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Due diligence doesn’t stop on the ‘go live’ date. So how do you keep the relationship working? “Keeping on top of the deal is critical to building a relationship that works for both parties” When Due Diligence Becomes Due Negligence 1 Both buyers and vendors tend to misunderstand due diligence. On both sides it is too frequently seen as a tedious legal exercise that bears no relation to the success of the ongoing deal. This is a mistake. Due diligence is in fact an essential part of every business relationship, and to dismiss it as little more than a box to tick before moving on to the more exciting part of the deal is an error with potentially serious consequences. Successful relationships are those that work well for both parties. If the service provider cannot make a profit or the customer doesn’t see any business benefit or improvement in service, there is no incentive for either party to invest in the relationship, and so it inevitably breaks down. In this case, money and time are wasted, reputations are damaged, and everyone ends up dissatisfied. This happens all too often, and to a very great extent it happens because people fail to conduct proper due diligence. In this paper we will show how to get it right. We will: Emphasise how both parties should use due diligence to understand exactly what they are getting into Demonstrate the central points that due diligence doesn’t stop on the go live date and that the customer needs to keep on top of the deal Outline several questions that all parties should address both before and after the go live date Before the Go Live Date Get due diligence right and you can begin with shared objectives, accurate expectations on service and delivery, and a price that both parties are happy with. Get it wrong, and in a matter of months you may be counting the cost of that failure. Too many organisations over-complicate due diligence at this key stage of the negotiation, and become bogged down in details of warranties and penalty clauses. When Due Diligence Becomes Due Negligence A Maturity lunchtime seminar in Central London on Wednesday 16th March 11am to 2.30pm RSVP on 020 7868 1901 or [email protected] to reserve your place

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Due diligence doesn’t stop on the ‘go live’ date. So how do you keep the relationship working?

“�Keeping�on�top�of�the�deal�is�critical�to�building�a�relationship�that�works�for�both�parties”

When Due Diligence Becomes Due Negligence

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Both buyers and vendors tend to misunderstand due diligence. On both sides it is too frequently seen as a tedious legal exercise that bears no relation to the success of the ongoing deal. This is a mistake. Due diligence is in fact an essential part of every business relationship, and to dismiss it as little more than a box to tick before moving on to the more exciting part of the deal is an error with potentially serious consequences.

Successful relationships are those that work well for both parties. If the service provider cannot make a profit or the customer doesn’t see any business benefit or improvement in service, there is no incentive for either party to invest in the relationship, and so it inevitably breaks down.

In this case, money and time are wasted, reputations are damaged, and everyone ends up dissatisfied.

This happens all too often, and to a very great extent it happens because people fail to conduct proper due diligence.

In this paper we will show how to get it right. We will:

• Emphasise how both parties should use due diligence to understand exactly what they are getting into

• Demonstrate the central points that due diligence doesn’t stop on the go live date and that the customer needs to keep on top of the deal

• Outline several questions that all parties should address both before and after the go live date

Before the Go Live Date

Get due diligence right and you can begin with shared objectives, accurate expectations on service and delivery, and a price that both parties are happy with. Get it wrong, and in a matter of months you may be counting the cost of that failure.

Too many organisations over-complicate due diligence at this key stage of the negotiation, and become bogged down in details of warranties and penalty clauses.

When Due Diligence Becomes Due Negligence

A Maturity lunchtime seminar in Central London on Wednesday 16th March 11am to 2.30pm

RSVP on 020 7868 1901 or [email protected] to reserve your place

When Due Diligence Becomes Due Negligence

“�An�‘everything�but�the�kitchen�sink’�contract�can�risk�blocking�innovation�and�losing�emphasis�on�the�outcome”

Cut through the morass of legal technicalities and focus instead on these four simple but vital questions:

1 Are�both�parties�absolutely�clear�about�the�underlying�purpose�of�the�deal�and�the�anticipated�outcomes? If those involved lack clarity on the strategy then there is little chance that the relationship will work. Does everyone involved know what is to be delivered, when, where, and to what effect?

2 Does�everyone�have�a�clear�understanding�of�what�needs�to�be�done�in�order�to�prepare�the�customer’s�operation�so�that�agreed�standards�can�be�met�on�the�go�live�date? This involves the customer examining its own existing operation, both as a sum of its parts (the contracts, people and assets that make up the relevant department or function) and as the sum of what it does (the services it provides and the quality it achieves). This is more than a mechanical process for the lawyers. Both parties need to get under the skin of the existing processes and assets to work out how in practice these will enable the service provider to meet expectations on the go live date.

3 �Do�the�bidders�understand�the�customer’s�current�and�future�business�requirements,�and�are�the�service�providers�bidding�on�the�same�basis? Buyers should remember the significant investment of resource involved in bidding for a project, and ensure that vendors are all equally informed on the project objectives, the current state of the buyer’s operation, and its future plans in this area.

4 Does�the�buyer�know�how�its�current�in-house�costs�compare�with�best�practice? Without this information it is impossible for the customer to tell whether or not

potential service providers are offering value for money. A benchmark at this stage, in the form of a “proxy bid” based on real prices paid by other organisations for similar services that they have outsourced, will confirm the price that the customer should expect to pay over the life of the deal. It can save time and add value, clearly defining service, outcomes and anticipated benefits.

The Contract

Only once these basic questions have been satisfactorily answered should the parties negotiate the contract. Unfortunately, some people – and some lawyers in particular – make the mistake of believing that the longer and more comprehensive the contract, the better the relationship will be. They are wrong, for two very good reasons:

1 First, the contract is there to support the relationship, not to stifle it. An “everything but the kitchen sink” contract that fills many shelf-feet of space with endless schedules of essentially operational material can block innovation and reduce emphasis on the outcomes and outputs. In most cases, it is far better to specify what is required and leave it to the service provider to decide how it delivers that.

2 Second, no contract, no matter how bulky, can anticipate all the changes which could affect the parties over the life of a five or ten year deal. Events such as mergers alter business priorities, as do technological advances, regulatory changes, and of course the economic climate.

So, given all this, the very best contracts are concise, focused on outcomes and outputs, and flexible so that they can enable change. Crucially they must ensure that both parties are getting good value at each stage of the relationship.

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When Due Diligence Becomes Due Negligence

“�A�benchmark�can�identify�a�fair�price�for�the�service�and�so�reduce�the�unit�price�for�the�customer”

After the Go Live Date

Setting up the deal properly is critical, but it is still less than half the story.

You should conduct regular health checks as opportunities for both parties to assess the situation. These should not be judgmental or confrontational, and should form part of the overall process of governance which regulates the relationship between the parties. They should also be within the framework of the customer’s strategy both for the relevant service and for how this fits within its broader business strategy.

Here are three questions that you should ask throughout the life of the contract:

1 Is�the�customer�still�controlling�the�strategy?� It is highly risky to outsource to the same organisation both the setting of a strategy and the provision of services to meet that strategy. The customer must never lose control of the strategy.

2 Is�the�customer�able�to�manage�the�contract�effectively?� The customer must be able not only to manage the relationship on a day-to-day basis, but also from a more strategic perspective. They must have input and buy-in from the users of the services and the business as a whole. The right skills and information are needed, and of course both differ from the skills and information required to run an in-house operation. Problems will arise if either is lacking.

3 Are�the�parties�communicating�openly�and�frankly?� For any business relationship to work there must be an effective exchange of information between the parties about each other’s perceptions of the way the deal is going and how to improve it where necessary. There must be a good contractual mechanism for addressing concerns

and making change, but it is just as critical for senior representatives to be open with one another. This depends as much on trust as on a good contract.

Benchmarking Price and Performance

Accurate and complete information is vital to making the relationship work. Measuring current service achievement against the levels agreed in the contract is, however, only part of the story.

The missing piece of information is how current service and cost compare with good practice elsewhere. The unit cost of commodity services, particularly in IT, is likely to fall, and so the customer will want to share in any cost savings and/or see re-investment in service provision by the vendor.

The introduction of a third party benchmarking organisation can prevent this happening by providing impartial, accurate data, based on the real price recently paid for the service by other organisations for similar services – similar, that is, in terms of volume, complexity and service level. Exercising the benchmarking clause in the contract will give this information and enable a fair price to be paid on an ongoing basis.

Of course this implies that every contract should include a properly-worded benchmarking clause to facilitate a meaningful result. There needs to be clarity on what is to be assessed, how meaningful comparisons can be made, and how the results of the benchmarking are to be used. For example, is the benchmarker’s report merely the basis for discussion, or is the service provider required to implement the recommendations? Does this mean reducing the unit price or varying the service levels – or both? If these points are addressed properly, a benchmarking exercise – frequently paid for jointly by customer and supplier – can identify a fair price for the service and so often reduce the unit price that the customer is paying.

PAGe 33

exercising the Benchmarking Clause – What is the Target?

The example below shows a ‘target price’ for the benchmark, as set out in the contract, of ‘top quartile’ within the peer group. In this example, for database operations, there is a 12% difference between the current price being charged to the client and the target price.

The benchmarking clause in the contract must, however, set out clearly what action will now be taken. Is the supplier contractually bound to reduce its price? What other outcomes could be considered? This must all be taken into account before the benchmark is carried out.

AuthorshipMaturity works with a number of respected law firms, and this paper has been co-authored by Rory Graham, partner at Coffey Graham LLP, who specialises in complex technology transactions such as outsourcing and systems procurement. www.coffeygraham.com

A benchmark from Maturity enables our clients to plan future scenarios, ensure the right price for a new outsourcing deal and get value for money during the life of a sourcing contract. Our ability to carry out benchmarks based on actual deal price as well as cost is core to our business.

For more information contact:020 7868 1901 • [email protected] • www.maturity.com

Money Never Sleeps

In conclusion, if money never sleeps, neither should a contract for an outsourced service just be left in a drawer after the go live date. Due diligence can ensure that the customer defines the service to be delivered and the price it expects to pay, and the customer must continue to be diligent about managing both service and price during the life of the deal.

There must be regular and frank discussion between senior executives, and this must

be based on accurate and complete information. Both the contract and the supporting benchmark should support the relationship throughout its term. For customers, this can result in a service that continues to deliver, often at a price that is reduced. For vendors, this can result in long-term customers who enhance not only their sales figures but also their reputations.

Failure to plan properly beyond the go live date and to continue to manage and measure effectively is not just a missed opportunity, but approaching negligence.

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£77,959

Contractual Price BenchmarkingExercising the Benchmarking Clause

Database operations: monthly amount

Client’sExistingCosts

TopQuartile(target)

Min Avg Max

-12%

£77,220

£91,387

£69,607£63,052

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When Due Diligence Becomes Due Negligence