Avoiding and Resolving Disputes in Outsourcing Arrangements
Lisa Renee Pomerantz, Attorney at Law
Outsourcing arrangements have become increasingly common. Companies prefer to focus on their core businesses and outsource more peripheral functions to vendors that specialize in those services. At the same time, technology has permitted more efficient outsourcing.
The customer’s relative lack of knowledge about the services to be outsourced lead to disputes in a number of ways:
- The customer may lack the information necessary to make the best selection of vendor or solution;
- The parties may not know the precise nature of the services to be delivered;
- The vendor may propose solutions that are easiest or most profitable for rather than most suited to the customer's needs and priorities; and
- The vendor may over-promise in order to win the bid.
To counteract these risks, the customer can ensure that it makes an informed decision. Options for doing so include obtaining proposals from multiple vendors and hiring a consultant to conduct a needs assessment and to assist in evaluating vendors and proposals.
Disputes can also arise during the implementation phase, in part because of inherent uncertainty about the nature and scope of deliverables. These can be manifested in:
• Internal confusion or dissension within the customer and/or vendor organizations;
• Difficulties measuring progress;
• Lack of customer cooperation and commitment of resources to the project; and
• Unanticipated changes in circumstances.
The parties can plan the engagement to minimize such disputes, by:
- Identifying milestones and deliverables;
- Defining standards and procedures for acceptance of the work;
- Specifying change order procedures; and
- Structuring compensation arrangements, including progress payments, holdbacks, bonus provisions and liquidated damages, to encourage efficient, timely and full performance.
Communication mechanisms should also be specified. For example,
- Authorized decision-makers and liaisons for both parties should be identified;
- Methods for tracking and communicating progress should be specified; and
- Regular project meetings should be scheduled.
Finally, methods for resolving disputes should be identified. The parties may designate a neutral subject matter expert to resolve questions about whether deliverables meet specifications. They may also call for escalation of disputes to senior management or the use of a standby mediator or arbitrator to resolve disputes as they arise.
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