Outsourcing contract objectives clause?
Have you ever seen an objectives clause like this near the beginning of an outsourcing contract or a master services contract?
“The customer’s objectives in respect of this agreement are for the supplier to:
(a) achieve optimum value for money for the customer;
(b) minimise any ongoing financial liabilities and risk for the customer;
(c) develop and implement a best in class operating environment;
(d) provide innovation in service delivery models and facilitate flexibility in service delivery;
(e) perform the services to market-leading service levels;
(f) provide capability to implement change management and new business processes; and
(g) act in the best interests of the customer at all times.”
Reason a customer includes an outsourcing contract objectives clause
No matter how well drafted an outsourcing contract is, or how accurately the scope of services is defined, there may be deficiencies in the description of the services and service level, or gaps in the supplier’s contractual obligations. An outsourcing contract objectives clause tries to fill in any holes so that if the agreement does not address a particular circumstance or outcome, or the agreement is unclear, the parties will refer to the objectives clause and interpret the agreement so as to give the fullest possible effect to the customer’s objectives.
Benefit to customer
‘Service based’ objectives clauses like the one above primarily assist a customer entering a contract for the purposes of outsourcing its entire business or a major function of its business to a supplier. In these situations, because the customer is effectively handing over an entire function of their business to the supplier to operate on behalf of the customer, the customer is putting a lot of faith in the supplier’s ability and desire to perform the outsourcing services to the customer’s ideal standards. The customer requires extra certainty in case anything is unclear in the contract – the objectives provide this.
A service based objectives clause in an outsourcing contract – suitable in certain situations
The example objectives clause above clearly focuses on the customer’s reasons for entering into the contractual arrangement and what the customer hopes to achieve. If the supplier is offering a ‘full’ outsource solution to a large customer, where the supplier is also acquiring the customer’s personnel and equipment, the supplier may have little choice but to agree to the customer’s standard service based objectives. This may also be true if the supplier is taking part in a competitive tender situation and desperately wants to win the business. In negotiations it is not easy to explain to a customer why your client will not be providing a best in class service or market leading service levels.
Broad ill-defined customer objectives may not be ideal for a supplier
Nevertheless, in many situations it may not be in either parties’ interests to compel the supplier to provide cutting edge services or to be responsible for providing innovation in service delivery. For example, it may not technically feasible for the supplier or cost efficient for the customer if it requires the supplier to constantly evaluate and enhance the services and improve the customer’s experience. Moreover, objectives such as “the supplier must act in the best interests of the customer at all times” are impossible for the supplier to comply with as the nature of a commercial contract means that the supplier will be acting in its own interests. Accordingly, the supplier may wish to negotiate the objectives clause to include more balanced relationship based objectives.
Practical negotiation strategies for a supplier:
1. Move the discussion away from targeting perfection
From the supplier’s perspective it is useful to re-frame the negotiation about the objectives to shift the discussion from ‘perfection’ to ‘reality’. If they are being honest, all customers will admit to wanting ideal service delivery for the cheapest price. However, the danger of the service based objectives illustrated above is that in the event of a dispute a customer will often rely on the broadly drafted objectives clause to bolster its argument that the dispute should be interpreted in the customer’s favour. Knowing this, the supplier should therefore argue that the objectives in the contract should be representative of the actual transaction so that they are appropriate for the type and level of service that the supplier will provide.
2. Advocate collaborative relationship-based objectives clause
A supplier should explain to the customer that the success of any outsource lasting five years or more largely depends on whether there is an ongoing positive relationship between the parties. An ideal objectives clause will focus on the requirement for the parties to act as partners and maintain a collaborative approach for the duration of the term. The supplier should argue that if the objectives clause focuses on the relationship, including the governance regime and sharing of information between the parties, it will more accurately reflect the aspirations of both the supplier and the customer. In other words, a relationship based approach will help minimise disputes and litigation compared to an objectives clause that focuses solely on the supplier’s delivery of the services to an ideal standard.
3. Balanced objectives clause that reflect reality
The reality is that some customers will not have the authority or desire to completely redraft the objectives clause to align with a relationship-based approach. In this event the supplier should try to negotiate more balanced objectives that narrow the scope of the most onerous or wide-reaching objectives that the customer is proposing. Using the example above, the supplier can redraft the objective from “perform the services to market-leading service levels” to:
“perform the services in accordance with the Service Level Agreement attached to this Agreement”
or redraft the objective from “provide capability to implement change management and new business processes” to:
“develop a change management plan and implement this plan in the customer’s business in accordance with the process specified in clause 11 (Change Management) of this Agreement.”
Conclusion – three approaches to negotiating objectives clause
Objectives clauses in an outsourcing or master services agreement can help promote collaboration and minimise disputes if they describe how the parties will interact and the positive relationship the parties intend to pursue over a five or seven year term. Often, however, customers will try to draft a service based objectives clause so that if there is a disagreement between the parties, the customer can rely on the ideal outsoutcing contract objectives clause and demand ‘perfection’ from the supplier.
A better approach is for the parties to approach the outsourcing contract as a partnership where the objectives clause at the start of the contract:
- reflects a relationship based approach and not a services based approach;
- is rooted in reality and is not targeting perfection or representing an idealised view of the supplier’s services; and
- has been negotiated so that it describes a balanced list of objectives, including the objectives of the supplier.
Photo credit: Pixabay