Outsource in haste, repent at leisure in a messy
divorce, says Clive Seddon
The party is over and everyone is busting a gut on
transition activities at the start of what will hopefully prove to
be a long-term and mutually beneficial outsourcing
partnership.
Supplier and customer got on well in a truncated procurement and
contract negotiation process. Termination and exit strategies were
not high on anyone's agenda, so standard provisions were used where
possible, and it was agreed that the exit management schedule would
be developed within the first 12 months of contract commencement.
This was done, but without much thought. It was again based on a
template which one of the contract management team had plucked from
another contract.
Some two years later the champagne has gone flat. Each party is
struggling with the relationship and the value proposition is
beginning to be questioned by the customer's new management team.
There is talk of re-negotiation, possibly insourcing the services,
or a new procurement with a new service provider.
Is this a typical problem? You bet. Some of the commercial,
financial and technical issues were well highlighted in the
article, "Bringing it all back home" (Computer Weekly, 19 October),
but from a legal perspective, the fact that the outsourcing
"divorce" strategy exit has not been properly dealt with is going
to cause major issues if the customer is intent on
separation.
A variety of scenarios
Producing legally binding exit provisions which are flexible enough
to cover a variety of termination scenarios and which will work in
practice alongside other provisions of the contract is one of the
more complex challenges facing lawyers specialising in outsourcing.
We are all learning from the practical experience which few
possessed during the negotiation of the first and second generation
of outsourcing contracts only a few years ago.
There are some simple but fundamental questions which need to be
addressed in the exit provisions. These include:
- Who can terminate the contract, in what circumstances, and
when?
- How and by whom is the service going to be delivered in the
future?
- Who owns what and how will this change?
- Assuming TUPE (Transfer of Undertakings and Protection of
Employment) legislation will apply, what are the implications?
- How is transition going to be achieved, by whom and when?
- How much will this cost and who is going to pay?
In answering these questions the customer should recognise that
the supplier may be an unwilling participant in the divorce. For
example, most exit strategies and plans depend, not unnaturally, on
the parties working together at the appropriate time to agree a way
forward. But if lawyers are involved and there is allegation and
counter-allegation flying around, the consensual approach ceases to
be achievable.
Be realistic about suppliers
Businesses need to be realistic as to what IT suppliers are able
and willing to deliver when the customer is dependent on the
continuation of the service until cut over. Every supplier is
likely to face staff-retention problems.
Perhaps most significantly, transition is going to be driven by the
deal between the customer and the replacement service provider or
how the customer wishes to insource.
Given these uncertainties, we favour a purposive rather than a
prescriptive approach to the production of exit-management
provisions. Senior commercial input is required to consider the
various scenarios which might arise and need to be
documented.
This means the exit strategy must be concluded very early in the
contract term, preferably before contract signature and before any
difficulties arise in the relationship. This strategy must be
reviewed on a regular basis as part of the governance arrangements.
In addition, the contract must ensure the asset register is
complete and regularly updated.
Finally, there must be appropriate provisions, for example in
relation to intellectual property rights and confidentiality, which
contemplate a fresh procurement process and transition to a new
supplier.
Things always look rosy at the start of an outsourcing relationship
but giving exit issues proper consideration can avoid a messy and
acrimonious split if the relationship hits the rocks.
Clive Seddon is an IT partner at international law firm
Masons