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