Articles Posted in Legal and Contracting Issues

Judging from my 25 years of experience as an outsourcing practitioner, I believe there is widespread consensus among suppliers and customers that, promptly upon their execution, outsourcing contracts should be locked away in a file cabinet never to be looked at again until it is time for them to be renewed (or litigated). Or, alternatively, be used as expensive door stops. This despite the many person-months of effort and hundreds of thousands or, in some cases, millions of dollars spent to structure, draft and negotiate them.

Why is this? Why do outsourcing customers repeatedly invest so much time, effort and money to create and negotiate detailed outsourcing contracts if they expect them to play such a small a role in the ongoing management and administration of their relationship with their outsourcing supplier? Is it somehow immoral or unfair to expect the parties to follow the roadmap they so painstakingly create during the process of negotiating the outsourcing contract, or to expect the suppliers to actually deliver on the numerous commitments they typically make in an outsourcing contract? Perhaps the better question is whether it is just too much of a bother for the company’s supplier management organization to read, understand and attempt to follow the typical outsourcing contract. Could the root of the problem be that outsourcing contracts are customarily structured and written in such a way that it is nigh on impossible for mere mortals to use them as effective tools for managing and administering an outsourcing relationship? If so, that is a powerful indictment on the last 25 years of the outsourcing industry.

Structured and written properly, an outsourcing contract is the best (if not the only) formal statement of the type of relationship the customer expects to have with its outsourcing supplier, the expectations and objectives for that relationship, and the rules of the road that both parties have agreed to live by. If the outsourcing contract is discarded as an ongoing relationship management tool, the customer and its supplier are left to muddle through – typically doing things the way the supplier has always done them with little regard to what was specifically discussed and agreed during the weeks and months of discussions and negotiations preceding the contract’s execution. This problem is exacerbated if, as is all too often the case, the business deal makers and lawyers who engaged in the discussions leading up to the contract’s execution disappear from the scene soon after the contract is executed, replaced by fresh troops who know little about the content of those discussions or the resulting contract and, as a result, would be hard pressed to follow the contract even if they were inclined to do so (which they generally aren’t).

What does the ideal outsourcing procurement process look like from the customer’s perspective? It is a process that enables the customer to put in place a deal quickly and efficiently with a minimum of friction and achieves the customer’s business objectives.

How often is this ideal realized? Not often enough.

Why not? There are many causes, but one contributing factor we frequently see is a bifurcation of the procurement process into a “consulting” phase and a “legal” phase.

In previous blogs in September/October 2011 (Supplier Selection; Contract Negotiations; Relationship Management) I offered practical tips on how to manage and mitigate some of the risks that arise throughout the life cycle of a typical outsourcing. These risks may arise during the supplier selection process, in the course of contract negotiations or during the implementation and day to day operation of the outsourced services. In this final chapter on managing risks in outsourcing I will focus on exiting from an outsourcing contract.

The exit from an outsourcing deal gives rise to a variety of different risks for a customer, particularly an exit following termination due to the supplier’s default or termination for convenience by the customer.

Common risks which you may face as a customer upon exiting an outsourcing contract include:

ZDNet blogger, Michael Krigsman, reported recently that nearly 70% of IT projects fail in some important way: An eye-popping number!

There can be endless debate on the actual failure rate of IT projects – the answer most likely depends on the criteria used to define “failure” – but a couple points are clear:

• An unacceptably large percentage of IT projects are not delivered on time or on budget or fail to produce the desired outcomes.

Enterprises that undertake serial M&A or outsourcing activity can find themselves with a diverse workforce with differences in pay and other terms and conditions of employment applying to different categories of employees across the business. This can lead to inefficiencies such as the cost of administering different benefit plans as well as dissatisfaction amongst groups of employees who consider themselves to be, rightly or wrongly, worse off than their colleagues. For this reason, we are often asked to help with developing and implementing plans designed to harmonise terms and conditions of employment across a client’s business.

Each harmonisation plan must be carefully considered. In the UK an employer’s ability to make changes to an employee’s terms and conditions of employment has always been challenging, particularly where an employee transfers pursuant to the Transfer of Undertakings (Protection of Employment) Regulations (“TUPE Regulations”). (Similar laws apply across the European Community although there can be marked differences.) This can be frustrating for an employer trying to integrate the new transferred employees into its existing workforce – because managing employees on different terms can often lead to issues in the workplace – and employers also need to provide a pay and benefits system which is not unlawfully discriminatory.

The UK government purported to provide a solution to this problem when it revised the TUPE Regulations in 2006. The 2006 regulations allow changes to be made to an employee’s contract (albeit with the employee’s consent) if they are unconnected to the transfer. Alternatively, if the changes are connected to the transfer they are still permitted if they are for an economical, technical or organisational (“ETO”) reason entailing a change in the workforce. However, the reality is that the employer’s ability to make changes to terms and conditions of employment for the purpose of harmonisation is very limited. The desire to achieve harmonisation is usually connected to the transfer itself and the ETO defence will not apply unless the employer can point to a workforce reduction or change in the employee’s function.

Unfortunately, the new year does not hold much hope for reversing the disturbing trend of increasing federal, state and local taxes and surcharges that are applied to telecommunications services. It’s not unusual for enterprise customers to pay an additional 25-30 percent on their bill, depending on the types and locations of services purchased. The worst of these offenders is the Federal Universal Service Fund (FUSF) charge, which is administered through the FCC and applied by telecom carriers to interstate and international service charges, and is now almost 18 percent. The FCC is expected to review the FUSF contribution requirements this year, but may try to expand FUSF contributions to include broadband connections (Internet access), which are currently not subject to the charge. These would lower the percentage rate, but will likely not decrease total payments.

Thousands of state, county and local governments are faced with tightening budgets and decreasing revenue sources. These taxing authorities set their sights on telecommunications transactions to help replenish their coffers. In many jurisdictions, the idea of “updating” telecom taxes generally means revising existing statutes to include new technologies and services, such as Voice over Internet Protocol (VOIP) or prepaid wireless. For years, carriers have tried to get a national, uniform tax policy for telecom, but to no avail.

These taxes may be referred to on your invoice as sales taxes, gross receipts taxes, 911 fees, or communications services taxes. There may also be line items for regulatory administrative fees or property tax fees, which are imposed by some carriers but not required to be collected by any government agency.

Outsourcing attorneys spend many hours negotiating complex terms and conditions governing the delivery of IT outsourcing (ITO) and business process outsourcing (BPO) services. As good outsourcing counsel, we spend a lot of time imagining ugly scenarios and allocating the associated risks and liabilities. Often as not, the result is an outsourcing contract that looks more like a phone book than anything you would use to guide the development and management of an outsourcing relationship.

It’s no wonder business people want to lock these contracts in the bottom drawer.

Industry-standard contracts have ballooned to hundreds of pages and yet, despite over two decades of maturation, the outsourcing industry continues to produce more than its fair share of disappointments: failed implementations, misaligned service delivery models, spotty operational performance, billing disputes, cost blowouts.