Q: The one certainty in any outsourcing arrangement of any duration is that there will be change during the life of the contract. How can this be avoided?

TL: In itself change isn’t a problem –its life. Carry out pre-contract due diligence, nail the service specification down as tightly as can be, and transfer as much risk as possible to the supplier during the contracting stage and still things will be different in the future. However, that difference will have an impact on what service you as a client get, and what you pay for it. And we are not necessarily talking about years in the future either – typically service, scope and volumes, not to mention the wider business environment, turn out to be different to what had been assumed in the contract within weeks of signing.

Q: Surely some changes are predictable and their consequences factored in?

TL: Some changes of course are inevitable and their consequences are pretty predictable. For example, the contract WILL come to an end one day, so exactly what will happen on termination needs to be described. Some of the supplier’s key staff WILL leave or be promoted, so you need to define how that will be dealt with. Volumes WILL fluctuate, so the impact on pricing and service commitments needs to be understood.

Q: But what are the big changes which can’t be predicted and the impact of which is difficult to predict?

TL: These might include a break-up or divestment of parts of a company, as happened to a major retailer just after signing a finance outsourcing contract in the late-nineties. Or a catastrophic drop in business as happened to a major telecoms player after the dot com crash, when they had recently signed up for one of the early HR outsourcing deals, or more positively of course, an acquisition which needs to be integrated into the group.

Q: How are these kind of events dealt with in the outsourcing contract?

TL: These events are commonly defined in the contract as “Significant Business Events”, and the usual approach is to say that if such an event happens the parties will agree the impact on the deal at the time, acting in good faith. Which sounds fine, especially to a frazzled negotiating team who have more than enough to deal with already with the things which they can define. But it is not actually terribly helpful – “agreements to agree” are fraught with risk, and any imbalance in power in the relationship could be exploited in future.

Q: What might a better approach to coping with unpredictable change be?

TL: The best way to deal with this is to identify a number of possible simple future scenarios (a doubling or halving of transaction volumes; the sale of an identified division etc) and to work through with the supplier how they would deal with this, and what the impact on charges and service would be.

Q: And when should scenario analysis like this take place?

TL: There are two points at which to do this. Firstly, during supplier selection, such scenarios should be work-shopped with the supplier to see how they deal with them at a relatively high level. Secondly, during the contracting process, the scenarios should be worked through in detail, and the agreed outcomes attached to the contract as an illustrative “touchstone” which can be used to guide negotiations when an actual event occurs. Clearly at this stage the scenarios will be fairly simple, but so long as the principles are clear, and the assumptions are documented, this exercise should give a clear illustration of the likely impact of such changes on the contract.

Q: Can and does this really work?

TL: By doing scenario analysis both parties enter the arrangement with their eyes open – if some changes would be too much for the deal to bear, better to know up front. And the touchstones can guide future negotiating teams from both sides – no illustrative scenario will ever be matched exactly by real events, but they will provide a real context for negotiations. Overall, scenario analysis will reduce risk and improve transparency in any outsourcing arrangement.