Don’t Leave Your Outsourcing Contract in the Drawer

It is one of those sayings that people just love to recite: “The best contracts are the ones that stay in the drawer.” In ten years of advising customers on their outsourcing agreements, I have heard this phrase uttered in just about every large negotiation that I have done (typically with a knowing nod of the head from others at the table, and sometimes with a disdainful look in my direction). And while it may just be a saying, it is a terribly misguided one; and, even as a guiding principle, it typically will produce the exact opposite result of what it is intending to achieve.

In short, the saying centers around the idea that a healthy long-term working “partnership” – especially one that requires trust, sacrifice and evolution, which most outsourcings do – cannot be strictly managed off the static words on a page, but instead through a trusting, mutually beneficial relationship. So, if you are taking the contract out of the drawer, instead of managing via relationship and trust, either it means that you are being adversarial, which is sure to just escalate and lead to a deteriorating relationship; or it is evidence, in and of itself, that you do not have a good relationship. In this way, the contract is seen as a “negative” – some sort of necessary evil on the front end (perhaps to appease Legal and Finance), that somehow can be vanquished once the contract is signed and the real relationship begins.

Earlier in my career, I thought that the danger in this thinking was that it primarily would lead to the customer failing to enforce its negotiated rights – whether due to the outsourcer’s self-interest, the outsourcer’s lack of incentive to do the “right” thing, or just pure lack of knowledge on both parties’ part. And while this may often be the outcome, I have come to realize that the “keep the contract in the drawer” principle is even more dangerous than that, and ultimately will work to the detriment of both parties.

Ironically, keeping the contract in the drawer will most often lead to all of the things that, according to the saying’s advocates, it is supposed to help prevent. More specifically:

• Lack of Trust. Ignoring the contract often fosters a lack of trust as the parties become less aware of what their obligations are, and at least breeds a suspicion that one side is willfully ignoring its responsibilities.
• Adversarial Atmosphere. Using the contract actually helps to keep things less adversarial, because – once signed – it can serve as an objective (almost “third party”) authority for the parties. As a general matter, how can a party be blamed, or be seen as taking advantage of the other party, for doing what the contract says it is supposed to do?
• Obstacles to Evolution and Change. Precisely because so much changes over time – the people originally involved in the contract, the customer’s environment and business needs, and the technologies that the outsourcer uses to support them – relying on a documented baseline, and periodically refreshing that documentation to stay current, is critical. Otherwise, the documentation becomes so inapplicable to the reality that, if and when issues do arise, they are magnified because the parties have a much harder time recreating what happened, engaging in a principled discussion, and getting back on track.
• Deterioration of the Relationship. For all the reasons above, using the contract can maintain – even strengthen – a relationship. Keeping it in the drawer is more likely to lead to a deteriorating one.

I am not suggesting that the parties have to slavishly follow their contracts. There are certainly times and places – many, in fact, over the course of a long-term outsourcing relationship – to diverge from the terms of the contract. But when a party needs, wants or otherwise is willing to do that, then using the contract as a baseline will help the parties be transparent and have a principled discussion about it. And this more likely will lead to the greater satisfaction of both parties – not just with the immediate result, but also with the relationship as a whole.

The right answer is not to “put the contract in the drawer”, but to put the time and effort into creating a good contract and to see it from the beginning as a relationship management tool. The best contracts are the ones that are structured to promote a long-term, mutually beneficial relationship; which give clear guidance to the parties as to their rights, obligations, and how to govern the relationship; and which are easy to read, understand and use. And contracts like those should be utilized regularly – not left in the drawer!