How to contract for improvement

In long-term services contracts, often customers expect continuous improvement from the service provider.
How to contract for improvement

In long-term services contracts, often customers expect continuous improvement from the service provider. The challenge is how to contractually impose that on the service provider. One approach is to include a continuous improvement schedule in the contract.

The continuous improvement schedule sets out any specific obligations related to improving the value of the services over the term of the contract. It sets out:

  • specific service streams that are subject to continuous improvement;
  • activities to be undertaken as part of the continuous improvement process;
  • processes and procedures for proposing and agreeing changes resulting from the continuous improvement regime; and
  • specific cost provisions

In general terms, the key principles and objectives underlying the continuous improvement process should be to improve quality and efficiency, reduce costs and encourage innovation.

It is important that the process reflects the need to achieve value for money over the full term of the services contract. The need for the type of specific obligations set out in the continuous improvement schedule should be considered on a project-by-project basis.

It should be noted that service levels could provide for a gradually increasing level of performance or for additional service levels to be added through the life of the project. However, service levels tend to take a more structured approach where a continuous improvement provision will usually be more flexible and ad hoc in its operation.

However, sophisticated continuous improvement regimes in more complex projects may use a combination of devices to provide a stringent and structured approach to the improvements and obligations to achieved them

Devices often used for continuous improvement are benchmarking exercises, targets for cost reductions and key dates for service revision/review based on predictable changes to the customer’s business processes or requirements.

Drafting considerations

When drafting detailed continuous improvement provisions, the customer will need to consider what types of improvement the customer intends to achieve and how they can be achieved. It will also need to consider effects on other aspects of the contract and how it relates to other contractual mechanisms.

While it is difficult to settle on position for the points set out at the start of this article, it is important that the customer has a clear idea of what it intends to achieve through the continuous improvement regime. The detailed provisions will need to be developed in collaboration with the service provider and each service provider will have a different approach.

Benefits-sharing

The guiding principle of a continuous improvement process should be to deliver benefit to the customer, primarily as value for money. A key benefit to be achieved is reducing costs and it is important that this is passed to the customer.

In certain circumstances it may be appropriate, and even desirable, to allow the service provider to share in the costs benefits of a continuous improvement change. As a rule of thumb it may be appropriate to share a saving with the service provider if they suggested the improvement or implementing means the provider incurs costs.

Where a change is suggested and/or driven by the service provider, a benefit-share is appropriate and the value to the customer of that sharing is clear. The service provider needs to be encouraged to exceed its obligations whenever possible and the only way of ensuring this is to deliver an incentive.

It is far more effective to incentivise good performance than to deter poor performance i.e. setting realistic obligations and encouraging over-performance rather than setting more robust obligations and deterring under-performance. It is important to remember that it is not in the service provider's interests to propose a change that could undermine its margin. It might be prepared to do so where its margin is bolstered through a benefit-sharing mechanism.

Identifying improvements

Either party may identify improvements as part of the service review process, or suggest them ad hoc. Each party should have the right to propose improvements, although the customer will usually retain the right to decide whether a change should be implemented or not. Where a benefit-sharing mechanism is applicable, service providers will often refer the final decision as to whether a change should be made to a joint forum.

The customer should be wary of relinquishing its discretion in relation to implementation of changes and any move towards a "joint decision" would only be appropriate where it is proven that the change is a genuine improvement rather than a cost cutting exercise that could result in a diminution in quality.

It is with mandatory improvements (for example, hardware refresh obligations) that the customer has the right to compel the service provider to implement the requisite change and the provisions in the contract relating to these types of improvement need to be clear and enforceable.

Implementing improvements

Changes as a result of improvements identified after the contract has been signed should be implemented through the change control procedure. This provides transparency both in terms of time, costs and impact on the contract and services associated with implementing the improvement.

How to contract for improvement

by Dr Sam De Silva

Partner - Head of IT Law and Outsourcing Law, Penningtons Manches LLP

Dr Sam De Silva is a partner and the head of the IT and Outsourcing practice at leading UK law firm Penningtons Manches LLP. His main areas of practice are technology projects and the outsourcing of technology and business processes.  He has been published widely and speaks regularly on these topics and is Chair of the Law Society's Technology and Law Reference Group. Sam is also one of very few UK solicitors who is a Fellow of the Chartered Institute of Purchasing and Supply (FCIPS), Fellow of the British Computer Society (FBCS) and a Chartered IT Professional (CITP).  He is also an IT Law Accredited Member of the Society for Computers and Law.  

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