There is a lot of work <or there should be> before a contractual relationship is entered into. Regardless of how complex the job is or how much risk is involved, as the Principal you need to beable to clearly articulate what your requirements are and what you expect from the service provider.

Typically the type of relationship is governed by a number of factors the least of which should be cost. When choosing the method <and detail> of engaging a service provider the Principal should beconsidering factors such as: the ability of the service provider to offer cutting edge technologicalsolutions or a demonstrable commitment to each other’s success, or perhaps the impact on themarket.

What you want is generally the easy part, being able to quantify it however might be difficult especiallywhen talking about service delivery. The details will depend on the type of contractual relationship youintend on having.

The terms of engagement broadly fall into two distinct types of contractual relationship that is the‘Master / Slave’ and the ‘collaborative’ approach. Both types have their place in business and both have their risks and rewards.

The Master/slave relationship has been the default for a lot of companies in the past and this remains the default where there is a large power differential <or large market> between the two parties.

The proverbial carrot and stick mentality gives you what you pay for, no more/no less, the risks aregenerally clear <if you don’t do this then you won’t get paid> designing the contract and KPI’s will berelatively easy.

In fact the master/slave relationship is <generally> easy for the service provider to resource too,because the tasks will be clearly defined with deadlines and clear expectations.

However there is little or no room to innovate and certainly no incentive for either party to share intheir successes.

Bluntly the master/slave relationship limits both parties to doing what the contract tells them, in orderto receive payment.

Management gurus the world over have been trying to convince business that a more collaborativeapproach will achieve better results. A collaborative approach allows both parties to share some ofthe risk and share some of the rewards; both parties are incentivised to do well.

Just as getting ‘buy in’ from your employees is a desirable outcome, getting ‘buy in’ from your serviceprovider offers potential rewards over and above the contract price.

A really simple example is co-branding of service vehicles, which you would probably only do if youwere in a long term ‘strategic’ type relationship with the Principal. As the service provider you get to link your organisation with the brand of the Principal which gives your organisation more credibility<and free advertising> allowing you to seek bigger and better contracts.

The risk of course is that if one party is doing badly in the market then this may be reflected in thepartner too.

Traditionally one of the reasons you contract an organisation to carry out services for you is to passas much of the risk you can to them. The master/slave relationship is good for this as you can makethe service provider entirely responsible for some aspect of your business <by giving them the authority to act> thus divesting yourself of the responsibility to look after it. The contractor willobviously recognise the risk and price appropriately. One of the problems is that you cannot entirely divest yourself of the risk because if everything fails it is YOUR business that is affected too. The other side of the coin is that you are essentially giving up control of part of your business to someonewho just wants to make a dollar, if it gets too hard there is a possibility that your contractor will just leave.

In a collaborative relationship both parties share the risk perhaps not equally but certainly honestly.

Managing your service contractors has benefits that managing staff doing the same work does not, forexample the Principal does not need to manage sick leave, or go through the process of firingsomeone you don’t like. But there are some similarities for example as the Principal you need tomonitor the performance of the service provider, and motivate them for top performance. You might ask ‘surely the fact that the service provider is getting paid is enough motivation?’ but no, when youthink of the service provider as a homogenous entity it might not need motivation but if you rememberthat the service providers organisation is made up of individuals then you should realise thatmotivation is key and it makes a big difference when the service providers staff are motivated. In thiscollaborative relationship you have with the service provider you can do your bit to keep everyonemotivated.

If you subscribe to this point of view then you can use common motivational theory to design the KPI’sapplied to the contract. Take Herzberg’s two factor theory which talks about hygiene factors; whicheliminate job dissatisfaction and motivators that increase job satisfaction, some examples are:

Motivators | Hygiene

Achievement | Supervision

Recognition | Salary

Responsibility  |Status

Advancement | Company policy

Growth | Working conditions

By taking these factors into account when designing KPI’s the principle and service provider can alignthemselves and achieve a harmonious relationship.

Today outsourcing can encompass a number of aspects of doing business, for the purposes of thispaper we can define it as the process by which an organisation employs a separate company<service provider> under contract to perform a function that was previously undertaken in house, thismay involve the transfer to the service provider assets including people and branding.

In most organisations the decision to outsource the FM component comes about for one of two reasons: 1) to allow the organisation flexibility to meet changing market conditions and2) To allow theorganisation to reduce its total operating costs and concentrate on its core business. When considering the outsourcing of FM services there are at least three factors to consider:

1) Cost or value for money,

2) A good definition of the organisations service requirements,

3) The attributes of service that the organisation sees as important.

Cost (or value for money) is not just a measure for how much money an organisation can save in theoutsourcing process, it needs to be a measure of both the hard and soft services the organisationrequires, it is easy to quantify hours of labour, but not so easy to quantify hours of management orgood communication.

Definition of service requirements comes down to what you want as an organisation, replicating thegood parts of a previously in-house service is not as easy as it sounds.

The core service requirements should align with the organisations strategic vision or goals, someattributes to consider are perhaps customer service, priority of service or speed of response.

Following on from the decision to outsource must come the negotiation process in which two or moreparties try to resolve differences, solve problems and reach agreement.

Negotiation is complex but in general can be classified into five distinct phases:

1) Clarification of wants,

2) Put forward proposals,

3) Bargain,

4) Gain agreement,

5) Follow up.

Each phase can be distinct actions by themselves or run into the next depending on the complexity ofthe agreement.

Clarifying wants is a process of narrowing down the offer to ensure the next phase is as accurate aspossible, from the Principal’s point of view some service providers may be able to provide additionalservices or innovative solutions, or perhaps be able to clarify the needs of the Principal’s business. The service provider needs to be sure that they are pricing their offer appropriately, pricing what the Principal requires and not unnecessary items. In a competitive market an inappropriate price willensure the service provider has wasted their time.

Putting forward a proposal in a tender process may just be a paper based submission and in somecases a presentation or demonstration of the contractor’s ability. At this stage there is a condition thenthe proposal eg: if you pay $XX then we will provide the following services.In a verbal negotiation this takes the form of an if/then statement, then there is a stop and wait for aresponse, if the other party says “No” or remains silent it is up to the negotiator to restate their case orput forward an alternative proposal.

The bargain stage involves the exchange of concessions, these should be specific and clear andobviously any concessions cannot cause harm to either party.

The agreement phase is a process of reaching agreement item by item based on the bargains madeon the previous phase, items need to be packaged in such a way so that in the event of disagreementonly one part of the deal is given away in the event a concession is to be made to reach agreement.

Agreements must be summarised in writing and ‘in principle’ agreements made if a firm conclusioncannot be realised.

Like every project some sort of follow up is required, ongoing monitoring of the results and actions that have come out of the agreement. The performance of both parties is measured and results are reviewed against the wants of both organisations.

When negotiating there are perhaps four strategies or outcomes that can be achieved, entering the negotiation with one of the following strategies gives the negotiator clear guidelines to work to.

  Lose – Win  |  Win – Win
Lose – Lose  |  Win – Lose

Top of the list is the Win – Win outcome both parties achieve the best of outcomes resulting in asustainable long term relationship.Win – Lose is a throwback to the old master/slave relationship that contracting once was <and still isin some cases>, the limitations of this relationship centre around the service provider not achieving satisfaction in the relationship perhaps not making a big enough profit to enhance their business orusing up resources that would be better suited elsewhere. This is NOT a sustainable relationship.

Lose – Win, any outcome with the word Lose in it is self-defeating, this is no exception.

Lose – Lose, why bother?

In summary, managing contracts requires a firm understanding of what it is you need, clearly articulating it to the ‘right’ service provider <one that is closely aligned to your company values>allowing good and open dialogue during the contractual period, measure against key performancecriteria <correct if necessary or rewarding were it is due> and close out by reviewing the outcomes toseek improvement.