Negotiating the Optimal Outsourcing Contract: Business & Legal Issues

Transcription

1 Negotiating the Optimal Outsourcing Contract: Business & Legal Issues HR Society for Human Resource Management April 19, 2005 Daniel R. Mummery, Partner, Latham & Watkins LLP Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership Copyright 2004 Latham & Watkins. All Rights Reserved.

2 Global Outsourcing Practice Group Over the past 5 years, lawyers in Latham s Global Outsourcing Practice have advised on outsourcing deals representing more than $70 billion in total contract value. Advise clients in in IT IToutsourcing transactions, renegotiations & terminations Infrastructure Infrastructure Telecommunications Telecommunications Managed Managed network, network, data, data, voice voice and and video video Applications Applications development development and and maintenance maintenance Help Help desk desk Offshore Offshore relationships relationships Advise clients in in business process outsourcing transactions, renegotiations & terminations Human Human resources resources Finance Finance and and accounting accounting Procurement Procurement Credit Credit card card processing processing Back Back office office Asset Asset management management Logistics Logistics Insurance Insurance applications, applications, underwriting underwriting and and claims claims processing processing 1

3 Vendor Perception: 2

4 Customer Perception: The Customer is always right 3

5 Overview Typical Deal Structures Key Contract Topics Key Contract Provisions Ten Common Problems 4

6 Overview Typical Deal Structures Key Contract Topics Key Contract Provisions Ten Common Problems 5

7 Typical Deal Structures BPO Services Agreement Fundamental deal terms and conditions Integrates exhibits Master Services Agreement Global deals with Local Services Agreements Bundled ITO and BPO Key Exhibits Statements of work Pricing Service levels (SLAs) Transition plan Governance Exit plan 6

8 Overview Typical Deal Structures Key Contract Topics Key Contract Provisions Ten Common Problems 7

9 Key Contract Topics Scope and price Base Services versus New Services Service levels Fees Benchmarking Flexibility and change Exclusivity/Insourcing and resourcing Acquisitions and divestitures/business downturn Regulatory compliance 8

10 Key Contract Topics Control Transfers of customer personnel Supplier key personnel Subcontractors Governance Allocation of risk Indemnities Limits of liability Exit Termination rights Termination assistance services 9

11 Overview Typical Deal Structures Key Contract Topics Key Contract Provisions Ten Common Problems 10

12 Key Contract Provisions (Scope) Base Services Description Tasks described in SOW Everything customer employees & contractors were doing before the Effective Date Items contained in customer budget Inherently related services 11

13 Key Contract Provisions (Scope) Base Services Description (continued) Specificity (Vendor) vs. Sweep Clauses (Customer) If it s not a Base Service, it s a New Service (Ka Ching!) 12

14 Key Contract Provisions (Scope) Service Levels & Service Level Credits Service Levels should be in force on the Commencement Date Credits are not exclusive remedies Dependencies/excuses/customer service levels Termination for failure to meet service levels 13

15 Key Contract Provisions (Price) Fees Unit pricing Base fees (non-variable) ARCs and RRCs New services 14

16 Key Contract Provisions (Price) Benchmarking/MFC Test vendor pricing throughout term Problem = each deal is unique Remedies = fee adjustment, termination right Tie benchmarking rights and remedies to exclusivity 15

17 Key Contract Provisions (Flexibility and Change) Exclusivity/Minimum Fees Vendor wants: guaranteed revenue, control of environment Customer wants: flexibility, an attentive vendor Insourcing / resourcing Take or Pay : minimum fees 16

18 Key Contract Provisions (Flexibility and Change) Acquisitions, Divestitures and Business Downturn Integration and support Pricing adjustments Divested entities Consents 17

19 Key Contract Provisions (Flexibility and Change) Regulatory Compliance Monitoring changes in law Who Bears the cost of changes required by changes in law? Aligning the sales pitch 18

20 Key Contract Provisions (Control) Transfer of customer personnel Separate terms and conditions ARD issues in global deals Customer control over key supplier personnel Transition manager Contract executive and his or her direct reports Project staff Subcontractors 19

21 Key Contract Provisions (Allocation of Risk) Indemnities and Limitations of Liability Indemnities Direct versus third party claims Damages cap Exclusions Just say no to sole remedies 20

22 Key Contract Provisions (Exit) Termination Rights & Fees Astronomical termination-for-convenience fees Change in control = lower termination fees? Bright-Line terminations (transition milestones, service level credits, prolonged FME) Regulatory changes 21

23 Key Contract Provisions (Exit) Termination assistance services Base Services versus New Services Fees Exit plan 22

24 Overview Typical Deal Structures Key Contract Topics Key Contract Provisions Ten Common Problems 23

25 Ten Common Problems 10. Vender staff turnover 9. New contract layer between customer and vendor 8. Lack of customer training 7. Contract restraints 6. Billing practices 5. Complexity of documentation 4. Pricing pressure 3. Scope fights 2. Sales versus substance 1. Lack of effective governance 24

26 Speaker Biographies Daniel R. Mummery Latham & Watkins LLP Daniel R. Mummery is a partner in the firm s Silicon Valley office. His practice encompasses a wide range of corporate and technology matters, with a particular emphasis on complex information technology and business process outsourcing transactions, including outsourcing renegotiations and restructurings. Mr. Mummery s ITO experience includes infrastructure, ADM, end-user computing, help desk and network transactions. His BPO experience includes HR, finance and accounting, procurement, claims processing and logistics transactions. Mr. Mummery has worked with a wide range of clients, including some of the largest communications, energy, financial services, healthcare, media, technology and transportation multinationals in the world. In his career, he has represented such clients as AT&T, BellSouth, British Telecommunications, Cable & Wireless, Hughes, ChevronTexaco, DuPont, Entergy, Gateway, General Motors, Levi Strauss & Co., Lucent Technologies, McGraw-Hill, Miller Brewing Company, Ryder, Sempra, United Air Lines, UnitedHealthcare and Wellpoint. The Chambers Client s Guide to USA, America s Leading Lawyers for Business ( ), has awarded Mr. Mummery their highest ranking the only California IT and IT Outsourcing lawyer to achieve this recognition. 25

27 Latham s Global Network of Service Established as one of the world s premier, full-service business law firms Provides seamless service worldwide through a network of more than 1,500 attorneys and 21 offices around the globe Relationship management in UK, Europe, US and Asia Legal expertise across key markets and time zones Full US, English, EU, German, French and Japanese law expertise One-firm global platform views integrated, teamwork approach to service as the cornerstone to success Four members of our global outsourcing team were recently ranked by Chambers and Partners in the IT/IT outsourcing and technology categories. 26

28 Although this seminar presentation may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. The presentation is not created or designed to address the unique facts or circumstances that may arise in any specific instance, and you should not and are not authorized to rely on this content as a source of legal advice and this seminar material does not create any attorney-client relationship between you and Latham & Watkins. 27