Managing change through effective governance

27 August 2004

Kristina Walles

Introduction

Outsourcing transactions are often complex and involve a wide range of legal and business challenges. Outsourcing contracts are often entered into on a long term basis – five to ten years is not unusual. It is impossible to avoid changes of circumstances during this period and if the parties have committed themselves to a long contract term it can often be anticipated that changes to the contract may be required. A party’s wish for contractual change may arise as a consequence of new or altered requirements, e.g. due to an expansion or a reduction of a party’s business. Changes may also be inevitable due to the level of service available in the market place, changes in law, technology or other unexpected events.

In the light of the above it is of great importance that an outsourcing contract is flexible and that the parties have clearly defined the procedures that shall apply to ensure that the contract can be amended to reflect any variations. This can be achieved by including terms and conditions regarding change management in the contract.

Due to the complexity of outsourcing transactions and the lengthy terms on which outsourcing agreements often are entered into, outsourcing contracts require a high-degree of co-operation and team work from both parties. An outsourcing contract is often characterisedas a marriage and (as with any marriage) it is vital that the contract contains procedures regarding governance and co-operation.

Change management

Change management procedures ensure that all changes and variations to an outsourcing contract are subject to proper control and authorisation, that the contract is amended to reflect the agreed variations.

If any of the parties want to implement a change, such change can be recommended or requested in accordance with certain procedures. The parties may wish to specify in the contract which circumstances the contract may or may not be changed and which elements shall contain a written request/recommendation for any changes. For example, a party may wish to state the reason for change, impact on service charges, impact on service levels, a timetable for implementation, the personnel to be provided by the supplier/customer, resource requirements, security issues etc.

The parties should regulate the time frame within which a party shall be obliged to respond to a change request/recommendation and how the contract will be amended if agreement on the change is reached. In order to prevent a party from delaying required changes, the change management provisions should also state that a party shall not unreasonably withhold or delay its consent to any change request. The provisions may also provide for various authorisation levels as regards representatives for each party. No doubt, different personnel will be authorised to agree on certain variations of the contract, e.g. depending on the impact on the service charges.

The parties may further want to agree that a different so called “fast track procedure” can be applied in cases where the requested change is a standardised change request, if a change is necessary on a temporary basis to maintain the continuity of the services or if the parties have agreed that a “fast track” procedure shall be applied.

Governance Procedures

The governance procedures established under an outsourcing contract should encourage open and frequent communication and co-operation between the parties at different seniority and/or levels of expertise. In order to achieve the best results, various levels of management forums should be established. The parties should also each appoint one contract manager who is responsible for the overall relationship between the parties on day-to-day issues.

The governance procedures should provide for a framework under which the various management forums are set out to deal with certain concepts such as strategic issues, business development, service improvement, performance reviews, user complaints, dispute resolution, change requests and other issues or problems that may arise under the contract. The governance procedures must also anticipate unresolved issues which should be escalated through the levels of management.

The governance procedures normally also contain provision concerning the meeting frequency for each management forum, the number of members of each management forum which each party is entitled to appoint, which party shall be responsible for summoning the meetings and to keep the minutes etc. A general requirement of members of a management forum is that they shall have the specific knowledge or expertise required to address the issues or problems which are to be dealt with by the management forum in question.

Conclusions

You should always make sure that a long term outsourcing contract provides for flexibility and that it contains procedures that will apply and ensure that the contract may be amended to reflect any variations. You should also make sure that appropriate governance structures are established under the contract which encourage open and frequent communication and co-operation between the parties. There is no standard formula for the successful implementation of an outsourcing transaction, since each deal is different. It is therefore important that you adopt and adjust any change management or governance procedures to the individual circumstances of your particular outsourcing transaction.