contract for success: the keys to success for …...the keys to success for master services...
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CONTRACTFOR SUCCESS: THE KEYS TO SUCCESS FOR MASTER SERVICES AGREEMENTS
By Ajay AyyappanGeneral Counsel
Written by
January 22, 2020
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Whether an enterprise is new to contracting for operations management services or has been doing it for decades, the decision to tap into global labor pools for one or more of its business processes is a significant one. It requires careful consideration of the contractual terms that will guide the delivery of services between the enterprise and its provider. However, many negotiations tend to devolve into heated and protracted discussions on risk allocation. By focusing on points of failure, rather than what can drive success, parties enter into sub-optimal relationships.
Points of failure are the areas of a master services agreement (MSA) or similar agreement that deal with each party’s liability to the other, such as limitations of liability, warranties, and indemnification clauses. While the terms of these provisions are important and require the parties to think through what they provide for, ultimately the success of a relationship cannot be measured in terms of the size of a damages cap or how broad of an indemnity a provider agreed to. A successful operations management relationship is one where the customer has achieved or exceeded the goals they set when they began searching for a service provider. For most customers those goals are reducing costs, increasing revenue, and driving transformational change to make their organization more efficient and competitive. The provisions of an MSA that speak to those goals will not be found in the risk allocation sections, but instead in the solutioning, governance, and outcome incentivization portions.
How, then, can parties maximize the likelihood of success? The following guidelines can help.
1. Get the Solutioning Right The parties should overinvest in time to map
processes, understand solutions, and flesh out the multiple phases and tollgates required to transfer to and
transform a complex service or set of services from the customer to the provider.
Both customer and provider must make expert resources available for the solutioning phase. On the provider side, these resources should be experienced operations personnel with a deep understanding of migrations and service delivery in the client’s industry. On the customer side, these resources should be personnel that have had oversight of the process being transferred and who understand the nuts and bolts of the work.
The customer should provide verifiable historical data so that the provider can understand how the service has been performed to date. This should include:
• Complete transparency in what service levels have been
• If such data isn’t available, the parties should work together to come up with a fair baselining solution that arrives at reasonable service levels.
2. Create a Framework that Incentivizes Success Consider building structures into your MSA that encourage your partner to not just meet minimum standards, but exceed those goals.
• Gainsharing: Both sides often contemplate including some form of year-on-year continuous improvement in quality or other relevant measures while designing their initial overall commercial construct. However, it can be difficult for parties to incorporate more than incremental change at the inception of the agreement. A well thought out partnership will allow for the possibility of gainsharing between
CONTRACT FOR SUCCESS: THE KEYS TO SUCCESS FOR MASTER SERVICES AGREEMENTS
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the parties in cases where one or both parties can, through investment and development, create a step change that goes beyond the contracted service. In exchange for pursuing such measures, the parties agree to share in the resulting commercial upside.
• Service Bonuses: When expectations are not met, such as cases involving low service levels, it is common to have a service credit regime to penalize poor performance. While this may help prevent misses, it does little to encourage wins. Customers should consider whether exceeding service levels has value for them, and how they would accordingly incentivize a provider for achieving such targets through means such as service bonuses.
3. GovernanceGovernance is the structure through which the performance of the services, monitoring, and accountability for contractual obligations, the parties’ objectives, and overall relationship is managed. A well thought out governance program will cover all material facets of the services, help ensure each party’s expectations are met, and address issues before they become serious.
Points to keep in mind when creating a governance program for an operations management relationship include:
• Governance is a skill in and of itself. Those tasked with governance responsibilities should have experience in managing complex commercial relationships and the bandwidth to devote the necessary time. The work cannot effectively be performed as a side job or as an extension of the purchasing business’ personnel. On the flip side, to be successful, the governance professional will need reporting and support from the various parts of their organization that are involved with the contracted
services.
• Governance is more than just monitoring service levels and monthly invoices. It should include, among other things, monitoring contractual terms, assessments of whether objectives are being met, regular stakeholder meetings within and between the parties, and a robust change management system for the inevitable modifications that arise in any relationship.
• Governance is proactive. The goal is to spot and address issues before they bubble up to become serious problems.
Ultimately, contracting for success requires each party to have a clear understanding of their and the other party’s objectives, and a shared commitment to achieve those respective objectives through a balanced and well thought out contractual framework.
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