Legal Download 2.0 - Driving Service Excellence

A Roadmap for Success: Driving service excellence through outsourcing and managed services contracts

Tags: DLA Piper Middle EastUnited Arab Emirates
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By  Hinal Patel , Paul Allen Published  August 7, 2009

Achieving service excellence is no simple matter. Outsourcing and managed services transactions are typically complex: tens, hundreds or perhaps thousands of employees may be affected, multiple territories may be involved and business critical functions may be transferred.

Notwithstanding the complexities, customers quite rightly expect service excellence. Customers want a solution from their supplier which will help them to achieve their own business objectives; they want the right services, at the right service levels, at all times.

By preparing a well formulated vision of what service excellence means for a particular deal, and by putting in place suitable performance and relationship management tools, the parties will give themselves a better chance of achieving service excellence - this is where the contract between the parties plays a pivotal role!

Through collaboration, the customer, the supplier and their expert advisors can prepare a contract which promotes the achievement of service excellence. Hallmarks of such a contract include:

a vision of service excellence in the form of a comprehensive statement of the services to be delivered and the service levels to be achieved by the supplier;

commercial incentives which drive the supplier towards achieving service excellence;

objective and transparent monitoring and reporting mechanisms which inform the parties whether or not service excellence has been achieved;

suitable and balanced remedies for addressing service problems;

continuous improvement requirements which are directed towards ensuring that the service improves or is made more efficient along with relevant technologies;

• a change regime which fairly and efficiently manages changes to the services; and

• a governance program which requires the parties to evaluate, address and resolve service risks and issues as and when they arise.

This is the first in a series of articles which will briefly examine each of these hallmarks. In this article, the first two hallmarks will be considered.

Vision of service excellence

Service excellence is all about ensuring that the customer receives the services needed to meet relevant organisational objectives within any organisational constraints. What these services are will depend on the individual circumstances of the customer (i.e., service excellence for one party is rarely service excellence for another). It is therefore critical that the services and service levels are described adequately. Otherwise, how will the supplier know what needs to be delivered to achieve service excellence?

Parties may be tempted to deal with this area in a cursory way (especially when negotiation timeframes are tight!). A customer may, for example, simply accept a supplier’s standard solution as being fit for purpose or decide to adopt a service description and service levels from a previous deal.

Both of these ‘one-size-fits-all’ approaches are fraught with danger, particularly for the customer. Even so, in certain circumstances the use of standard solutions can help a supplier to achieve operational efficiencies, which could mean lower charges for the customer.

One thing is for sure - a one-size fits all solution that is not fit for purpose will not achieve service excellence. Imagine if a health service provider looking to procure hosted clinical applications is offered a service level which has come from a deal for a human resource management system. The application availability required by the health service provider may be at the highest end of the scale (99.99%, 24/7/365), whereas the human resource management system service level may only provide for availability during regular business hours, and even then a certain level of outages may be acceptable.

What could the consequences be in these circumstances? First, the health service provider is highly unlikely to end-up receiving service excellence. Worse still, the health service provider may be put in a position where it has to re-negotiate the solution and the applicable charges, both of which will mean delays and, most probably, an overall increase in procurement costs.

Even worse than that, if the clinical system is not available to a surgeon at a critical time, the consequences for a patient could be dire - not to mention the consequences for the health service provider if the patient brings a claim for medical negligence. While the fictional example given is deliberately at the extreme end of the scale, this type of misalignment between customer needs and the services offered does occur, albeit needlessly.

When it comes to documenting the service description, the service levels and all other delivery-related requirements, cutting corners is usually not the best approach. Instead, to drive service excellence the parties should endeavour to work out exactly what the customer needs and then prepare a comprehensive and detailed document which clearly articulates what is required.

This approach will help the parties to avoid any unpleasant surprises of the type described above. Practically speaking, it is not always possible to agree all the details at the outset of the contract. In these cases, legal and commercial consultants well versed in transactions of this type will be able to offer practical ways of dealing with the unknowns in a way that mitigates associated legal and commercial risks.

Commercial incentives

When it comes to incentivising a supplier to achieve service excellence, one’s mind will always turn to the various ‘carrots’ and ‘sticks’ which are available. Careful consideration by both parties is required here, with ‘balance’ being a guiding principle.

If you give the supplier all the carrots too early, you might end up with a well paid but fairly disinterested supplier: “I've already been paid so what do I care if I don't hit that service level”.

Whereas, if you pay the supplier too late or hit them with too many sticks along the way, you might end up with a supplier that feels so antagonised that they become uncooperative or, worse still, financially starved: “There’s no point in working on this account as we are not appreciated and will never be paid properly anyway”.

Various incentive models may be adapted to meet the needs of a particular deal. A common incentive model is the ‘buyer/merchant’ model which involves payment for services delivered. This model is usually accompanied by a service credit regime by which, in the case of underperformance by a supplier, the price payable is reduced to reflect a diminution in the value of the service received.

Also common is the ‘risk/reward’ model which, broadly speaking, sees the supplier rewarded by some form of bonus where high-level objectives are achieved. Usually, the bonus will be an additional payment although it could be any kind of bonus, including the award of new business or an agreement to ‘go exclusive’ with the supplier.

The models described above are not necessarily mutually exclusive and are certainly not the only models which can be used. Indeed, the options here are only restricted by the commercial imagination of those negotiating the deal.

One word of advice though: the simplest mechanisms are often the best. More complicated mechanisms can become unwieldy which in turn can lead to additional administrative overhead (because of the time taken to understand and apply them) and disputes (where they are so complex that they end up being ambiguous, at least for the uninitiated).

Still, complicated mechanisms are sometimes necessary. Where this is the case, be sure to include clear examples of how the mechanism will work in practice within the body of the contract. If the parties are unsure as to what will work in practice, it would be a good idea to seek counsel from their trusted advisors.

Closing thoughts

Achieving service excellence in an outsourcing or managed services transaction should not be taken for granted. It is easy for an organisation to pay too little attention to contractual matters which will help to drive service excellence. However, given the availability of expertise in this field, it is also easy to commence these transactions on the right footing and to promote the achievement of service excellence from the outset.

Hinal Patel is a Partner, and Paul Allen is Senior Legal Consultant, in the TMC group at DLA Piper Middle East LLP.

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