Compensation no substitute for understanding

How customers and suppliers in an IT outsourcing relationship can enhance mutual understanding – aided and abetted by lawyers – and how they can anticipate and deal with problems became the main subject of debate for the panel.

Ben Wishart at Whitbread posed an example that underlines the challenge facing providers of a generic service, such as networks, in understanding that industry sectors vary widely in their needs at grass-roots level.

In the hotel sector, he said, network suppliers need to understand that if the network goes down between 5pm and 7pm, it may be within the SLA (service level agreement), but “all the guests who are trying to check in are having a bad experience because the network’s down and that affects their likelihood of returning.

“If it happens at that time, five Mondays in a row – which, thankfully, we have not experienced! – whoever is running your network – or any other service affecting the customer experience, for that matter – can expect to be spending a lot of time in your office.”

The consensus was that, in these situations, it is far better for client and supplier to forge a better understanding – thus reducing the likelihood of a dispute – than for the supplier to pay compensation after the event.

“I’ve got clients who are not interested in me handing over, for example, £10,000 worth of compensation; they’re interested in getting the problem fixed,” said Ian Roy from Capgemini. “So you create a solution that has extra resilience engineered in, which may be a bit more expensive, but then you’re avoiding carrying [a] business risk premium.”

David Hamlett at Wragge & Co said he advises clients that damages, penalties or service credits can never compensate for disruption. The key aim, he said, should be for clients to encourage correct behaviour from the supplier – “so the supplier doesn’t say ‘I couldn’t care less if [network downtime] is between 5.30 and 7.30 – it says I can take two hours a day, and that’s the time I’m taking it down’.”

Jonathan Cooper-Bagnall from PA noted how, in financial services, for example, “suppliers will build premiums into their costings to accommodate when clients call them because something’s gone down on the trading floor, and it needs to be fixed in 30 seconds flat. You can’t explain to a trader ‘I’m sorry, that’s not in the service agreement,’ not unless you want to be ripped to bits.”

By contrast, he said, it was often difficult for clients to calculate the cost premium needed to reduce the likelihood of IT or network mishaps, so they may be unwilling to pay one.

Other panellists emphasised the importance of ensuring a cultural fit between suppliers and customers. Ron Jarman at Reuters recalled one transaction in which a supplier with a very different culture was selected, on the basis that the supplier’s rigid processes would be ideal for the client. “But then you try living in that relationship with someone from a very different culture, it’s really difficult.”

Mr Cooper-Bagnall added that achieving a cultural fit is not just a business-to-business issue, it is also about individuals.

He said: “What do you do when you’re at the coalface at an operational level and you just can’t stand the service delivery manager of the supplier, and he or she can’t stand you – and neither of you can tell your respective bosses that this is the case? I’m not sure there is a really constructive way of identifying how people need to think about this relationship.”

In this situation, said Mr Jarman, clients might ask for their suppliers’ service manager to be changed, but it is a lot harder for the supplier to tell the client that it has the wrong people managing the relationship. In a client organisation, moving someone to another post might become a mark against them, he commented, whereas among service providers it would not necessarily be career-threatening.

Mr Wishart felt that sometimes it was right for a supplier to deliver an unpalatable message, and this may well add a lot of value to the relationship. Mr Hamlett agreed it was normally best to face these interpersonal issues head-on. Otherwise, “all you’re doing is delaying the inevitable, and you end up with more disputes and more troubles”.

The conclusion seems to be that senior people on both sides can agree readily about the broad objectives of an outsourcing arrangement, but at operational level the devil is in the detail and everyone needs to work hard to exploit each other’s skills.

Access to different skills is, after all, one of the key aims of outsourcing, although, as PA’s Fons Kuij-pers noted, this may not be easy to achieve when the customer’s employees move across to the supplier. “What you get is many of your own people back …you don’t necessarily get an injection of higher level or better quality people.”