Governance portrays the methodology by which decisions are proposed, adopted and implemented. In corporations, governance describes the rights and remedies of the shareholders to decide upon selection of directors and on major corporate changes that affect their interests, and on the rights and duties of directors.
In outsourcing, governance describes the protocols and procedures for
- communications between the parties at all levels;
- the maintenance of personal links between corresponding individuals in each organization;
- the process for reaching consensus on matters not identified in the contract or as to which the interpretation might not be clear; and
- the process for determining when consensus has failed and a dispute exists.
Failed Design of Governance Procedures
In drafting outsourcing agreements, the parties should step back and consider whether particular rights that they might have could backfire.
For example, if the parties are required to adopt an internal escalation process for resolution of emerging disagreements, but one party has the ultimate unilateral control, the outcome is pre-ordained unilateral control. In drafting such agreements, the drafters should consider whether the impetus to exercise unilateral control will be irresistible. If so, the “relationship governance” would change from one involving a mutual exchange and reciprocity of effort to one involving unilateral control. Unilateralism tends to ruin relationships because, absent restraint or self-restraint, power tends to be exercised. In such situations, the service provider might consider adding a premium to the pricing, insisting on more mutuality in the governance process or precipitating some other crisis that permits reassessment of the governance process.
Corporate lawyers familiar with business divorces will have a point of view that seeks to gain maximum rights in dispute resolution. Business advisors and executives need to evaluate whether true self-interest lies in maximizing rights or in driving mutual accommodation for continuation of the relationship.
“Relationship governance” defines the set of rules and procedures for empowering the parties to move forward in their relationship. Without an effective means of “relationship governance,” the communications fail, and the relationship fails.
In outsourcing, the long-term character of the contracts imposes a burden on the parties to fairly and predictably delineate their roles and responsibilities and the means for channeling and resolving inconsistent interpretations and disputes.
If “relationship governance” fails, then the outsourcing contract should specify the means for declaring and validating the existence of a breach, for termination (which might merely involve a renegotiation and restructuring), and for allocating the costs of the resulting early end to the relationship.
Core principles in relationship governance depend on the outcomes intended:
- If one party has the right to break a deadlock in a dispute, the outcome will be as it wishes, and intermediate procedures to weigh the opinions of the other party will become pure formalities.
- Personal relationships should be developed at all levels, across a “ladder” of enterprise relationships.
- At the highest levels, the senior executives may share accountabilities for success of the relationship under the “buck stops here” principle of escalation of disputes to business decisionmakers.
- The timing of decisions needs to be identified, since justice (or change) delayed may be tantamount to justice (or change) denied.
Relationship management principles may be set forth in the main text of the agreement or in an exhibit. Wherever located, the rules should reflect alliance-type relationship building as if in a joint venture or other long-term strategic alliance.