Managing B2B relationships through service contracts

Service contracts have an important role in managing the relationship between a supplier and a customer. Longer-term agreements often include provisions for oversight over the services, measurement of service delivery, and managing any disputes.

Working relationship

Successful delivery of services depends on a good working relationship between the customer and the supplier. It is usually helpful to set out a framework for the management of the parties’ relationship. This could simply be naming the parties’ respective relationship managers, who will have responsibility for the service. Beyond that, the contract could set out details of:

  • Meetings to be held by the parties’ relationship managers, such as frequency, quorum, and the preparation and agreement of minutes.
  • Reports as regards the services, such as frequency, content and who is to be responsible for their preparation.

The contract could also provide for the establishment of committees to manage discrete areas of the relationship, such as finance and technical standards matters.

Customer’s audit rights 

Service contracts often contain a right by the customer to audit the service charges. The customer may also want wider rights as regards:

  • Supplier’s performance of the services and service levels.
  • Supplier’s compliance with the customer’s mandatory policies.
  • Supplier’s handling of the customer’s data.
  • The service contract can also set out what happens if the customer is dissatisfied with the results of the audit, for example, increased monitoring by the customer of the supplier’s performance of its obligations.

Service levels

Service levels specify the levels to which the supplier must provide the services, such as:

  • Availability of resources.
  • Call response times.
  • Problem resolution times.

The key elements of a service level provision are:

  • Service levels. Too few service levels may mean service levels cannot be measured effectively, whilst too many service levels can be an administrative burden.
  • Review. Service levels should be capable of review to reflect market trends or to introduce new measures which more accurately reflect the impact of performance failures on the customer.
  • Measurement. The supplier being required to report its actual performance (measured against the service levels) to the customer on a periodic basis.

Service escalation

Service escalation procedures are mechanisms that a customer can use if the services do not meet the required standards. Whilst the supplier is given an opportunity to take remedial action, the risk of poor performance faced by the customer is put back on the supplier as the supplier usually have to pay the customer’s costs for these procedures.

Common procedures are:

  • Service augmentation. The supplier is required to allocate more resources to the services.
  • Increased monitoring. The customer has the right to increase its monitoring of the supplier’s (poor) performance.
  • Step-in. The customer has the right to “step-in” and take over responsibility for delivery of the services. The customer usually appointing a third-party appointee to step-in on its behalf.

Service credits

Most service level regimes have a service credit mechanism, where the price paid for the services is adjusted on any failure to meet the service levels.

Service credits usually apply on a graduated basis between the required service level and a lower minimum “acceptably unacceptable” level of performance. They may be payable as a credit against the supplier’s next invoice or as a direct payment from the supplier to the customer. The service credits are often capped at an agreed percentage of the total prices payable.

The service credit regime should reflect the specific characteristics of the project. For example, a service interruption during peak hours having more serious consequences than an interruption occurring in off-peak hours.

Service credits should not, however, be set so high so that they become an unenforceable penalty. The payment should not be disproportionate or unconscionable, by reference to the loss which the customer might suffer.

Service credits are not the same thing as liquidated damages, which are a fixed or determined sum agreed by the parties to be payable on breach of contract. The customer could reserve its right to claim damages if the supplier’s performance drops below a given threshold. Any service credits which have already been paid to the customer should then be deducted from the value of the total claim.

Change control

A change control clause requires the parties to follow a prescribed procedure when making changes to the services.

A change control mechanism ensures that a change (including cost implications) is fully considered before proceeding. This can help to avoid disputes as to what was agreed, and also avoid practical difficulties in implementing the change.

Dispute resolution

Formal dispute resolution proceedings are usually a last resort. A dispute resolution clause, by which the parties try to resolve disputes through negotiation and mediation, before or in parallel to court proceedings, may be helpful.

In such a clause, the parties’ designated representatives will attempt to resolve areas of dispute between themselves before referring the dispute upwards within their respective organisations if they fail. Should senior management also fail to resolve the dispute, the dispute will then be referred to external mediation and, if still unresolved, will then be referred to the courts.

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