A strategic partnership is only as strong as the commercial trust you share. When things go wrong it is important you consider contract termination as the ‘nuclear option’; the option of last resort when every other reasonable mechanism to improve performance has been tried.
However, it is still an option, so recognising whether that button should be pushed – and if so, when – is important. Should a lack of confidence to remediate set in through repeated – and failed – attempts to get matters back on track, you can find yourself too far down the road to make it back from the brink. Your perception may then be that the only logical route open to you is early contract termination.
A report of this happened in a relationship between strategic supplier Vertex Data Science (Vertex) and electricity company Powergen (now known as E.ON). The report reflects the lessons we have learned from working with hundreds of clients over the years who have found themselves in similar situations.
Early Contract Termination – The Parties
When Powergen took over TXU, it acquired more than just a competitor’s organisation, it also acquired the company’s customer relationship management operations service provider, Vertex. Almost immediately after Vertex and Powergen signed a subsequent new contract to cement their relationship for the best part of a decade, reports of issues started to be publicised.
Sensibly, the parties came together and renegotiated their agreement to a slightly shorter ‘Master Services Agreement’ (MSA). However, once again, the issues in the relationship were reported to have rapidly spiralled, with both sides suggesting the other was the cause.
Less than a year later, Powergen served a termination notice on Vertex and Vertex decided to take the disagreement to the courts in an attempt to prevent the termination happening. The apparent primary reason behind this decision being to prevent the reputational loss to Vertex that could have ensued should the contract be cut short.
Vertex’s reported perspective on this matter was paramount to them. Its reputation is a vital piece of the procurement puzzle and apparently management were worried that if it were publicised that it had lost a contract, this might impact the company’s chances in subsequent procurement bids.
The presiding judge in the case, Mr Justice Tomlinson, disagreed, and on this point, it is reported that he considered that the damage in that respect had probably already been done, as the media spotlight was already on the case.
The problem for Justice Tomlinson was that both sides claimed the other was to blame for the issues in their strategic partnership.
Powergen alleged that Vertex:
- lacked care and skill in the completion of their service
- was responsible for services that Vertex said they were not
- was resistant to change requests and that a third-party consultancy report pointed the blame at them for call centre performance failings
Vertex argued that they had nothing to answer to, that it was Powergen that had made changes as a ruse to get out of the agreement between them, and that Powergen had contributed to the issues in the first place and due to implied terms in the MSA, this absolved Vertex of blame.
The Judgment
Mr Justice Tomlinson considered that the relationship between the parties had degraded to such an extent that it would not be productive to force them to continue working together. He is reported to have stated: “In these circumstances I do not consider that it is appropriate to grant injunctive relief which will have the effect of compelling the parties to work together. Nor do I consider that the terms of the contract are sufficiently precisely defined to indicate to Powergen precisely what is required of it if it is not to prevent or hinder Vertex from performing its functions under the MSA.” The courts deemed, therefore, that Powergen was allowed to terminate the contract early.
Early Contract Termination – Five lessons learned on how to develop truly collaborative strategic relationships
The term ‘relationship’ may seem a little lightweight when discussing commercial matters, but it really is at the heart of the success or failure of your strategic projects. How you select, foster and maintain/govern relationships with your strategic suppliers will either make the whole experience infinitely more complex or much more productive.
Truly collaborative relationships do not happen by chance: they are built, nurtured and form as a result of ongoing collaboration. They involve the communication and understanding that exists between you, the trust you have in one another, and the commitment to set aside individual priorities in favour of a common goal that fits both organisations.
The following 5 steps are some of the key behaviours we have observed and evidenced across over 500 strategic supplier relationships that generate real value for both parties and reduce misunderstandings over expectations:
Lesson 1: Clarity on ‘what good looks like’
This step is all about teamwork and the trust that is generated through a clear understanding of the goals and expectations on the project. To know what good looks like requires a complete understanding of ‘what is’ and realistically ‘what could be’ (the ‘Future State’) in order to quantify the transformational benefits of the project, which in turn will help you to create a picture of ‘what good looks like’ to communicate to all stakeholders.
Lesson 2: Know your supplier
The formation of a good communication structure between collaborative partners – where information can be passed in such a way (language, tone, clarity) that it will be both fully understood and acted upon with appropriate urgency, comes from understanding your strategic partners. Know your supplier, who they are, what they are motivated by, the stresses they face and the limitations they work under.
This is not a one-time analysis; this is an ongoing relationship that needs to be formed, nurtured and strengthened throughout the project. We often recommend that clients create a team dedicated to forming and fostering closer relationships with their supplier counterparts: the Intelligent Client Function (ICF) team. The better you know your supplier, the better you’ll know how to speak to them to get things done, to encourage positive behaviours, to identify issues on the horizon, and to guide all parties through choppy waters and back into calmer seas.
Lesson 3: Know the risks
While it is a good thing to enter into each new relationship constructively, this also needs to be supported by healthy experience-led critical friend challenges and with eyes wide open to the potential risks involved. Every project has its trials, including how you:
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- predict them;
- spot them on the horizon;
- identify them when they are near; and
- plan to tackle them when they impact on your objectives or threaten your outcomes.
This will often mean the difference between maximising your opportunities and failing to deliver.
Lesson 4: Encourage the right behaviours
Siloing, commercial or individual protectionism, poor productivity and a lack of governance, to name but a few, are behaviours that should be avoided, and where recognised, addressed to turn them around. In an ideal world, parties should be working in unison, doing what they need to in order to deliver on targets and outcomes, always looking for ways to optimise and improve through innovation and maintaining a clear vision of the outputs required.
However, this ideal world takes a huge volume of effort. In most circumstances, to some degree your relationship will be challenged by a lack of commitment or capability in one or more of these areas. There are three ways of addressing this:
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- through the wording of your contract to make sure that requirements and responsibilities (and the ramifications of failure to properly execute them) are fair, understood, clear and agreed to;
- through the governance of that agreement, the identification of issues and the actions you take to guide your partner back on track; and
- your own actions, to ensure that your teams are doing all they can to fulfil their responsibilities and to find resolutions when issues are discovered.
The right behaviours encouraged in your own and your supplier’s people will help to build your commercial trust and productivity, improve the chances of a decent focus on innovation and to nip poor behaviours in the bud so they do not escalate.
Lesson 5: Inclusion and buy-in
It is important to trust in the knowledge and experience of those you have access to – suppliers, in-house teams and stakeholders. Ask them for their opinions, their critique of your ideas and their out-of-the-box thinking.
Show that you are listening to them. Involve them in the process as this inclusion often leads to widespread buy-in and, therefore, true collaboration, when you need it from them.
There will always be some who will internalise their thoughts and feelings. It’s your job to create an environment in which they feel more at ease to share their thoughts, because those thoughts may well turn out to be vital to the process and your efforts, and also important to their buy-in to the process.
Conclusion
While an early termination must always be considered a last resort, as we can see from the judgment laid down in the Vertex vs Powergen case, there are times when a relationship has become so strained that to force parties to collaborate would likely be both unconstructive and costly. Therefore, there will be circumstances where to part ways is simply the most commercially logical solution.
To avoid this eventuality, we would recommend starting out on the right foot with the five lessons highlighted in brief above. However, if you are already past this point and are in a relationship that needs putting back on the right track, or one that simply has to be untangled so you can progress with another supplier with minimal damage to all sides, we can discuss ways in which you may be able to move forward from this point. For an informal discussion, please do not hesitate to get in touch.
Photo credit: iStock
