Outsourcing: Issues and Analysis: Change

1. Overview 

Change is a fact of life

Contractual relationships change and develop over time and the signing of the outsourcing contract is very rarely the end of the contracting process.  Quite simply the outsourcing contract should be treated as an evolving document which requires appropriate mechanisms to respond to, and deal with, changing circumstances effectively and efficiently.  The outsourcing contract may need to be able to respond to the provision of additional and reduced resources as well as the provision of new services and fundamental changes to the existing services.

There are a number of potential reasons for change, including:

• the supplier may upgrade his business so as to be able to deliver enhanced services to customers.  As a result he may wish to change all customers to a new basis;
• the customer's business model and business needs may change either organically and or through acquisition or disposal;
• technology or intellectual property essential for the provision of the services may cease to be available for reasons outside the control of either party.  For example, authority to use the key piece of software may be withdrawn as part of a wider industry upgrade program in a way which requires significant change to the services themselves; 
• new or improved technology, intellectual property and/or methodologies may become available to support and facilitate the provision of the services;
• the service output and/or the manner in which the services are provided may change over the lifetime of the outsourcing;
• regulators may impose change.  This can range from an obligation on the customer or supplier to dispose of part of their  business in the context of a corporate transaction to a requirement on a broadcaster or telecoms company to change the system used for wider policy reasons.
• Any of these triggers for change may directly change the services provided or have an indirect impact on the outsourcing contract.  For example, change may significantly affect the economics for either customer or supplier in operating the contract.

Anticipating change proactively

Contracting parties should be proactive about anticipating change.  The customer needs to think about whether its requirements or business will change over the lifetime of the contract. The supplier needs to think about how and if can will deal practically and cost-effectively with change, whether requested by the customer or driven by outside forces. Rather than just relying upon a change mechanism to effect change retrospectively as a response to an alteration in circumstances, the contracting parties should be prepared to commit to meet and discuss the outsourcing arrangements both regularly and whenever necessary, for example by nominated representatives who have the authority to agree and put into practice the required change.

The customer and supplier should discuss the extent of the flexibility which the customer will have to change the services so that the customer can understand the implications of any changes it requires upon the ability of the supplier to supply the services in a manner and at a cost which is acceptable to the customer.  The parties may want to agree the implications of any foreseeable change, for example if they know that the volumes of services will change they may want to agree in advance the effect upon the charges of changes in the volume of the services. It may also be foreseeable that the customer will need the supplier to make resources available to it (for example man days of consultancy).  In this situation, the parties may agree and set out in the contract what man-day rates will apply.

In preparing any outsourcing contract it is vital for both parties to consider how likely it is that changes will have to be made the services.  Some services may be relatively unlikely to change (eg the provision of maintenance services for a long-term air-conditioning system).  Other services may inherently be extremely likely to change (eg the provision of IT support to a company in a fast moving high-tech environment).

The outsourcing contract should try to anticipate the consequences of particular changes, for example, which changes should be paid for by the customer and which by the supplier. While it will not be possible or indeed desirable to prescribe for every conceivable change, the outsourcing contract should set out a framework on how changes are to be managed as well as setting out the consequences of the more obvious changes, such as changes in volumes or service levels, or both.

2. Change Mechanisms

From the customer's perspective the outsourcing arrangements need to satisfy the customer's original business objectives and the customer's future business objectives and the services must be delivered in an efficient and predictable manner which represents best value for the customer.   From the supplier's perspective it will want to ensure that it delivers the services as efficiently and cost-effectively as possible and will want to retain as much freedom as possible to deliver the services in the way it sees fit, making changes to the services and the way in which they are provided whenever the supplier deems it necessary.  There will always be a degree of tension as to which party has most control over the services and the way in which they are delivered and this issue should discussed by the parties at the start of the negotiating process and dealt with clearly in the outsourcing contract.  One way of dealing with the issue is to build flexibility into the service specification by making the scope of the services outcome based rather than the contract dictating the manner in which the required outcome is achieved (for example, the customer could require the supplier to answer telephone calls within 60 seconds rather than specifying that the supplier needs 30 phone lines and 30 operatives).  

However, not all changes can be dealt with by building flexibility into the service specification particularly if the element of the services which is required to change is the outcome of the services itself and so change mechanisms have to be built into the outsourcing contract. The outsourcing contract will usually deal with different types of change in different ways, for example treating some changes as minor and some as major, some as changes which can be made unilaterally and some which can only be made with consent.

Types of change control mechanisms

The inclusion of a change control procedure is a common way of introducing flexibility into the arrangements and to allow the parties to deal with agreeing unanticipated changes to the services.  A well drafted change control procedure should ensure that any changes to the services are prepared, dealt with and agreed on an orderly basis.  The change control procedure can be as informal or as formal as the parties agree and many outsourcing contracts contain both formal and informal change control procedures:

• Informal Mechanism: The parties may want to ensure that minor or routine changes don't need to go through a formal change control procedure to allow these changes to be made easily and quickly and to avoid the formal procedure from becoming overloaded, too bureaucratic or its importance devalued. The type of change dealt with by any informal procedure are usually those which so not result in a change in the customer's business objectives, the service output or which don't have an adverse impact upon other elements of the services and which do not affect the charges. The informal arrangement often simply provides that changes are to be agreed by certain nominated representatives of the parties.  This type of provision is usually used to deal with minor or operational changes that do not need to be deatl with by a more formal prescriptive clause. One way of dealing with change is by giving the supplier control over how the services are provided (ie the right to unilaterally change the manner of provision of the services).  This could be done by setting out the required service output in the service specification but leaving it silent as to have the service outputs are to be achieved.  Obviously the degree of prescriptiveness as to how the supplier provides the services will vary from contract to contract and the scope of unilateral changes that the supplier can make may be limited to minor changes.  If this approach is adopted it is important that the contract makes clear which changes to the way in which the services are provided can be made unilaterally and which will require the consent of the customer.

• Formal mechanism: The formal prescriptive type of clause is usually what it meant by a "change control" clause.  The change control procedure commonly does the following:

• Specifies which party can initiate changes, ie will the supplier and/or customer be able to initiate changes?
• Specifies if the supplier and/or customer will be able to veto some or all proposed changes?  This is particularly important as it effectively sets the relative bargaining power of the parties.  One particular change that the customer will be anxious to have a power of veto over is the change to charges;
• Specifies what type of changes have to be dealt with using the procedure;
• Places a requirement upon the parties (particularly the supplier) to act flexibly and reasonably in considering and agreeing changes to the services;
• Places an obligation upon the supplier to consider and advise the customer on the effect of the change upon the customer's business objectives.  The inclusion of this requirement will depend upon the degree of responsibility that the supplier has taken on for achieving the customer's business objectives;
• Places a requirement upon the parties (in particular the supplier) to consider the effect of the proposed change upon the services and the achievement of the service levels;
• Places a requirement upon the parties to consider the best way to implement any agreed change;
• Specifies how changes are to be documented and how the change will be reflected in any relevant documentation such as the service specification, exit plan, disaster management plan etc;
• Deals with how the change will affect the terms of the contract and whether or not the terms of the contract need to be amended to deal with the change;
• Deals with the effect of the change upon the charges.  The procedure needs to ensure that any changes to the charges are reasonable.  The change control procedure should ensure that any increases in the charges are reasonable and the clause may even set out the basis upon which any additional services are charged. The customer will also want to ensure that the change control clause clarifies that changes can result in reductions in the charges, for example where the service is reduced, as well as increases.  In this situation the clause should also set out how any reductions in the charges will be calculated; 
• Sets timescales for the parties to respond to and deal with request for changes;
• Includes a mechanism for resolving disputes about changes, taking into account the nature of the issue to be decided; and
• Allocates responsibility for the costs arising from the change control procedure itself (as opposed to changes to the charges resulting from changes to the services).  For example the supplier may want to specify the circumstances in which it can charge for the carrying out of impact assessments (usually when the customer has requested the change).

Dealing with mandatory changes

As noted above there may be times when it necessary for one party to be able to unilaterally impose a change upon the other party for example where changes are required to ensure that the services comply with changes in legislation and regulations.  The mechanism dealing with mandatory changes is usually much simpler and usually provides for a unilateral imposition of change, a deadlock breaking mechanism and exit from the outsourcing relationship as an alternative to change.  They usually specify that the changes made must be only to the extent necessary and impose an element of reasonableness.