Andrew Crawford advises on sorting out the legal and practical problems on fulfilment.
The venture had a convincing ‘suit’ and an ‘apparently’ coherent business plan. The aspiring e-tailer’s management satisfied the venture capitalists that the business fitted their model for a successful investment.
Furthermore there was an attractive co-branded site and a steady revenue stream for advertising sales.
Unfortunately, much to the surprise, and irritation of the investors, additional unforeseen financing was soon required by the e-tailer because of a rather mundane ‘glitch’ which had caused problems in fulfilling orders.
During the investors’ evaluation, the management had convinced them, rather against the investors’ initial instincts, that it was necessary for the business to hold stock.
The ‘suit’ argued, plausibly, that many suppliers of branded goods simply would not reserve stock for a formative e-tailer during the start-up phase. The venture just did not have the credibility. Furthermore, when the business was launched they were selling fast moving goods on the understanding that the supplier would hold stock for them. But there was embarrassing occasions when the supplier had already sold stock badly needed for website orders.
The investors were well aware of press reports about the failure of retailers to deliver, especially during the run up to Christmas, including the prospect of class action against Toys R Us. Firms are also anxious that they remain on the Consumer Association’s web trader list.
Having accepted that it was necessary to hold stock, it was agreed that to save costs, warehousing and delivery would be outsourced.
The unfortunate glitch occurred in the arrangements between the e-tailer and the warehouse operator.
As a ‘knee jerk reaction’ the venture capitalists re-read the due diligence report, albeit with the luxury of hindsight. They discovered that while the outsourcing arrangements were fairly described, the contract itself had a number of unhappy limitations.
In addition, the now slightly less convincing ‘suit’ admitted that his original forecasting of volumes of goods going through the warehouse had been optimistic.
Among the practical and legal problems that had occurred and needed to be fixed were:
Dealing with over-capacity. As a result of the forecasts, too much warehouse space had been reserved and was now under-used. Worse, it was manned by staff who often had little or nothing to do. The relevant clause in the agreement required the e-tailer to give 12 weeks’ notice of the volumes required each month. The notification period was too inflexible for the e-tailer’s business. It had to be reduced to one month to reflect the monthly rolling forecasts of the business. Additional provisions needed to be introduced into the agreement to provide the capacity for changes in the e-tailer’s requirements for handling goods of differing sizes.
Delivery times. Despite having spare bodies at the warehouse, there had still been alarming delays in making deliveries. This resulted from a number of factors including inadequately drawn-up service levels relating to time limits for processing orders. The warehouse was, for example, failing to ensure that those orders to be satisfied by direct delivery from the manufacturers were promptly e-mailed to the relevant manufacturer. It transpired that there was confusion over the duties of the warehouse, for example, as to who precisely was responsible for ensuring that the tasks were completed and the methods of reporting to the e-tailer. It was necessary for clear performance targets to be negotiated and included together with provision for what would happen when the warehouse staff did not meet those targets.
Order processing commitments. The time limits within which orders had to be despatched were rather weak. As a result, whenever there was a rush on in the warehouse, the e-tailer’s orders were put to one side by warehouse personnel on the instructions of senior management anxious to look after higher volume customers. It was necessary to alter service level provisions to ensure that, even in peak periods of service for a number of retail clients, a minimum level of resources would be continuously available in order to provide an agreed level of service.
Systems. There had been problems with the order acceptance system. It was inadequately tested before operations began. It failed to notify the warehouse (and the e-tailer) when the orders had been delivered. As a result, some lucky buyers received two items for the price of one!
Call handling arrangements were inadequately documented. The e-tailer had been paranoid about potential customers being reluctant to input card details on screen so a phone number was provided on the website. The warehouse’s call centre facility had been contracted to receive those calls and to deal with product and delivery-related enquiries. While a dedicated team had been engaged, at great expense, the level of knowledge of the particular staff proved inadequate. The ‘suit’ reluctantly accepted that in the cold light of day it might have been an error to direct calls from viewers of the company’s Portuguese language site to the warehouse’s call centre facilities in Scunthorpe. It also emerged that no operations manual had been drawn up.
Termination arrangements. The new lawyers, brought in by the investors to renegotiate the warehouse agreement, also notified that there was no provisions in it dealing with what would happen if the warehouse terminated the arrangement. It became clear that if the warehouse terminated the agreement, the time available for the e-tailer to put in place alternative warehousing arrangements was woefully inadequate. Provisions for recovering data and records were virtually non-existent.
The solution was to renegotiate a more explicit warehousing agreement at some additional expense. Unfortunately, the e-tailer’s negotiating position was not as strong as it had been when the warehousing contract was initially negotiated. The ‘suit’s’ reluctance to grapple with the small print of the agreement came back to haunt him. It took some two weeks of fairly fraught negotiation and a substantial increase in the fee scale to resolve the problems with the warehouse. However, restoring customer confidence in the e-tailer’s service took rather longer to fix.
Checklist of key issues to consider when reviewing outsourcing arrangements.
Are the following services going to be required and if so, to what standard?
How long will the arrangements run and how quickly can either party terminate them?
Can the warehouse sub-contract part of the service? If so, who is liable if the sub-contractor fouls up?
How are fees and charges to be calculated?
Location of warehouse sites and volume of space required?
Personnel issues - will there be a dedicated crew?
Notification of volumes and changes in requirements?
Procedure for modifying services, systems or service levels?
Monitoring reporting - what will happen in practice?
Operations manual - who is responsible or producing this (if there is to be one) and what happens if the relevant individuals at the warehouse fail to follow the guidelines?
Transfer of software between the two companies - what needs to be licensed?
Insurance arrangements?
Service Levels - for example:
- call centre, operating house and telephone handling
- customer payment processing
Contingency plans - what comfort can be drawn from the warehouse’s own plans?
Dispute resolution - what can be put in place to reduce the risk of litigation?
Handling of third party complaints and claims?
Liability of the warehouse for the clients’ losses - is this going to be capped?
What happens when the agreement comes to an end? Consider the position of stock, intellectual property rights, mailing lists etc.
For further information, please contact Andrew Crawford, partner in international law firm CMS Cameron McKenna on Tel: 0171 367 2297 or e-mail [email protected]
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