IT Outsourcing Contracts Guidance On Building The Legal Infrastructure And Dispute Resolution Strategies

Transcription

1 IT Outsourcing Contracts Guidance On Building The Legal Infrastructure And Dispute Resolution Strategies Rajesh Sreenivasan Partner, Rajah & Tann 14 July

2 Outsourcing Agreements - General The transfer of components or large segments of an organization's internal IT infrastructure, staff, processes or applications to an external service provider. Potentially surrendering control over vital backroom services Often encompasses both provision of services and procurement over a long time frame Note some of the different types of Outsourcing models Information technology Outsourcing (ITO) Business Process Outsourcing (BPO) Facilities Management (FM) Knowledge Process Outsourcing (KPO) 2

3 Outsourcing Agreements Necessity Establishes duties and responsibilities of vendors Prevent delays through clear timelines Puts in place clear communication lines between vendors and customers Allows for structured monitoring mechanisms Sets up agreed procedures for change in work scope and other variations Consider economic value carefully involve and tie-in management / board approval early 3

4 Outsourcing Agreements Necessity Establishes payment mechanisms and milestones Clears concerns over Intellectual Property ownership present and future Establishes clear governance and dispute resolution policies Allows for systematic transition out at termination/expiry of contract 4

5 Outsourcing Agreements - General Note Structure of Outsourcing Agreements Transition In Due diligence (even before this stage if possible) Assets and Personnel Transfer (Transfer/Termination/Renegotiation of Leases, employment contracts) Prepare dynamic asset list of assets and personnel Scoping exercise ensure joint involvement Services Stage Clearly state date of commencement of services and service credits Adherence to service levels invoke service credits structure and liquidated damages clauses Monitoring and governance rights and obligations Change control strategies 5

6 Outsourcing Agreements - General Structure of Outsourcing Agreements (Cont.) Transition Out Mapping assets and personnel to dynamic asset list Effecting transfers of assets ands personnel Handover obligations to new service provider Termination/Expiration rights and obligations Evidence Gathering Key over-arching provisions Intellectual Property Rights Audit and Benchmarking Step-In Governance and Dispute Resolution 6

7 Offshore Outsourcing issues Foreign Law Need for foreign counsel review of documents Note underlying regulatory obligations and differences e.g. MAS compared to Bank Negara Remote monitoring, access and control via effective governance are paramount Third party audit and benchmarking clauses need special focus to allow for remote and periodic audits 7

8 Offshore Outsourcing (cont.) Difficulty in collection of evidence and enforcement of foreign judgments Cost issues Revenue recognition note withholding tax implications Privacy strategies compliance with minimum standards Address any IP enforcement concerns 8

9 Outsourcing Recent Developments MAS Guidelines on Outsourcing amended 1 July 2005 definition of institution revised Fundamental change in assessment of the value of outsourcing the inevitable fall of the TCO amortisation arguments contract terms on benchmarking and price review strengthened High profile failure of several outsourcing deals e.g. MasterCard in Tucson massive credit card customer information loss Greater management/board scrutiny on true value vs. inherent risks 9

10 Outsourcing Recent Developments Offshore outsourcing SLA monitoring and compliance concerns privacy breaches, fraud e.g. Citibank and Mphasis in Pune Reality check - Dell and Conseco in Bangalore Monitoring and audit provisions in agreements expanded and enhanced Many successful deployments and extensions of outsourcing deals as well e.g. Bank of Queensland and EDS extended to

11 Setting up the Framework Practical Considerations 11

12 Setting up the Framework I What is the service to be outsourced? 1. Identify the service provider Identify specific skill sets expected of vendors to fulfil outsourcing Be specific in types of services required Conduct sufficient market analysis of available vendors Consider a tender process Leveraging off the Expression of Interest stage 12

13 Setting up the Framework 2. Identify elements of the service(s) Conduct internal benchmarking Secure employment of key personnel Identify thresholds of acceptable service levels for each element of the service List thresholds clearly Enumerate responsibilities of vendors in meeting thresholds List effect of failure to meet service levels Definitions should be clear, comprehensive and consistent 13

14 Monitoring - Measuring Effectiveness 14

15 Monitoring Strategies Providing for inspection in the contract Providing for acceptance in the contract Staggered clauses on performance levels List services according to priority in performance Constant monitoring for mission critical systems and services Have clear UAT structure and follow through Tie UAT in with change control procedures (i.e. new UAT for systems/services once change procedures initiated) 15

16 Rights & Obligations : Customer Rights of the Customer in Monitoring Access Obligations of the Customer in Monitoring Reasonableness Conduct and manage project team meetings 16

17 Rights & Obligations : Contractor Rights of the Contractor in Monitoring No interference to service Obligations of the Contractor in Monitoring Rapid response to queries Provide reports as required Ability to report on-time and pursuant to requirements Work with Customer in project team meetings 17

18 Key Barriers to Monitoring Barriers to effective monitoring Lack of commitment at project team meetings and in reviewing reports Lack of clear lines of responsibilities Lack of appropriate/adequate statutory/legislative/regulatory tools outside of contract Lack of continuity in funding for monitoring personnel or software Often stems from lack of awareness of importance of continuous and consistent monitoring Reticence to use technological monitoring agents e.g. performance monitoring via software agents 18

19 Change Control Procedures & Monitoring 19

20 Strategies in crafting Change Control Procedures Contract variations need to be governed Change Control Procedures ( CCP ) - Avoids ambiguity in scope of work 20

21 Strategies in crafting Change Control Procedures Allow for modifications without parties breaching contract Discuss and establish/agree position on change control procedures early - at tender/proposal stage Tie change mechanism timelines to significant performance milestones or contract renewal timelines for ease of administration 21

22 Strategies in crafting Change Control Procedures Review Schedule E of the Master Systems Acquisition Agreement Put in place:- Written procedure for request for change provide change request form Procedure for determining acceptance of changes Negotiations timelines to prevent unnecessary delay 22

23 Strategies in crafting Change Control Procedures Express obligation on vendor to perform while negotiating Specify areas of work not subject to change procedure e.g. Mission critical services Cost split for changes Allowing change without CCP in the past Craft Service Level Guarantees for period of negotiation 23

24 Barriers to successful CCP Inflexible change procedures Ambiguity in definitions and timelines for changes Scope of changes not pre-determined Allowing change without CCP in the past Poor documentation management and monitoring of changes Note third party involvement i.e. backdoor sub-contracting through CCP 24

25 Dispute Resolution and Governance Approaches 25

26 Role of the Law Complex interplay between technology and law require specialist expertise Evidence is a major issue in dealing with cross-border disputes especially for digital media in IT disputes which is transient and may not be admissible in some countries. Time is of the essence. Legal cost and business losses escalates rapidly Improper data preservation can lead to inadmissibility of digital evidence in foreign jurisdictions. 26

27 Dispute Resolution Clauses Provide for an escalation procedure Have a governance process and set-up committees with specific responsibilities Closely tied to monitoring process Escalate dispute internally in line with governance obligations prior to evoking ADR. Ensure priority is followed (e.g. Mediation followed by arbitration or legal action) certain modes may not be available/effective 27

28 Dispute Resolution Clauses Comply with Jurisdiction Clauses law and forum Ensure proper notices are given in advance and in the agreed form [with acknowledgment required by recipient] Allow reasonable time as may be required for other party to be informed of breach and to rectify such breaches Remember the importance of maintaining a good working relationship in long term contracts 28

29 Dispute Resolution Clauses Mediation The most popular first step in alternative dispute resolution (ADR), mediation involves the appointment of a mediator who acts as a facilitator assisting the parties in communicating, essentially negotiating a settlement. The mediator does not adjudicate the issues in dispute or to force a compromise; only the parties, of their own volition, can shift their position in order to achieve a settlement. The result of a successful mediation is called a "settlement." Note mediation should be seriously considered and when commenced, undertaken diligently Can lead to cost sanctions otherwise cf. Burchell v. Bullard (English CA) unreasonable refusal of mediation 29

30 Dispute Resolution Clauses Arbitration An alternative dispute resolution method by which an independent, neutral third person (arbitrator) is appointed to hear and consider the merits of the dispute and renders a final and binding decision called an award. This award is binding can be enforced by normal court proceedings if not complied with 30

31 Dispute Resolution Clauses Litigation An action brought before a court in order to recover a right, obtain damages for an injury, obtain an injunction to prevent an injury, or obtain a declaratory judgment to prevent future legal disputes. It involves a formal process of dispute resolution between individuals, business entities or non-profit organizations before a presiding judge who will issue a final and binding judgment. Every country has its own rules of court that are often unique. Requires local counsel for representation in court Costs can be astronomical in some jurisdictions Note need to negotiate strongly for your local laws to apply The litigation process is mandatory once duly commenced. Note evidence rules Structural legal system incompatibility must be addressed e.g. Common law v. civil law regimes 31

32 Exit Strategies and Conclusions 32

33 Exit Strategies I Have clear termination events marked out in contract State transition out obligations / need to agree on scope of work for transition out Transition-Out process should at least mirror Transition-in Consider implications of a no-cause termination clause based on sufficient notice Mandate assistance of current service provider for handover Prepare schedule of assets and personnel for transfer in advance by keeping a dynamic list from Day 1 of project Preserve evidence for cause of exit in the event of anticipated litigation 33

34 Exit Strategies II Have clear notice requirements prevent unanticipated termination Require continuity of service level compliance from service provider until date of handover be prepared to bear costs to mandate assistance Comply with any regulatory standards set in your industry for exit (e.g. MAS, MOH) Ensure sufficient IP rights is retained over all necessary software Perform post-transfer due-diligence to ensure all relevant contracts are terminated or transferred 34

35 Exit Strategies III Note attempts to delay performance through the initiation of frivolous legal action by vendors Note regulatory compliance obligations cannot be contracted away Address challenges vigorously do not appear to have waived your legal rights by not initiating legal action in a timely manner. 35

36 Question & Answer Copyright