Call the shots before you sign

The pitfalls of outsourcing contracts

The pitfalls of outsourcing contracts.

Many users enter into outsourcing agreements assuming they will automatically benefit from new technology over the life of the contract. However, unless this has been agreed in the contract, the supplier is not obliged to upgrade equipment.

Most outsourcing deals span between three and seven years, during which time developments in technology are often huge. If this is not reflected in the service provided, businesses may find themselves uncompetitive and unable to add value to clients. This is often compounded by the lack of flexibility in the contract to cope with changes in the market and consequential changes to corporate strategies.

Technology for free

For those that find themselves in this predicament, all is not lost. Where there are no contractual provisions for technology refresh, there are nevertheless ways to negotiate the benefit of new technology with no or little impact on price.

For example, in one recent case for a new banking client, we were able to assist in a renewal of business-critical systems where its existing outsourcing contract lacked appropriate contractual provisions.

The supplier was persistently failing to meet minimum service levels. After obtaining the opinion of a "technical expert", it was found that this was because the system was not scalable to reflect the growth in the client's business and the consequential increase in users' demands on hardware capacity. Buried in the 100-page services schedule, the supplier had said that the system would be scalable for the life of the contract.

Clearly, users should ensure that appropriate obligations are included in the outsourcing contract. These will include provisions to allow companies to benefit from technological developments and will establish how investment costs and savings in costs of service provision will be shared.

Exit rights

Planning exit rights out of contracts is even more important than planning for advances in technology. Failing to ensure the continuity of service provision if the contract is terminated or collapses can be catastrophic. This is especially acute where finance functions have been outsourced.

Third-party assets, in relation to software, maintenance and other critical services can be severed immediately, as a supplier is not obliged to sell any such provisions to the user or a new service provider.

And it is not just IT services that the user stands to lose. The position of employees performing the roles that have been outsourced could also be threatened if the relationship between the user and supplier disintegrates.

Unless these issues are addressed in the contract from the outset, and transfer agreements or alternative arrangements are made, it is likely that a user could find itself "locked" into a supplier arrangement with no realistic alternative ahead.

However, it is not all doom and gloom for users. The first step is to seek appropriate advice at an early stage to determine what the user needs and where the contract is inadequate.

If a user suspects a supplier may not be co-operative, there are ways of negotiating appropriate exit rights. A subtle approach would be to use the rights a user may have under the agreement to conduct an audit, which could in turn force improvements.

Yet, while there are ways to rectify, or improve, an unsuccessful outsourcing deal, the value of professional advice when putting the contract together is clear. It is during these negotiations that the user has the power. This is the time to "call the shots", make demands and stipulate terms and conditions. After the contract has been signed, the power shifts to the supplier, often making life for the user not only difficult but expensive too.

Bobby Gill is an outsourcing specialist at law firm Osborne Clarke

www.osborneclark.com
This was last published in April 2003

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