If other remedies fail and you must terminate your deal,
it is not a good time to find that contract flaws create major
problems in achieving a successful handover.
Although the market for outsourcing services is now well
established across various industry sectors and the contracts used
to support such services have evolved significantly in the past ten
years to reach relative stability and maturity, it is still
surprising how many outsourcing contracts contain flaws or
loopholes.
In many cases, the flaws and errors will never come to light
because the relationship between the parties is solid and issues
are resolved commercially, with no need to dust off the contract to
determine a party's rights or obligations.
As well as death and taxes, one other thing is certain in life -
that at some point in time, outsourcing arrangements will come to
an end. Outsourcing contracts often provide that the customer may
terminate the relationship at certain break points or after the
expiry of an initial term.
Where the customer is the party that serves notice of
termination, it will typically do so only after it has given some
thought to the post-termination position and in many cases will
have gone some way in its planning and preparations.
However, the customer's preparation and decision-making process
is made extremely difficult if it does not have access to
up-to-date and complete information about the services being
provided and the staff and systems used by the supplier to provide
those services. All too often, the customer will not be entitled to
have access to information from the supplier until notice of
termination has been given, and in many cases this will be too late
(and too late in any event to be useful in determining the decision
to terminate in the first case).
Without access to key information, the customer's management may
find it hard to make an informed decision on whether to retain the
contract, re-tender it or bring the services in-house because they
may be unable to assess the cost differences between these three
options.
If a decision is taken to re-tender it, the customer may find
there are gaps in the information it can disclose to bidders, with
the consequence that bids received may be subject to qualifications
and assumptions, and ultimately the risk passes back to the
customer.
Another common failing in outsourcing agreements that relates to
the termination process is the amount of time given to the customer
to put in place alternative arrangements and to migrate systems.
Three- and six-month notice periods are surprisingly common but are
woefully inadequate for going through the entire re-tendering
process and negotiate a replacement contract.
Where the customer is the terminating party, it may have
undertaken much of the preparation required before it formally
serves notice of termination, but where the supplier serves notice,
the customer may be caught unawares and totally unprepared.
Most good outsourcing agreements will contain provisions dealing
with the consequences of termination, such as the invocation of an
exit plan. In reality, however, many contracts do not actually
require the supplier to prepare a detailed exit plan until notice
of termination has been given.
Often what is actually included in the contract is a plan to
create a plan with an outline of the areas to be included. If
migration has to happen quickly, perhaps because of the insolvency
of the supplier or because of its material breach, the customer may
be unable to move as swiftly as it would like.
Step-in rights are often included in outsourcing agreements in
the belief that if there are problems with the services, the
customer or its agent can take over the operation of the service.
But the reality is that step-in rights are extremely difficult to
undertake.
Most customers will not have retained sufficient expertise
in-house to perform the tasks being taken over, so they will have
to seek other service providers.
But other service providers are generally reluctant to accept
what is, in effect, a poisoned chalice, trying to sort out someone
else's problems. Also, most contracts will preclude the invocation
of step-in rights where the infrastructure used to support the
services is shared.
The solution would be for the affected customers to pool
together but it is rare for contracts to permit customers to
jointly invoke step-in rights.
Given the substantial increase in the number and complexity of
outsourcing projects over the past three or four years - and in
many cases with contracts signed after rushed negotiations - it is
inevitable we will see a corresponding increase in the number of
outsourcing disputes, with a fair share of contracts coming under
close scrutiny and their deficiencies highlighted.
Conor Ward is a partner at the law firm Lovells