Drafting and Negotiating Teams

I had lunch with a client and friend recently, and we had an interesting (to us at least) conversation about what are the parts of an outsourcing or technology services contract that are likely to be the sources of conflict as opposed to the ones that are likely to be used in a conflict.  Both of us were of the view that the terms that some lawyers may not want to focus on – or that the business people think the lawyers should stay out of – are the ones where the conflicts arise.  The true “legal” terms often end up mattering often only if there is a problem that the business people cannot resolve.

The parties enter into a contract so that the customer can get the services and the vendor can get paid.  So, it really should not be surprising that the scope of services and the pricing are the places where most disputes arise.  Over the years, I have worked with clients (both vendors and customers) on a number of disputes, and the issues have always fallen into one or more of the following categories:  (i) whether certain services were in scope and so included in the price; (ii) whether the deliverables met the specifications, and so whether changes and/or corrections are included in the amounts already paid (or if a holdback must be released); (iii) whether the customer and its other suppliers have met their responsibilities and as a result whether the supplier is entitled to additional charges for working around a failure of the customer to meet those responsibilities or is excused from its failure to perform; (iv) whether the supplier’s performance meets the required service levels; (v) what the schedule for performance was and whether or how far behind the supplier is in performance; (vi) whether milestones have been met for payment; (vii) whether the customer or the supplier can assign the contract and their rights/obligations to a subcontractor, the purchaser of their company or some other party; and (viii) general disputes about what the pricing schedule means and what amounts the supplier is allowed to charge.  My lunch partner had very similar experiences.

You can argue that perhaps some of the categories I listed above should be broken out, or combined with each other.  Perhaps you have seen some other permutations on the fact patterns of the disputes.  That is really beside the point.  The point is that the vast majority of disputes in contract matters (including outsourcing arrangements) arise out of who, what, when and where.  However, unlike many contracts where the who, what, when and where may be quite clear (Wally will provide a bushel of grade one wheat to Wendy in Wichita on Wednesday), the scope of services in an outsourcing arrangement may be very sketchy and too often, will not have been carefully written and reviewed by the relevant stakeholders so that it lines up with what is actually needed or what is actually being provided or reviewed by the lawyers and contract wonks to make sure that it is clear.

Ironically, too many lawyers and other professional negotiators focus their time on reviewing and polishing the terms and conditions.  We will have many posts in the future on topics related to issues in the limitations of liability, the indemnifications, dispute resolution provisions and other legal terms.  However important those provisions are, they come into play rarely, and only when something else has already gone wrong.  I am always shocked in those instances in which the lawyer (or other custodian of contractual tightness) for the other side of the deal is completely absent from the drafting, review and negotiations of the parts of the contract that matter the most, the scope of work, the service levels and the pricing.  While I freely admit that lawyers and other contracts wonks should not be deciding the business terms, and that many lawyers are focused on eliminating risk rather than identifying and managing it, I am still puzzled why the people who are the most critical readers of a document and who are trained in finding the holes and the gaps are ever left out of preparing the provisions that actually give rise to disputes.

So, what is the right way to work on the scope, service levels and pricing?  Of course the level of effort and the team participants should vary depending upon the size of the transaction, the risk and the complexity.  For example, for a time and materials project to provide consulting, the definition of the scope is less critical and requires less precision in drafting from the vendor’s perspective than does a large fixed-price project.  For anything more than the smallest, simplest deals, it seems to me that the correct team (from the vendor perspective) includes at a minimum: (i) the project manager who will have to deliver, (ii) a person with a strong technical understanding of what needs to be delivered, and (iii) a person whose job is writing tight, clear contractual language.  Ideally, the person who sold the deal should be involved too, so that the team knows what expectations were set with the customer.  On the customer side, I think you need: (i) the business person (or a senior representative if there are many) who is supposed to benefit from the services, (ii) a person with a strong technical understanding of what is being delivered and how it will fit into the overall environment and (iii) a person whose job is writing tight, clear contractual language.

The pushback I have received on these views normally can be summarized as one (or both) of two responses.  One response is that there is no time to pull these resources together or that these people are not available.  The fallacy of this argument is that there is no time to do the job right, but apparently there is the available time to deal with the inevitable delays that arise from the customer and supplier having misunderstood each other.  The other response is that one person (i.e., the one giving the response) has it under control and does not need some or all of these other participants.  I hope Superman remembered to bring his cape.