The critical issues in outsourcing have evolved with changes in
the marketplace, the growth in second- and later-generation
outsourcing, and new technologies such as cloud and big data.
Lawyers handling outsourcing deals thus deal with new challenges in
a wider variety of deals. This article will discuss those
challenges and how you can mitigate the risks for your company as
an outsourcing customer.
Demand for an efficient but effective negotiation process
Early strategies of broad scale outsourcing to a single provider
are giving way to strategic and specialized sourcing to multiple
providers. The smaller deals still involve mission critical
services, so sacrificing diligence or contractual protections can
create substantial risk. Fortunately, you can get good results with
the tools, processes and experience now available. These include
proven contract and schedule templates, checklists, guides to help
the business team gather and record needed information, a process
designed to reduce the number of cycles to get to closure, and the
experience both with the tools and processes as well as with the
counter parties and similar transactions.
Resourcing not outsourcing
The traditional outsourcing model assumed that the provider was
taking responsibility for an existing internal function. For
example, the traditional dragnet clause requires the provider to
perform all the functions previously performed by the customer at
the existing service levels (unless those functions are explicitly
excluded). As more customers are moving toward
second-or-later-stage transactions, they need new approaches,
including more robust service descriptions.
Need to integrate across service providers
As customers have an increasing number of outsourcing providers,
the customers increasingly need to integrate and ensure close
working relationships among providers. To build a working provider
ecosystem, customers need to establish rules and relationships that
protect the vital interests of each provider and reward
collaboration. Because this approach is different from the
traditional separation between competitors, you need to address
this requirement early in the sourcing process and follow through
The double-edged sword of short term deals
In the face of increased uncertainty and dramatic change,
customers have sought to increase flexibility with shorter terms.
While customers may believe shorter term contracts protect them,
the reality is that exit would be costly, time consuming and
disruptive. Consequently, you would be prudent to include long-term
contract protections even if the nominal term of the contract is
Establishing rights in critical provider technology
Customers are increasingly outsourcing to use provider
technology instead of to find a lower-cost workforce to operate
customer technology. For example, there is a rise in SaaS and cloud
transactions. While customers still retain rights in their data,
the bigger issue is what replacement system will be used to process
that data. The risk can be mitigated by obtaining options to
license some or all of the provider's technology and
commitments to provide replacement systems and transition support
at predictable costs for substantial periods.
Securing "big data" rights and services
Advances in "big data" technologies have allowed
companies such as Google and Amazon to create spectacular value
with secondary uses of data. Traditional and even current service
contracts often permit these secondary uses without compensation.
For example, contracts often permit providers to retain aggregate
and anonymized copies of customer data which allows the providers
to benefit from data. In addition, customers often overlook
opportunities to partner with their providers to gain the benefit
of insights that be generated from the provider's broader
Retaining rights to protect business
As providers increasingly deliver with a global service delivery
model integrated with provider processes and technology,
traditional "step in" rights increasingly provide false
comfort. However, customers continue to face the risk of providers
becoming financially, operationally or otherwise unable or
unwilling to perform specific mission-critical functions. To
protect their businesses, customers increasingly value options to
take specific work back quickly (including rights to take over
assets and license materials) and commitments to provide
information on an ongoing basis to make these options
Minimizing risk, cost and surprises on exit
With more transactions reaching end-of-life, we too often see
customers surprised by their vulnerability on exit when they seek
to move the services to a replacement provider. Whether due to lack
of motivation by the replaced provider, a lack of governance
attention by the customer or a problem relationship, common
complaints include (a) exit rights designed for the technology at
the signing date not fitting the technology at exit, (b) incomplete
or poorly organized data, and (c) inadvertent waivers of exit
rights needed to transition the services. You can mitigate these
risks with flexible exit rights, including rights to key data, and
by conducting regular audits of the data and using financial
incentives for the provider to properly maintain that data.
Governance and follow-though (and follow-through, follow-through, follow-through)
Too often, carefully drafted contracts are ignored and both
parties operate without regard to the carefully considered
processes and allocations of risk. Customers can, and frequently
do, lose value by overlooking an important right, cost or
protection for a long period. Like internal operations, outsourcing
agreements must be persistently monitored to retain and build
value. Adjustments to the contract should be reflected by
deliberate mutual agreement and not by default.
Resolving disputes while preserving (or even building) the relationship
Disagreements in outsourcing agreements are inevitable, but
resolving them is not. Experienced outsourcing customers have found
that disputes that accumulate and remain unresolved can fester,
weaken trust and destroy an otherwise productive relationship.
Finding ways to quickly and efficiently force a resolution is the
best way to maintain, and perhaps even build, trust and a strong
working relationship. There are various strategies for
accomplishing this ranging from novel governance structures to
using third parties identified in advance to finally resolve
disputes within specified dollar ranges.
The outsourcing market is growing more complex and risks are increasing
Yesterday's contract will not overcome today's
challenges. However, you can manage that complexity and mitigate
those risks using tools, processes and best practices developed
over the decades of outsourcing.
This article was previously published by Inside Counsel.
Originally published on 25 September 2014
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