circumstances is the best approach. Admonishing your supplier, piling on the blame, overt threats and overplaying your position is likely to cause the provider to respond defensively. This will ratchet up the hostility, takes focus away from problem solving, and ultimately will delay earnest settlement negotiations.
The letter should then be used to frame the initial term sheet for the workout negotiation. When the negotiation progresses and the parties reach alignment on the resolution, the term sheet will establish the checklist for the parties to prepare and negotiate the detailed amendments and settlement agreements that will bind them to their negotiated compromises.
Keep your hands clean
Unpaid invoices can become a real problem in failing customer-provider relationships. Concluding that they are not receiving their contracted services, customers are often inclined to withhold payment. If your contract includes a right to withhold payment for disputed amounts, you should certainly exercise that right. However, only withhold the amounts disputed in good faith, pay the undisputed amounts, and strictly follow the payment dispute processes in the contract – even in the middle of contentious disputes and workout negotiations.
Holding back payments that are reasonably due for charges and fees incurred under the contract gives the provider a readily available contract breach claim. In most commercial agreements, suppliers can terminate the contract or suspend services when the invoices are not paid. Don’t hand your supplier this leverage over you during the workout negotiations.
Successful negotiation strategies
Customer-supplier negotiations ordinarily revolve around aligned mutual self-interest. The customer wants to buy products and services from its preferred provider and the provider wants to sell those products and services to the customer. Negotiating a dispute is a very different customer-supplier dynamic and can easily become a zero-sum game with hostile players. The right workout negotiation strategy adapts to this different footing and helps the parties circumvent the traps.
A workout negotiation can be emotive; both sides may feel harmed and angry, which can add a lot of baggage to the negotiation. When assembling the workout team, select an empowered lead negotiator who has not been deeply involved in the disputed matter or entrenched in the grievances. External advisors or senior leaders from a different part of your organization who have appropriate experience are good choices. They are better positioned to view the issues objectively, empathize with both sides’ challenges, and find common ground leading to practical solutions.
To blunt their impact when asserted by a supplier, consider acknowledging (when appropriate to reach agreement on critical points for the path forward) obvious areas where you may have contributed to supplier’s failure and can offer to do better in the future. Acknowledgments of fault should be made carefully and strategically to reach compromise on important issues after consultation with legal counsel. Unless handled correctly, admissions of fault could prejudice your legal claims if settlement negotiations don’t work and formal dispute proceedings are initiated.
Workout negotiation must always take place at the right level and seniority on both sides. On the provider side, the account and support team will be motivated to hold onto the dispute rather than admit their own failure to manage the account and escalate the matter to senior leadership. They will have their own emotional baggage that hinders resolving the dispute and typically lack the clout within their organization to strike the deep compromises required to correct troubled deals. Hence, you should swiftly escalate and work at an executive level with your service provider.
When deals have broken down, the day-to-day working relationships between the customer and supplier teams often become highly dysfunctional and antagonistic. As part of the resolution of the dispute, it may become necessary for the provider to change the account team. This can be a difficult and fraught discussion and should be managed carefully with input from legal counsel. Switching out the account team also has the important benefit of minimizing the likelihood that long-standing grievances between the parties will infect the workout negotiations and execution of the agreed upon resolution.
Although they will jealously protect their margins and revenue, most providers do not want unhappy customers. Preserving customer goodwill can, therefore, be a factor in workout negotiations. For clients they value, some providers will make concessions to resolve disputes amicably — even when the customer’s contract rights don’t provide strong support for its requests. This is most useful in cases where there is a long-term contract or the contract in trouble is only part of a broader commercial relationship between the parties.
The value of a well-negotiated contract
An acrimonious dispute or deal break down exposes the importance of putting in place service agreements that thoroughly documents the providers’ service delivery responsibilities, incorporates commercial flexibility, clearly states the parties’ termination rights and responsibilities, protects your ability to recover likely damages, and establishes an effective dispute resolution framework. During the initial contract negotiation, the effort and time required to prepare and negotiate a robust and durable agreement may seem unnecessary. But when a deal breaks down, a well-negotiated contract (from the customer’s perspective) delivers significant value. It can minimize ambiguity that leads to divergent interpretations on core commercial or legal terms, provide the customer with protections against service disruption while disputes are pending, and offer specific remedies that can be used to hold the provider accountable for its contract commitments.
The best way to ensure a positive outcome from a critical dispute or deal breakdown is to negotiate a good contract at the outset.
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