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If you operate a website which does business with consumers based in the European Union, read on.

In the recent case, Verein für Konsumenteninformation v Amazon EU Sàrl (28 July 2016), brought by Austrian consumer protection body Verein für Konsumenteninformation (VKI), the Court of Justice of the European Union (ECJ) held that Amazon’s standard terms of business were unfair under the Unfair Terms in Consumer Contracts Directive. As such, an injunction was granted forcing Amazon to change its standard terms.

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We all know that “cloud computing” is one of the most tired and overused phrases in the technology industry, and it has been for years. Everyone has gone “to the cloud” now, right? Not so fast. When it comes to cloud-based enterprise email, the market has lagged somewhat behind.

A Gartner report published on February 1, 2016, found that “[t]he cloud email market is still in the early stages of adoption with 13 percent of identified publicly listed companies globally using one of the two main cloud email vendors.” Those two leading cloud email vendors are: (a) Microsoft, which offers Microsoft Office 365 and has an 8.5% adoption rate among global companies; and (b) Google, which offers Google Apps for Work and has a 4.7% adoption rate among global companies. There are other providers in this space, including Amazon Web Services and Rackspace, which also provide cloud email solutions.

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According to Theresa May, the UK’s recently installed prime minister, Brexit means Brexit. But what this actually means in practice is still unknown. There is still a huge amount of debate over what Brexit will look like, what process should be followed and how long it will take. Some commentators, such as Michael Dougan, Professor of European Law at the University of Liverpool, have suggested that it could take up to 10 years to make all the necessary adjustments.

In the meantime, it’s business-as-usual in the field of commercial contracts, outsourcing and technology deals. That said, there are some key areas that should be considered when putting these deals together, given what we now know (and still don’t know) about Brexit, as well as provisions that should be kept under review as the Brexit story unfolds. This is going to be an evolving area, but, based on discussions with both buyers and sellers over the past couple of weeks, here are my top ten:

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In case you missed it, the Great British public caught the world off guard when, on 23 June 2016, a small but significant majority voted in favour of the UK withdrawing from the European Union. Much like the termination of an outsourcing agreement without detailed exit provisions and a well worked out plan, the decision has sparked political and economic chaos, as the UK is plunged into a period of prolonged uncertainty with much wider ramifications for political stability and economic growth across the EU and beyond.

What does this all mean?

From a UK-based outsourcing lawyer’s perspective, it is very much a case of wait and see. The English law regime applicable to outsourcing and procurement remains, for the time being, “as is”. Until parliament moves to repeal or amend the European Communities Act 1972, UK laws, which include the application of the EU Treaties, remain unchanged. Moreover, laws and regulations which have been transposed into English law in response to EU Directives in diverse areas such as working time, agency workers, data protection and TUPE laws will continue until further notice.

None of these issues have yet been worked out, so it’s very much a case of wait and see. 

Disengaging the UK legal system from the EU’s will be no simple task. The two-year limit which runs from the UK formally triggering Article 50 of the Lisbon Treaty will be challenging to say the least.  Sir David Edward, former judge at the Court of Justice of the European Union in Luxembourg could not have put it better when he said “withdrawal from the Union would involve the unravelling of a highly complex skein of budgetary, legal, political, financial, commercial and personal relationships, liabilities and obligations.”

In terms of where we are headed, much will depend on the way in which the exit is carried out, including maintaining our relationship with the EU through the EEA (AKA the Norway model) or  through the EFTA (AKA the Switzerland model). Whatever model is adopted, we can certainly expect changes across a range of legal topics which impact outsourcing and procurement contracts including intellectual property, data protection, competition, tax, and employment law, as well as cross border arbitration and litigation.

In the public sector arena, relevant EU laws are largely transposed into domestic laws such as the Public Contracts Regulations 2015. These will not be repealed overnight. British firms competing for public procurement contracts in other EU member states will still be guaranteed access to the public procurement market by the Procurement Directive for the time-being. But in the utilities (telecoms, post, water, energy) and defence sectors there are already specific rules allowing the market to be closed to bidders from third countries, which is what the UK will become.

Not the decision wanted

Kerry Hallard, CEO of the UK’s National Outsourcing Association, spoke for many in the industry when she said that…“[t]his is certainly not the result that members of the National Outsourcing Association wanted; this is not the result that the British outsourcing industry as a whole wanted. That fact was clearly demonstrated back in March when we surveyed the UK outsourcing industry, and again just two days ago when we polled over 200 industry representatives on their beliefs regarding Britain’s EU membership at our NOA Symposium conference.”[1]

There is widespread belief that passporting for UK-based financial services firms will come to an end,  and concern about how the UK can continue to participate in the Digital Single Market post withdrawal, all of which will no doubt impact the industry.  Risks include the loss of talent to financial centres such as Dublin, Amsterdam and Frankfurt, which may well shift the centre of gravity away from the UK and discourage future inbound investment. This is not confined to financial services – with EasyJet, one of Europe’s largest budget airlines, and Vodafone, the telco giant, both having announced that they are mulling whether to relocate their UK headquarters in light of Brexit.

Keep calm, and carry on…at least for the time being

David Noble, Group CEO of the Chartered Institute of Procurement and Supply, cautions[2] that procurement and other industry professionals “must act as the suppressor of panic, not the creator” and counsels that increased attention should be “paid to the supply chain and currency exposure.” 

Procurement, outsourcing and supply chain contracts, especially for cross-border goods and services, will need to be reviewed, for potential impacts, including looking at clauses dealing with topics such as force majeure, material adverse change, compliance with laws, change in regulation, currency exchange and inflation / cost of living allowances. These issues will also increasingly feed into future contract negotiations.

[1] http://www.noa.co.uk/documents/Brexit%20Decision%20Contradicts%20Beliefs%20of%20Britain%E2%80%99s%20Outsourcing%20Industry

[2] http://www.cips.org/en/supply-management/news/2016/june/calm-down-step-up-and-lead-the-way-and-says-cips-group-ceo-david-noble/

 

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As stated by Wired, “It’s all the standard advice you’d give a tech novice,” aptly sums up the White House’s Cybersecurity National Action Plan (CNAP) that President Obama unveiled on February 9, 2016. Announced as part of the President’s overall budget proposal, CNAP is a plea within the federal government to implement a sturdier foundation for its cybersecurity strategy. The administration proposes a 35% increase in cybersecurity funding, much of which would go toward creating programs that are intended to leverage private sector expertise to improve the woefully outdated, if not completely nonexistent, federal government cybersecurity infrastructure.

Among other initiatives, CNAP includes an awareness campaign targeted at personal-level cybersecurity habits, a joint government-private sector commission for compiling cybersecurity best practices, and incentives to entice private sector talent to enlist in the government’s ranks. Although these programs anticipate private sector involvement, they are rooted in the government’s pressing concern about its own vulnerabilities to cyberattacks. The standard refrain is that CNAP seeks to raise the level of cybersecurity for the government and the private sector, but the rhetoric around the announcement belies an overwhelming focus on federal government advancement that will likely have little impact on private sector progress, if the program is implemented at all.

Citizens’ Awareness Campaign

Several of the private sector actors integral to CNAP have already been selected by the government to partner with the National Cyber Security Alliance on a national awareness campaign aimed at U.S. citizens. Google, Facebook, Dropbox and Microsoft are all named by the White House as participants, though no details are provided as to what exactly these private companies will be doing to support the campaign. The key detail of the campaign plan is again, quite foundational: encourage (and empower) individuals to use two-factor authentication to protect personal data and stop relying on passwords alone. Such protection measures are old hat in the private sector and particularly standard for managed security and IT services offerings. The campaign could benefit from private sector input about the appropriateness of more advanced protection technologies, as well as red flags to look for and steps to take after a cyberattack. Such knowledge transfer, however, is a one-way street.

Commission to Enhance Cybersecurity

The President also proposes under CNAP to create a bipartisan Commission on Enhancing National Cybersecurity “comprised of top strategic, business, and technical thinkers from outside of Government”, in addition to members of Congress from both sides of the aisle. The Commission’s private sector representatives will primarily be tasked with using their expertise to make recommendations about how to improve cybersecurity practices, presumably for the benefit of the public sector representatives (members of Congress) who are not tasked with making recommendations. Similarly, CNAP includes a Center of Excellence for the development of new cybersecurity technology through the combined efforts of the private sector and government. If a diverse group of private sector experts are amassed, it is arguable that they will likewise benefit and foster innovative ideas that may apply to the private sector as well, but it is dubious how impactful that benefit might be.

Cyber Corps

Another major tenet of CNAP is dedicated to increasing the resources available to the federal government to build the cybersecurity workforce it needs to advance. Over the past twenty years, the federal government has relied on contractors from the private sector to provide cybersecurity services and there remains a shortage of skilled labor in this field, such that effectively insourcing the federal government’s cybersecurity needs requires mining private sector talent. The President’s proposal calls for a $62 million workforce investment to fund training of new-hire cybersecurity professionals, but also to offer loan forgiveness to recruits who commit to a career with the federal government. President Obama offers, “We’ll even let them wear jeans to the office,” emphasizing that CNAP depends on the difficult task of enticing cybersecurity experts away from the better-paying private sector.

Overall, CNAP is multi-faceted, makes some strides to give back to the private sector in exchange for what is asked from it (see proposed cybersecurity training to 1.4 million small businesses from the Small Business Administration), and ultimately, may never come to pass. Although the President spoke directly to House Speaker Paul Ryan (R-Wis.) about CNAP and anticipates bipartisan support for the initiative, the budget proposal as a whole received immediate disparagement from Congress, including a statement from Ryan that “President Obama will leave office having never proposed a budget that balances – ever”. Given that much of the budget requires congressional approval, an approval that will undoubtedly be withheld until the moving vans pull up to the White House, CNAP may get left behind in the Obama administration.

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Brian Wainwright • Robert S. Logan

The Protecting Americans from Tax Hikes Act of 2015 (the “PATH Act,” Division Q of the Consolidated Appropriations Act, 2016, P.L. 114-113, enacted December 18, 2015) made some important changes to the U.S. federal income tax treatment of U.S. real estate investments by non-U.S. persons under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”).

Increased Withholding

The withholding rate applicable to dispositions by non-U.S. persons of United States real property interests (“USRPIs”) has been increased from 10 percent to 15 percent of gross proceeds, except for sales of residences intended for personal use by the acquirer if the purchase price does not exceed $1 million.

Foreign Pension Exemption

FIRPTA (and its related withholding tax) no longer apply after December 18, 2015 to dispositions of USRPIs held directly (or indirectly through one or more partnerships) by, or to distributions received from a real estate investment trust (“REIT”) by, a qualified foreign pension fund or by a non-U.S. entity wholly owned by a qualified foreign pension fund. A qualified foreign pension fund is any trust, corporation or other organization or arrangement (i) which is created or organized under the law of a country other than the United States, (ii) which is established to provide retirement or pension benefits to participants or beneficiaries that are current or former employees (or persons designated by such employees) of one or more employers in consideration for services rendered, (iii) which does not have a single participant or beneficiary with a right to more than five percent of its assets or income, (iv) which is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in the country in which it is established or operates, and (v) with respect to which, under the laws of the country in which it is established or operates, (A) contributions to such organization or arrangement that would otherwise be subject to tax under such laws are deductible or excluded from the gross income of such entity or taxed at a reduced rate, or (B) taxation of any investment income of such organization or arrangement is deferred or such income is taxed at a reduced rate.

Qualified Investment Entities

Special FIRPTA rules apply to “qualified investment entities.” A qualified investment entity includes any REIT and certain regulated investment companies (“RICs”) that are or are deemed to be United States real property holding corporations (“USRPHCs”). A USRPHC is, in general, a corporation that holds USRPIs with a value of 50 percent or more of its total business assets and worldwide real property. The PATH Act modifies these rules in the following important respects:

  • The inclusion of RICs as qualified investment entities, which had expired on December 31, 2014, has been permanently extended. Although this extension is generally retroactive to January 1, 2015, it does not apply with respect to FIRPTA withholding for any payment made before December 18, 2015, and a RIC that withheld and remitted tax on distributions after December 31, 2014 and before December 18, 2015 is not liable to the distributee with respect to amounts so withheld and remitted.
  • The FIRPTA rule that excludes publicly traded stock of a corporation from the definition of a USRPI for certain holders of five percent or less of the publicly traded class of stock has been modified, solely in the case of REITs, to increase the maximum ownership percentage to 10 percent.
  • The similar FIRPTA rule, applicable to holders of five percent or less of stock of a qualified investment entity that is publicly traded in the U.S., that prevents application of FIRPTA to distributions from the qualified investment entity attributable to the entity’s disposition of USRPIs, has been increased to 10 percent, again solely for REITs. Such distributions are instead treated and subject to withholding as dividends.
  • The so-called “cleansing exception,” which exempts from FIRPTA dispositions of stock of a USRPHC that has disposed of all of its USRPIs in taxable transactions, has been modified by excluding REIT and RIC stock from the scope of the exception.

Qualified Shareholders

FIRPTA shall not apply to dispositions of REIT stock (including REIT stock held indirectly through one or more partnerships) by, or distributions from a REIT attributable to the REIT’s disposition of USRPIs to, a “qualified shareholder” of the REIT. While certain holders of publicly traded REIT stock or stock in REITs that are “domestically controlled” (i.e., less than 50 percent ownership by foreign persons during a specified period) receive beneficial treatment under FIRPTA, the new rule for qualified shareholders applies even if such REIT is not publicly traded or domestically controlled. A qualified shareholder is a foreign person that (i) is eligible for the benefits of a comprehensive income tax treaty which includes exchange of information provisions and whose principal class of interests is listed and regularly traded on a recognized stock exchange, or is a partnership created or organized under foreign law as a limited partnership in a jurisdiction that has a tax information exchange agreement with the U.S. and has a class of limited partnership units traded on the NYSE or NASDAQ representing greater than 50 percent of the value of all partnership units, (ii) is a “qualified collective investment vehicle,” and (iii) maintains records on the identity of direct owners of more than five percent of the class of the foreign person’s interests or units.

A “qualified collective investment vehicle” is a foreign entity that (i) is eligible for a reduced rate of withholding under an income tax treaty even if it holds more than 10 percent of the stock of the REIT, (ii) is publicly traded, treated as a partnership under the Code, is a withholding foreign partnership, and would be treated as a USRPHC if it were a domestic corporation, or (iii) is designated as such by the Treasury Department and is either fiscally transparent or is required to include dividends in income but is entitled to a deduction for distributions.

The qualified investor exception is not applicable to the extent that an “applicable investor” (other than a qualified shareholder) holds an interest in the qualified shareholder (except for an interest solely as a creditor) and such applicable investor directly, indirectly, or constructively (through certain attribution rules) holds 10 percent or more of the REIT. In such a case, generally the qualified shareholder’s interests in, and distributions from, the REIT remain subject to FIRPTA to the extent of the applicable shareholder’s proportionate ownership of the qualified shareholder.

A special rule also applies to REIT distributions to a qualified shareholder that would be treated as a sale or exchange of stock under Internal Revenue Code sections 301(c)(3), 302, or 331 that treats the portion attributable to an applicable investor as FIRPTA gain and portions attributable to other investors as income subject to dividend withholding (subject to treaty reductions).

Presumptions Regarding Domestic Control

Finally, the PATH Act introduces new rules and presumptions regarding whether a qualified investment entity is domestically controlled.

  • A qualified investment entity may presume that holders of less than five percent of a class of stock regularly traded on an established securities market in the United States are U.S. persons, except to the extent that the qualified investment entity has actual knowledge that such persons are not U.S. persons.
  • Any stock in the qualified investment entity held by another qualified investment entity (i) which has issued any class of stock that is regularly traded on an established stock exchange, or (ii) which is a RIC that issues redeemable securities (within the meaning of section 2 of the Investment Company Act of 1940), is treated as held by a U.S. person if such other qualified investment entity is domestically controlled (as determined under the new rules), and a non-U.S. person in any other case.
  • Any stock in a qualified investment entity held by any other qualified investment entity not described in the bullet point immediately above is treated as held by a U.S. person to the extent that the stock of such other qualified investment entity is (or is treated under the new rules as) held by a U.S. person.

Available Material

  • Consolidated Appropriations Act, 2016, H.R. 2029, P.L. 114-113, as signed by the President on December 18, 2015.
  • Technical Explanation of the Protecting Americans from Tax Hikes Act of 2015, House Amendment #2 to the Senate Amendment to H.R. 2029 (Rules Committee Print 114-40), Joint Committee on Taxation, JCX-144-15, December 17, 2015.

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Happy new year, outsourcing industry!

In our last post, we posited that the new year brings an opportunity for a fresh start in structuring fundamental aspects of an outsourcing transaction. We pointed to the following mechanisms used to restrict a customer from an early exit from an IT outsourcing deal as being outdated, having originally been designed to protect a supplier’s significant capital investment in outsourcing deal, which has all but disappeared in today’s typical deals:

  • Whole or partial exclusivity;
  • Termination for convenience and/or wind-down fees;
  • Limitations on the customer’s withdrawal of services (calculated in a variety of different ways);
  • Variable resource category “banding”, whereby fluctuations in chargeable volume metrics force renegotiation of pricing; and
  • Mandatory asset buyout mechanisms.

As we indicated in our last post, the suppliers’ case for continued use of these mechanisms is not compelling, but we acknowledged that suppliers do have a legitimate case for having an expectation of revenue in order to justify the level of discounted pricing offered to the customer up front. To better illustrate why these mechanisms are ill-suited to addressing the revenue expectation, consider, for example, a termination for convenience fee. This is typically structured based on the timing of the termination (with a higher fee at the beginning of the term, moving to a lower fee as one approaches the end of the term). This assumes revenue will be fairly evenly distributed over the term, but is this a reasonable assumption? What if the customer provides more revenue earlier than anticipated, or less revenue overall? Termination fee provisions rarely provide for any adjustment for revenue actually received by the supplier.

Another example is resource category “banding”, which sets boundaries around chargeable resource volumes and forces a price renegotiation if the boundaries are exceeded (up or down) on a sustained basis. What if the customer is actually compensating for lower volumes of one service by purchasing higher volumes of another service, such that aggregate anticipated revenue is maintained? These mechanisms would still trigger a price renegotiation, eliminating price predictability, even where revenue is the same or even higher than anticipated.

The remaining mechanisms are similarly ill-suited because they do not focus directly on revenue (e.g., exclusivity is simply focused on locking the customer in the transaction, without regard to revenue; any limitation on withdrawal of services is just that, only being indirectly related to revenue). A better solution would be one that is tailored to addressing this expectation specifically. For example, a revenue target can be established, and revenue can be measured and tracked easily relative to that target. Suppliers can and should take some risk of “business downturn” for the customer, however the customer should bear the risk of its own decisions to in-source or re-source the services to other suppliers, as this is squarely within their control. The customer can be afforded a reasonable degree of flexibility to remove some volume of services (measured in terms of its revenue), bearing the consequence of the aggregate of such decisions over the term of the deal. In addition, the customer need not be unreasonably penalized for falling short of the revenue expectation (e.g., the infamous “take or pay” remedy where the customer must pay 100% of a revenue shortfall). Instead, where the customer falls short of a revenue expectation, it could be expected to pay the supplier a reasonable amount commensurate with aggregate revenue received, akin to a pricing adjustment reflecting a lower discount for lower revenues. Any termination by the customer for cause should operate to reduce revenue thresholds, on the theory that the customer should not be expected to meet the same threshold where the supplier is not performing what it has promised.

By focusing more on revenue expectation, and less on outdated mechanisms, a fair deal reasonably aligned with both the supplier’s and the customer’s objectives can be established. This would surely be a welcomed start to the new year for outsourcing customers.

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The advent of the new year provides an opportunity to contemplate a fresh start — and that’s just what is needed when it comes to structuring the fundamentals of an IT outsourcing transaction.

Early IT outsourcing transactions typically involved significant capital investments by suppliers, who would often purchase the customer’s existing assets and promise to deliver services inclusive of refreshed assets at defined refresh cycles. These “asset-heavy” transactions often included mechanisms to either prevent the customer from exiting early, or to compensate the supplier for significant unamortized capital investment where the customer terminated services early. Examples of these “exit-restricting” mechanisms are:

  • Whole or partial exclusivity;
  • Termination for convenience and/or wind-down fees;
  • Limitations on the customer’s withdrawal of services (calculated in a variety of different ways);
  • Variable resource category “banding”, whereby fluctuations in chargeable volume metrics force renegotiation of pricing; and
  • Mandatory asset buyout mechanisms.

Very few transactions today contemplate the same level of capital investment by the supplier. This is due in part to the evolution of technology (e.g., cloud-based computing leveraging different degrees of shared resources), and in part to the shareholders of maturing supplier organizations demanding a greater return on their capital investments. Unfortunately for the customer, however, the “exit-restricting” mechanisms have tended to linger, even though the capital investments that they were once designed to protect have largely disappeared.

Suppliers seek to defend the continued use of these mechanisms for a variety of reasons, most of which are not very compelling. Justifying the continued use of the mechanisms as being “industry standard” is misleading; this might be true for asset-heavy deals that were once common, but is questionable for the deals that are more common today. Similarly, justifying their use as being necessary to compensate the supplier for costs associated with the transaction is often an exaggerated claim, as in many cases there are little or no stranded costs associated with losing a customer (e.g., where resources can be easily redeployed for use by other customers). Even if such costs do exist, the basis for compensation is questionable for things like pursuit costs or overhead, which should arguably not be directly allocable to the customer.

Suppliers do, however, have a legitimate expectation of revenue in an outsourcing deal. Consider where a customer offers high volumes of services for an extended term, and seeks discounts based on the aggregate, anticipated revenue. If the supplier did not employ some mechanism to assure revenue, the customer could simply take the discounted pricing and provide only marginal volumes for a modest term, taking the benefit of the pricing but not actually providing the revenue that justified the discounts in the first place.

While the old mechanisms can be deployed to assure this expectation, doing so tends to come at a heavy cost for the customer, who are forced to sacrifice their legitimate objectives of price certainty and commercial flexibility. The new year brings an opportunity to contemplate a fresh approach to balance both the supplier’s and the customer’s objectives.

In our next post, we’ll explore why these old mechanisms really ought to be left to history, and offer an example of a better solution more attuned to the fundamentals of today’s transactions.

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Of Silk and Services
As I listened to my wife, a custom wedding dress designer, talk a hysterical bride off the cliff this past weekend, I realized the conversation sounded eerily familiar. My wife was certain that the completed dress in front of them was exactly what had been ordered and she had emails, sketches and photos to prove it. The bride knew exactly what dress she had ordered, and this wasn’t it. She also had a set of texts, emails, and photos to support her expectation.

Sound familiar? This was nothing more than a failure to document a services solution. How can a “bride” to an outsourcing engagement avoid the same disaster?

Expectation Gaps
Outsourcing customers, like brides, are often nervous and excited about their engagement. They gradually become comfortable through hours of discussion with the solution designers. This exchange is almost always verbal, supplemented with the service provider’s charts and marketing language. Eventually, the customer becomes comfortable with the solution they are ordering, and each party thinks their understanding is mutual. Exhale, smile, shake hands. It is time for the lawyers to “paper it,” and we can jet off to Hawaii for the honeymoon, right?

Inevitably, right before signing the agreement, or, worse yet, after signing, the parties experience that awkward silent moment when they both realize that there is a million dollar gap in expectations. How can this be avoided? How can you document services like a champ?

Four Keys to Documenting Services like a Champ

  • Reduce Services to Contract Documents Early in the Process. In-person discussions and bright graphic slides can be an efficient way to reach mutual understanding and trust. The problem arises when this process is disconnected from the ultimate contract documents. These fluid discussions should be seen as just the first step in the service documentation process. Unless these discussions are consolidated and crafted into a single source of truth early on, features and components will be discussed but never make it into the agreement. Or, conflicts arise when some aspects of the solution differ from what is described elsewhere in the agreement. This leads to conflicts that are often dropped in the lap of individuals who were never part of the initial discussion.

 

  • Plan Time for Consolidating and Contractualizing the Services. The only way to document the services early is to budget time and prepare your team for working through and documenting the services. This starts at the initial procurement planning stage—before the RFP goes out or the sole-sourced partner is engaged. The parties often leave too little time to collectively consolidate and work through the service details. Include not only the business team and subject matter experts, but also the procurement and/or legal staff who will be responsible for drafting and eventually managing against the contract. For great advice on how to contract efficiently using “straight-through processing” read this article written by a colleague.

 

  • Ask the Hard Questions Early. Imagine that the prospective outsourcing customer hears the service provider say that the service desk is only operating during business hours, even though she knows that the contract clearly requires 24x7x365 coverage. It can be tempting to rely on the contractual language and avoid bringing up this discrepancy, lest the service provider use this as an opportunity to increase the price. This is an extreme example, and gaps are often more subtle. In almost every case, transparency and clarity up front result in a healthier relationship and decrease the chance of heartbreak for both parties later on.

 

  • Separate the “What” from the “How.” In drafting services it is important to distinguish between the customer’s requirements (“what” services must be performed) and the service provider’s solution (“how” the services will be performed). For example, the customer requires a world-class service desk tool, but trusts the service provider to select the best tool and operate it according to their best practices. This what-how distinction also guides the drafting process, and allows for the approaches suggested in the first two bullets above. Typically, we recommend that the customer draft their service requirements, then let the service provider create the first draft of the solution description in response to those requirements. This latter piece, the solution, is the location where the pertinent information from PowerPoint slides and conversations should be distilled down into contractual language. Both parties should walk through this service description and make any necessary adjustments to ensure clarity and completeness.

 
Happy Customer, Happy Life
The real benefit of documenting services properly is not just that it creates a great end product. Rather, the greatest value is found in the conversations that necessarily occur through this distillation process.

Of course, brides need their dream dress, and businesses need solutions that address their business requirements. It is almost never a question of whether the dress or the solution gets fixed. It is a question of “Who pays?” and “How much?”. Follow the keys above and think early and strategically about the process for drafting the services to ensure a healthy and happy relationship for years to come.

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In the first installment of this post, I posited that one factor contributing to disappointing results following a merger or acquisition is the flawed perception that transition services are not that important. I noted that this mindset may dilute the effectiveness of the post-deal enterprise(s) and result in unanticipated and unmitigated risks, lost or reduced revenues and/or interruptions of key business operations.

Let’s assume that you are sold on the importance of transition services. Even when transition is given appropriate attention, companies often suffer the perils of misguided implementation of the transition service regime, which may include:

  • Insufficient planning;
  • An undisciplined process;
  • Inadequate diligence (not asking the right questions); and/or
  • Incomplete or improper terms.

This installment focuses on how best to avoid these issues by adhering to a practical set of informed best practices.

Transition Services “Value Imperative”

Although there is no single “right way” to devise and execute a transition services strategy, there is one guiding principle that should drive any transition service regime. For the sake of discussion, I’ll call it the “value imperative,” which should advance three primary objectives:

  1. Help position the post-closing enterprise(s) to be at least as (if not more) competitive in the market(s) in which they operate;
  2. At a minimum, preserve (and potentially enhance) the valuation; and
  3. Enable the enterprise(s) to fully exploit the targeted synergies of the deal.

Put another way, the transition services should, at a minimum, “do no harm” to the value proposition being pursued, recognizing that the mechanisms for achieving this goal may differ depending on whether you are the seller or buyer (the recipient or provider of the transition services).

Implementing an effective transition services regime is as much about process as it is about substance. In this installment I explore the key attributes of an effective transition services process from the perspectives of both the provider and the recipient of these services.

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