Planning an escape route

Negotiate termination rights at the start of a contract


Everyone is keen to obtain a bargain, whether it is a new TV in the January sales or a cut-price corporate desktop agreement. But as deals grow, so do the risks, and that big desktop outsourcing deal may bring a reduction in quality rather than cost.

In an ever changing business climate, more and more companies are modifying their long-term strategy in order to stay competitive, and many are looking at the offshore environment as a sensible cost-saving option. The result is that long-term outsourcing deals, while bringing stability and joint benefits, are having to accommodate change.

A good partnership will always be flexible enough to allow change, but even with the best intentions, sometimes it is just not possible to maintain the ongoing relationship, in which case, contract termination is often the only way forward. So when is the best time to address this issue?

Breaking up is never easy

Certainly, the most difficult time is at the end of the contract life. At this point, both parties are probably fighting their corner or simply do not have any spare cash to throw at the problem. Both are looking at exiting with maximum profit and minimum fuss, which inevitability removes any level of decorum or the possibility of an amicable settlement.

So what about in the middle of the contract? Think about how this might be approached and manage expectations because the impact may affect your business relationship with your outsourcing provider.

It is a difficult topic to raise and if you drop “exit strategy” and “termination plan” into conversation, however politely you phrase it, it is unlikely to result in the response, “That’s wonderful news, please let me know how I can assist.”

The reality is that both parties are now on the retreat and start to distrust each other. Alternatively, the supplier looks at how to pass the cost of this proposal back to the user.

The above describes a change in circumstance or business policy which invariably was unforeseen, but with a little insight this need not happen. So, in an ideal world, when should termination and exit procedures be discussed?

The best time is always at the beginning of the relationship, before the contract is signed, because the supplier is at its most accommodating and you are looking forward to that exciting partnership, profitability and improved level of service.

It is also the best time to assess your supplier and understand their flexibility. The salesperson may appear to be accommodating and offer all the right gestures and warranties, but that does not mean their lawyers will be and it is always surprising how few verbal agreements make it though to the contract. It is important to press some of these issues because your company will not thank you if the service takes a dive and things get messy.

Negotiating sensibly

Nobody likes to look on the gloomy side when negotiating, but ensuring the service is fit for purpose also means negotiating sensibly. When negotiating termination rights it is important to consider:

  • The associated costs to both parties: are termination costs fixed or variable?
  • Time period to exit
  • How to deal with partial termination
  • Exit strategy
  • Staff movements before, during and after termination
  • Rights to staff information if there is any Tupe consideration
  • Audit rights
  • Access to buildings
  • Continuation of the service and service level though termination
  • Any increase in price if the exit is delayed
  • Asset transfer and licences
  • Repairs and damages.

This might sound daunting but taking on a supplier is never going to be simple.

It is also easy to lower the priority of these tasks, as clearly the focus is on putting the service in place, not ending it before it has started.

However, this is a big risk. Getting it right is difficult, but getting it wrong is disastrous: you will find yourself working harder, longer and swamped under a plethora of paperwork and service issues.

It is important, therefore, to use the right engagement model, which is paramount to delivering a quality solution.

Richard Ellis is a sourcing adviser with independent outsourcing consultancy Quantum Plus

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