Use of Mediation in Outsourcings

I was speaking with a colleague recently regarding whether mediation was a valuable tool in outsourcings, and if so, under what circumstances. We came to the conclusion that it is an appropriate tool for some outsourcings, but not all. 

It is inevitable in any outsourcing or large managed services arrangement that disputes will arise. Disputes arise for a myriad of reasons, ranging from a failure of the parties to appreciate and agree on fundamental business terms, such as differences of opinion on specifications or deliverables, to perhaps the more mundane question of whether a notice required by the agreement was given properly. Since these arrangements last for relatively long periods of time, preserving the relationship between the parties is very important for the outsourcing to be a success. 

In outsourcing agreements, the parties typically spend a fair amount of effort drawing up complex governance procedures, which include various committees, meeting schedules, roles and responsibilities, and, most germane to this discussion, a method for addressing disputes. The point of the committees, meetings, etc. is to ensure that there are plenty of opportunities for the parties to communicate. Good communication reduces the chances that small problems become big problems. (How to get the parties to actually follow the governance procedures is an entirely separate problem for another article.) 

In my experience, the dispute resolution procedures in these large contracts boil down to two basic steps: escalation and litigation.

Escalation generally involves referring the unresolved problem to successively higher levels of governance after set periods of time have elapsed. In theory, by escalating the problem to more senior levels of each party’s organization, the more senior members, being relatively more empowered within their respective organizations, are able to overcome the problem through the use of their power. In practice, the escalation process may simply entrench the parties in their respective positions. 

In the litigation step, in which I would include any binding adversarial process like arbitration, the parties are faced with an expensive and time consuming process that distracts the parties from the core business of the outsourcing. 

In my view, the fundamental problem with this process is that it takes the two parties and gradually forces them apart. At each step in the escalation process, and certainly by the time the parties reach litigation, the process naturally reinforces each party’s respective positions. The relationship between the parties can become strained, which further exacerbates this problem. This appears to become especially the case when the escalation is rapid or the stakes are particularly high, as the parties have not had an opportunity to cool off and gain some perspective on the dispute. 

My colleague and I concluded that under these particular circumstances, it would be helpful to insert a mediation or facilitated negotiation process between the escalation step and the litigation step. The principal benefit of mediation would be the introduction of a true neutral participant. A neutral having independence from either party and perspective on the dispute could shake the parties loose from their entrenchment and get them thinking creatively. Another benefit is that the mediation process is designed to bring the parties closer together, not to drive them apart, and therefore is more likely to preserve the relationship between the parties. 

For example, in the “build” or implementation phase of an outsourcing, timelines are short and there is a great deal of pressure on the parties to perform. A mediation step can inject some breathing room and fresh thinking, and resolve the dispute much more quickly than litigation ever could. Since the quick resolution of disputes are essential to a project’s success, mediation would be a valuable step in the process to save time and keep a project on track. 

In an ongoing services outsourcing, which has relatively long escalation timelines and a well established relationship, the benefits of mediation are not as clear. In this type of outsourcing, by the time a dispute has been completely escalated through the governance process, the parties have had plenty of opportunities to negotiate a solution, and are now looking for someone to render a decision so that they can move on. A mediation step introduced at that stage may only delay that decision and frustrate the process. 

I invite readers to share any experiences that they have had with mediation in the context of outsourcings, and particularly to comment on those factors that led to its success or failure.