05 January 2007
The main reason why so many big outsourcing contracts run aground is the lack of any sort of mechanism to solve disputes before they get out of hand, argues Mark Amsden. But there is a wealth of options open to public sector bodies
Last autumn, IT services company Accenture pulled out of the National Programme for IT in the NHS. Its decision to terminate a £2bn patient and GP systems contract followed a 67% drop in its profits after losses incurred on the deal.
Disputes over large-scale outsourcing projects are not uncommon. The Child Support Agency's outsourced IT system is a case in point. It was said to have contributed significantly to the CSA's problems, which included doubling the time for the settlement of claims and an alleged backlog of 300,000 cases. The argument between the supplier and the CSA degenerated into a blame game, although the National Audit Office discovered that the decision to make the system go live was taken despite both parties knowing of 52 defects.
Problems of this nature cost a great deal of time and money and are generally a lossmaker for all concerned. They can also seriously damage reputations. In the case of the CSA, a review of the agency by Sir David Henshaw found that 'the CSA brand is significantly damaged and its credibility among clients is very low'. In effect, the project helped the CSA sign its own death warrant. Last month the government announced that it was to be replaced by the new Child Maintenance and Enforcement Agency.
So why do problems of this scale arise in the first place? The root cause is almost always money. In public sector contracts, there have been instances where the government organisation has managed to negotiate very tight terms and conditions on contracts, while the supplier underbids to win the business. An outsourcing partnership based on unrealistic delivery terms for a price that leaves little profit for the supplier is almost destined to fail. Combined with the fact that no outsourcing project is cut and dried at the requirements stage – and will almost certainly involve change of some sort – conflict will almost inevitably arise.
The customer will invariably try to hold the supplier to the bargain, while the supplier will need to do everything it can to stay in – or get into – the black. These entrenched positions will ensure that the two sides stay at loggerheads until the dispute can be resolved, seriously damaging the project's prospects of success.
Both government agencies and their suppliers need to take a more flexible, positive approach, with give and take on both sides. The cost and inconvenience that it causes to change supplier, step in or in-source the business process or IT system means that it is highly preferable to do as much as possible to make these relationships work.
So how can such conflicts and disputes be successfully avoided or resolved once they start?
In the past, many government agencies have signed up for very long-term contracts – some Private Finance Initiative contracts span 35 years. If that is what is needed to make the projects viable, then so be it. But in deals of this longevity, the parties need to pay careful heed to dispute resolution clauses.
The starting point is to use a mechanism that requires the parties to talk to each other. A proper process for escalation is essential. Irrespective of polarised views, people are generally more amenable to the other side's point of view if they meet face to face. Communication restricted to letter or e-mail is a recipe for bravado and threat.
The next step is the use of adjudication – a form of rough justice – whereby a dispute is resolved quickly, outside the courts. There is no reason why the outsourcing contract cannot specify a number of adjudicators in specialist fields, who have all confirmed their willingness in advance. The contract can then provide that particular disputes be referred to one of that panel. The adjudication can proceed quickly. Decisions are often made within six to eight weeks of appointment, before the matter has really 'festered' between the parties. The decision is binding, unless overturned by some higher authority, such as a court or arbitration, if the parties take it that far. This method of dispute resolution is used widely in the construction industry and there is no reason why it should not apply to IT and PFI contracts.
Adjudication can also iron out disputes over the scope and interpretation of requirements in IT contracts. Take the example of a local government project. The requirements said that if employees were off sick for more than three days, they would have to be advised that they would need to provide a doctor's note. The supplier decided that it was sufficient for the system to generate an e-mail to the employee's work e-mail address. The council pointed out that not all employees had access to e-mail (cleaners, etc) and if employees were absent due to illness, they wouldn't be picking up e-mails anyway – therefore the system would need to generate a letter to the home address. An adjudicator would decide where the obligation lay.
Quick, binding decisions can help keep a long-term relationship on as even a keel as possible. The contract needs to be capable of dealing with any issues, no matter how large or small.
Another way to settle disputes is mediation. This is where all relevant parties get in a room to hammer out the issues, with the assistance of a mediator. This form of shuttle diplomacy tends to work very well. As mentioned, both parties can get very entrenched in outsourcing agreements – and it is much easier to be belligerent on e-mail or over the phone. When sitting down at the table together, or engaged in the same process, it usually becomes easier to move towards a resolution. It can also provide a means of saving face for the different people who are involved – often the mediator is blamed for any concessions that were made in reaching a settlement.
To avoid disputes, sensible management of the contract is also needed. This might seem an obvious point, but often the people involved in public sector outsourcing deals have not been involved in one before. The team that signs up to the contract is not necessarily the same team that runs it. The people who are involved in the management of the outsourcing need to be up to speed on the main contract provisions and understand where the real risks lie.
Many an IT project gets delayed through no fault of the customer. It's a natural thing to ask the supplier for an explanation and be presented with a plan B. The client team might not realise that each time they agree to work to the new project plan it often becomes the new contractual timeline against which claims for delay will be assessed – even if by the end the supplier is years behind the original schedule. Risks like this need to be understood. It is one of the reasons why client delivery teams are encouraged to undergo contract management training at the outset of a project.
Despite the conflicts and disputes that arise, there is no doubt that the technology projects that abound in the public sector are amazingly innovative and essential in the UK's evolution. From electronic patient records to applying for tax discs online, some of the projects that currently prevail will shape the lives of all UK citizens.
But for them to succeed and to limit potential failure, public sector organisations need to be aware how to limit dispute fallout. They need to sit down at the outset, work out objectives and develop a contract that will form a protective layer around the project. And it must be remembered that all the measures described above – adjudication to mediation – are just a means to an end, not an end in themselves.
Mark Amsden is a partner and national head of the IT Disputes Group at Addleshaw Goddard
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