Friday, June 25, 2010

Objectives vs. Ideals: The "Objectives Clause" in an Outsourcing Contract

More and more, outsourcing agreements include a section early on in the agreement about the objectives of the customer and the service provider in entering into the agreement. The provisions will typically do three things:

(i) state the parties’ objectives in entering into the agreement;

(ii) acknowledge that the objectives are not intended to create legal obligations for the parties; and

(iii) provide that, where there is any uncertainty concerning the meaning of specific provisions of the outsourcing agreement, the provisions are to be interpreted in light of the primary objectives of the parties in entering into the agreement.

The specific objectives identified in the section depend, of course, on the nature of the transaction. It is not unusual to see objectives such as:

• To achieve economies of scale through standardization and integration and in the delivery of services;

• To invest in leading edge information technology infrastructure, to remain current in today’s technology and to leverage future advances in technology;

• To reduce the customer’s operating costs; and

• To achieve regular, ongoing and meaningful improvement in the quality, accuracy and timeliness of the services.

Notwithstanding that “Objectives” clauses talk about the parties’ objectives and the parties’ intentions in entering into an outsourcing agreement, they seem, invariably, to be focussed on what the customer hopes to achieve from the transaction. It was always very hard, acting as counsel for a service provider, to get agreement to remove these types of Objectives clauses from the contract, regardless of how heavily weighted they were in favour of the customer. It characterized you as the devil’s advocate, suggesting that outsourcing agreements should not seek to implement leading edge technology, reduce operating costs or improve the quality of services. That was a difficult and foolhardy position to take, a set-up for ridicule (albeit politely expressed) and failure. The better option, in the circumstances, was to try to amend the clause so that it more accurately reflected the reality of the outsourcing transaction.

Against this backdrop, I want to touch on three types of potential amendments to Objectives clauses. The first one relates to the relationship aspect of outsourcing transactions. It is customary to describe outsourcing as a partnership, a relationship or a continuum, all as a way of distinguishing it from discrete, single event exchanges. If an outsourcing transaction is going to be a successful one, it will in no small part be because the parties have established a healthy relationship between themselves. This healthy relationship should certainly be an objective of both the customer and the service provider and it should be referred to in the Objectives clause. For example, in a 2007 outsourcing agreement entered into by the Province of British Columbia as part of its Alternative Service Delivery program (available at, the Province and the service provider acknowledged that the primary objectives and guiding principles of their contractual relationship included:

“to develop a long term and mutually beneficial business relationship
characterized by, among other things, mutual trust, respect and understanding of
each Party’s interests, mutual cooperation, good faith and flexibility to allow
for the addition or removal of services within the scope of the Services
described in (and in accordance with) this Agreement”.

The second area of focus should be to ensure that the Objectives clause actually reflects the customer reality. Very often, what we see in outsourcing agreements is not an “Objectives” clause but an “Ideals” provision – the description of the ideal outsourcing relationship. It is well and good to refer to leading edge technologies, high levels of innovation, extraordinary levels of service and other similar or equivalent distinguishing marks of top quartile outsourcing relationships – if that is what the customer wants, the ideals correspond to the objectives embodied in the RFP and the successful bidder was selected on that basis. Often though, the customer’s actual objectives are very different. The customer may be focussed on replacing outdated technology with something that won’t break, dramatically reducing costs, avoiding risk or potential disasters or simply staying out of the papers. That’s what should be reflected in the Objectives clause for those relationships.

Finally, if the Objectives clause is actually intended to set out the objectives, intentions and guiding principles of the parties, then it should also take account of the objectives of the service provider. There may be one or two service providers the objectives of whose business were solely focussed on leading edge technologies, high levels of innovation and extraordinary levels of service, but I am not sure they are still in business. Most service providers today are trying to use their expertise, insight and infrastructure to provide services efficiently to customers, to grow their business and to make a profit, i.e. the service provider’s objectives are:

• To perform the services efficiently and effectively;

• To avoid operational management of the services by the customer;

• To leverage the services to expand the service provider’s business, both in the specific area of the contract and in other sectors; and

• To increase its revenues and profit (in less service provider-centric terms, to establish a fair economic business arrangement for both parties)

Getting an alignment between the Objectives clause and the real objectives of the parties is more that an academic issue. It matters because the Objectives clause can be used throughout the term of the agreement and in a variety of ways. The clause may be used, as the introduction to this posting suggests, as a guide to interpreting specific provisions of the contract. If that happens, and the Objectives clause does not reflect the true intentions of both parties, then the result is unlikely to be fair to them. As well, objectives clauses are frequently used as part of the annual evaluation of the service provider’s performance. The objectives themselves may also show up in customer satisfaction surveys when the customer’s employees are asked to assess the service provider’s performance against the ostensible objectives for the agreement. If the objectives are not right, then it is also likely that the evaluations will be skewed. And, finally, the objectives clauses need to reflect the reality of the outsourcing transaction because, hopefully, the parties will read the clauses and try to establish a relationship that will achieve the objectives that have been agreed to by them.

If the outsourcing agreement is truly a partnership, and the Objectives clause reflects this partnership in a balanced way, then it should deal with the parties’ relationship, reflect the customer’s actual objectives in entering into the outsourcing and include the objectives of the service provider.

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