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
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
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
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
How are fees and charges to be
Location of warehouse sites and volume of space
Personnel issues - will there be a dedicated
Notification of volumes and changes in
Procedure for modifying services, systems or
Monitoring reporting - what will happen in
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
Transfer of software between the two companies
- what needs to be licensed?
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
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@example.com