Articles Posted in Legal and Contracting Issues

In part 1 of this discussion we described two front end challenges that, if not properly anticipated and addressed, can (and very often do) derail successful completion of enterprise projects. We’ll now turn to the downstream transactional considerations that can help position a project for success.

The Right Contract Architecture

Customer’s often grapple with how to develop the appropriate contract for enterprise projects. A statement of work alone is not sufficient to cover all the complexities of the project. Instead, customers should consider entering into a master service agreement (MSA) with the supplier. In addition to establishing a contractual framework (e.g., the form and process for developing statements of work) and the terms and conditions, the MSA should address the governing principles or “rules of engagement” for project delivery. Project delivery – especially in a multi-supplier environment – has its own rules which differ in many ways from those followed in typical managed service arrangements. Examples of rules of engagement might include:

It is one of those sayings that people just love to recite: “The best contracts are the ones that stay in the drawer.” In ten years of advising customers on their outsourcing agreements, I have heard this phrase uttered in just about every large negotiation that I have done (typically with a knowing nod of the head from others at the table, and sometimes with a disdainful look in my direction). And while it may just be a saying, it is a terribly misguided one; and, even as a guiding principle, it typically will produce the exact opposite result of what it is intending to achieve.

In short, the saying centers around the idea that a healthy long-term working “partnership” – especially one that requires trust, sacrifice and evolution, which most outsourcings do – cannot be strictly managed off the static words on a page, but instead through a trusting, mutually beneficial relationship. So, if you are taking the contract out of the drawer, instead of managing via relationship and trust, either it means that you are being adversarial, which is sure to just escalate and lead to a deteriorating relationship; or it is evidence, in and of itself, that you do not have a good relationship. In this way, the contract is seen as a “negative” – some sort of necessary evil on the front end (perhaps to appease Legal and Finance), that somehow can be vanquished once the contract is signed and the real relationship begins.

Earlier in my career, I thought that the danger in this thinking was that it primarily would lead to the customer failing to enforce its negotiated rights – whether due to the outsourcer’s self-interest, the outsourcer’s lack of incentive to do the “right” thing, or just pure lack of knowledge on both parties’ part. And while this may often be the outcome, I have come to realize that the “keep the contract in the drawer” principle is even more dangerous than that, and ultimately will work to the detriment of both parties.

In last two decades, much of the attention of customers and advisors has focused on outsourcing under the managed services model. The outsourcing era began with infrastructure outsourcing, which evolved from time sharing and facilities management. This was followed by outsourcing of applications maintenance and support and, on a parallel track, Business Process Outsourcing. This journey is littered with failed and successful delivery models, pricing constructs and business arrangements (including joint ventures). Some might consider offshore outsourcing as the most disruptive force to shape managed services.

These trials and tribulations have armed customers and advisors with a fairly mature level of knowledge and experience in outsourcing managed services. In contrast, there is a notable lack of maturity in the approach to sourcing and contracting for critical enterprise projects including ERP implementations, ERP consolidations and major ADM projects. Despite decades of experience with these projects, companies struggle to find and leverage the resources and tools necessary to execute them. Instead, they rely on anecdotal guidance from failed implementations. War stories of cost over-runs, time delays and abandoned projects abound.

How can enterprises avoid these mistakes? Let’s explore some of the challenges (and solutions). In this first installment, we’ll focus on two key front end considerations: (1) the role of executive leadership; and (2) proper planning and preparation (leveraging a sourcing “roadmap”)

A recent morning paper reported that telecoms giant Orange, who are outsourcing their call center services to IBM in the Philippines, told their night-shift call center employees in Darlington that if they want to keep their jobs they would need to move to Manila. Orange reportedly offered these employees a transfer package which showed that they would receive the same package as the local employees, which is a £200 monthly salary and a rice and laundry allowance. Does this amount to Orange being brutal – as suggested by the reporter – or simply uninformed of their legal obligations to Orange employees? Have jobs become so scarce that employees are willing to accept a lower employment package and a substantial cross-border relocation?

With the continuation of the current global economic downturn, outsourcing has been used effectively by some companies to reduce costs and (hopefully) provide a more efficient service. A successful outsourcing by a European company can derive many benefits for both the company and its employees, particularly due to stringent employment laws in Europe, which are designed to protect employees’ rights when they transfer to a new service provider, whether onshore or offshore. The fact that a few employees at Orange are considering a substantial relocation and significantly reduced employment package is indicative that an employer must not assume that the employees whose job are affected by an offshore outsourcing will be unwilling to consider relocation to another country, no matter how far. Therefore, when companies are considering outsourcing, they must prioritize dealing with employment issues.

The law requires that an employer provide proper information to, and carry out adequate consultation with, the representatives of any employees affected by the transfer concerning any measures which the new service provider is proposing. Generally speaking , the employee’s terms and conditions of employment are protected so that a new service provider must hire employees on those terms. It is also unlawful to harmonize terms and conditions of employment if the reason for doing so is connected with the transfer.

When considering renewing and extending an outsourcing agreement, a different set of dynamics often comes into play when compared with the initial transaction. As organizations’ outsourced relationships change and mature over time, it’s a good idea to try and capture lessons learned by undertaking a post closing review in order to better understand what went well (and not so well) and to formulate those lessons learned for sharing within the client organization. So let’s explore a few of those lessons learned in the context of renewing or extending an outsourcing agreement:

• Plan and Prepare: Over the course of a long term agreement, things change, new needs emerge and certain areas almost always need correction or refinement. Identify all of these at the outset, solicit input from the stakeholders (sponsor, SMEs, procurement, legal) and prepare a plan.

• Understand the Risk (and have a Back-up Plan): There may be many sound reasons to remain with the current provider and forego a competitive procurement. But with no competition the leverage balance swings in favor of the provider. Be prepared with a plan B (and make sure you have enough time to pursue it if things don’t go well with the incumbent).

As the global economy shifts, the global market for offshoring services continues to expand. Countries that would previously never have been considered are now proving to be tempting destinations for outsourcing services.

As we reported in this blog, forthcoming tax changes may affect the pricing available from the established Indian outsourcers. To the extent there is a material increase in the pricing from Indian providers, this should only serve to fuel the exploration of other destinations.

For example, Latin America continues to be a growing destination for offshore services. While Latin America may not be as attractive from a pure rates perspective, it offers some benefits of time zone alignment and potential cultural similarities for certain service scopes. However, there are also unadvertised risks in moving to Latin America, as outlined in a posting by CIO Magazine.

“What does that mean?” may be one of the most common questions a lawyer asks when working on the early stages of a sourcing deal. Sometimes it’s because the client is using company-specific or industry-specific jargon the lawyer hasn’t heard before. But more often it’s because the lawyer is trying to convert a concept or common parlance (which may seem intuitive to the client) into clear, unambiguous and precise contractual language.

Sometimes these conversations end up sounding like this recent deposition (or result in these types of conversations after the contract is signed):

Plaintiffs’ Lawyer: During your tenure in the computer department at the Recorder’s office, has the Recorder’s office had photocopying machines?

If you have an Indian supplier supporting your business, chances are that your supplier is taking advantage of the STPI (Software Technology Parks of India) and SEZ (Special Economic Zones) schemes. These provide certain tax incentives to qualified companies–effectively lowering their cost of doing business and allowing more competitive pricing. On February 28, 2011, the new Indian Union Budget was presented to the Indian Parliament. Although the budget includes numerous changes relevant to businesses operating in India, certain tax-related provisions may limit the benefit of these structures in the near future.

For more information, please see the Pillsbury Client Alert.

Conventional wisdom among technology and outsourcing practitioners is that neither side would willingly litigate an enterprise technology or outsourcing agreement. Each party has too much to lose from the public airing of a failing relationship. If that is true, why are we seeing more media stories of disputes around large-scale technology failures such as the litigation around the outsourcing of the Indiana welfare system. Within the legal profession, is the focus shifting from deal making to dispute resolution?

The market for large technology and outsourcing services is changing in five important ways:

1) Companies are becoming ever more dependent on more advanced and integrated technologies. Implementing them is inherently more complex and therefore risky.