Coronavirus - A guide for global industrials reassessing their outsourcing requirements during coronavirus - Global

• United Kingdom

• Coronavirus
• Industrials

08-04-2020

A guide for global industrials reassessing their outsourcing requirements during coronavirus

COVID-19 continues to cause widespread and indiscriminate disruption to global industrials. Manufacturing companies face more of a challenge in instituting remote working or emergency shift working than their service industry peers, which is creating new challenges and forcing companies to redefine “business as usual” on a near-daily basis while managing often complex supply chain and outsourcing arrangements. Addressing these challenges head-on in a calm, collected and collaborative manner will be crucial to maintaining sustainable relationships over the coming months.

What are the key challenges facing global industrials?

There are two competing themes at play:

1. Customer requirements in terms of volume and service, along with their ability to pay, will fluctuate significantly; and
2. Suppliers will struggle to perform to contract and may be subject to significant disruption both in terms of their own supply chain and from a cash-flow perspective.

Volume and Price commitments

Many businesses are likely to face fluctuations (both increases and decreases) in their requirement for outsourced services over the coming months. For example, with much of the population in effective lock-down, demand on outsourced IT (for remote working), contact centre, logistics and delivery services may be subject to significant increases. Most global manufacturers are currently struggling to get their teams online, and don’t have the internal IT infrastructure to cope with the influx of demand. 

Understanding your key supplier relationships (operationally and strategically), how services are drawn-down and how your pricing is structured, are the first steps in creating a workable plan to mitigate anticipated fluctuations in demand and cashflow. 

For example:

• Where volumes are subject to short to medium term increases, do the supplier’s fees scale automatically or are the fees subject to volume bands? Do the supplier’s fees increase with increased volumes more rapidly than they decrease as volumes fall?
• Are there any upper or lower limits that beyond which the contract’s pricing needs to be renegotiated? If so, what happens in the interim – does the supplier’s standard daily rate card apply?
• Are there minimum commitments in terms of volume or fees that will apply regardless of falls in demand?
• Can you agree a payment plan with your supplier to address any cash-flow issues?
• What fixed costs does your supplier have, for example, people, facilities and technology.
• How is your supplier likely to be impacted by COVID-19 and, specifically, any fluctuations in your volume requirements.

Pricing mechanisms designed for ‘business as usual’ may well need to be reassessed and renegotiated to address the peaks and troughs in demand for services that businesses are currently experiencing. 

Service Disruption

Remember that your suppliers are also facing cashflow and supply chain issues. Many have now fully implemented their business continuity plans, with personnel working from home and others in self-isolation. Many are considering the application of ‘force majeure’ clauses and other contractual relief mechanism (see here for some thoughts on these issues). 

While there are circumstances where delivery may become impossible, in the vast majority of cases, ongoing dialogue and a flexible approach by both parties is likely to be the key. Parties to outsourcing contracts that may be subject to service disruption should consider:

• Current and potential causes of disruption; are business continuity solutions in place and workable? are supplier personnel able to work remotely? are there supply chain shortages?
• What services are critical to the business and, in particular, are any of those services required for regulatory purposes? if so, can the supplier be permitted to re-focus its available resources to those areas?
• Similarly, are there any service levels and KPIs that can be temporarily suspended or refocussed in in return for supplier focus on the services which they have deemed critical.
• If a supplier is struggling to enable its personnel to deliver the services from home, are there any additional resources (e.g. IT, network capacity) that the customer can make available?
• Finally, are there services that could be brought back in-house in a temporary basis?

From a customer perspective, and as a last resort, what contractual tools are in place to ensure continuity of service? Examples might include rights to exercise step-in.

Immediate steps

• Early dialogue and agreement on short- and longer-term measures to address these issues can significantly reduce the likelihood of crossed-wires and contract disputes.

• Businesses at all levels in the supply chain will need to show flexibility in their approach. However, both customers and suppliers should be sure to follow basic contract hygiene when agreeing temporary and other changes to their outsourcing agreements. 

• If your contract includes a change control procedure, where practicable, use it! If the process is overly cumbersome (many will mandate steps that are measured in weeks not days) then agree a more streamlined approach but be sure to document those outcomes.

• Changes agreed in emergency situations often end up in dispute as decisions are made regularly and at speed.

Long term considerations

• Decent outsourcing contracts have long contained basic provisions dealing with changes in service volumes, business continuity and relief for circumstances beyond a party’s control. However, these often take the form of generic obligations, referring to standard supplier or industry practices. 

• As we have seen in recent weeks, manufacturers have struggled with the types of measures currently being put in place to slow-down the spread of COVID-19. Unfortunately, it seems likely that the current pandemic won’t be the last.

• We expect management teams will look to stress test business continuity plans more closely in future, for example through testing in scenario-based simulations. Customers should take an active role in ensuring that supplier continuity plans are aligned with their own to ensure end-to-end operational resiliency.

• Reliance on force majeure and other contractual rights such as frustration should be seen as a last resort for both parties and, in place of those, parties should look to how they can overcome challenges by being flexible whilst also keeping in mind the onward implications of exercising such flexibility.