Barbara Melby and Chris Archer of Morgan, Lewis, & Bockius LLP Print This Page
Inside Sourcing newsletters It's Time to Re-Source: Considerations for when your company is looking to replace an incumbent vendor in an outsourcing or strategic services relationship
Customers may consider replacing an incumbent vendor in outsourcing and strategic services relationships for a variety of reasons, including leveraging new or enhanced solutions, taking advantage of more favorable pricing and addressing relationship or performance issues. Re-sourcing presents an opportunity for change. Sourcing and legal advisors need to be aware of obstacles in existing agreements that could impact the customer's ability to re-source, and should think about adding provisions that allow for greater re-sourcing flexibility when negotiating new or amending existing agreements. We have outlined below several key issues to consider when preparing for and executing your company's re-sourcing strategy.
What does your existing contract say
Before implementing any re-sourcing plans, the customer should review the contract with the incumbent vendor to assess the key provisions that govern and direct the relationship, such as what information regarding the scope of services and service levels can be shared; how and when the contract expires or can be terminated; ongoing rights to critical assets and data; and obligations to assist with transition to a new vendor. Negotiations and contracts are usually not perfect. There is a good chance a review of the existing contract will identify issues that need to be addressed when re-sourcing to a new vendor.
Leveraging performance-related data
When considering whether to end the existing relationship - either at its expiration or by early termination - it is helpful if the customer is able to share scope, service level and other business information relating to the existing environment with potential successor vendors. After all, it is data about the customer's business - right? Well, the answer will likely depend upon what the contract says. Key questions will be who owns the information and whether any of the information is deemed vendor confidential information. The customer's rights may be addressed in the proprietary and confidentiality rights sections of the agreement. There may be relevant language in the actual scope, service level and reporting sections as well. Ideally, there are sections that specifically address the confidentiality of the agreement, as well as ownership of performance data, environment-related data and data contained in customer-specific reports.
Termination rights and obligations
If the agreement is not expiring by its own terms, then the customer will need to assess what rights it has to terminate the agreement. The customer likely has termination for convenience rights and, if the decision to re-source is due to performance issues or other problems, termination for cause rights. Deciding upon which termination right to pursue should be one of the first decisions made because it will likely dictate the re-sourcing strategy.
While many contracts allow for the customer to terminate upon notice, some do not. It will be important to determine if there are any termination fees, including early termination penalties, recovery of balance sheet amounts and wind-down costs. A full understanding of the termination fees is important for assessing impact on the business case.
Certain technology, processes, people and assets may form an important part of the existing outsourcing relationship. The contract may have a section outlining the customer's exit rights upon re-sourcing the services, or the exit rights may be scattered throughout various sections. One key provision to look for is the right to use the technology and processes used by the incumbent vendor in providing the services. Vendors today are often using proprietary technology in their solutions, such as automation software, robotics, and analytics. Is the customer's organization dependent on a key asset of the incumbent? What rights does the customer have to use the key asset and/or license its use to a third party post-termination? What rights does the customer have to the technology and processes that were developed during the course of the relationship?
In addition, it is important to determine whether any of the incumbent's personnel are critical to the knowledge sharing or the ongoing operations of the customer. The customer may want to bring certain personnel to the next outsourcing or services relationship or, at a minimum, have those people assigned to the account through transition back. Are there any solicitation and hiring rights? Are there any retention requirements? If there are vendor personnel outside of the United States, the customer will need to consider if there are any automatic transfer risks at the back end of the deal. If this happens, does the contract dictate who is financially liable for employment-related costs and claims?
Thinking ahead: Provisions to include when negotiating new contracts (or amendments)
Thinking through the unwinding of an outsourcing or services agreement when negotiating the agreement at the front end may help avoid some of the challenges discussed above, and provide greater re-sourcing flexibility. A few provisions to consider are set forth below.
Non-exclusivity. Add a provision clearly stating that the agreement and services are non-exclusive, and that the customer (and its affiliates) has the right to use third parties to provide the services or perform the services itself.
Right to rebid and share performance information. Similar to non-exclusivity, consider reserving rights to re-bid the services, as well as retaining the right to share certain information and documents that will facilitate a rebid.
Cooperation and transition back assistance. To facilitate the success and efficiency of a future re-sourcing, consider a broad cooperation provision that requires the incumbent vendor to work with, and facilitate the transition to, successor providers, including assisting with the transition back of services and providing access to systems, processes, documentation, facilities, interfaces and other important information and personnel necessary for the performance of the services.
Taking the time to review the existing contract for key rights and potential obstacles is a critical part of any re-sourcing strategy. Just as important, when negotiating new contracts, sourcing and legal advisors must think ahead - to termination and replacement - in order to preserve as much as possible the flexibility to shift solutions and vendors.
About Barbara Melby: Barbara Melby has been active in the outsourcing and commercial transaction legal market for the last 25 years. As leader of the Morgan Lewis's outsourcing, technology and strategic commercial transactions practice, and one of the leaders of its privacy and cybersecurity practice, she represents clients in such complex transactions as outsourcing, strategic alliances, technology and data-related agreements, and other services transactions. She also advises businesses on privacy and security issues that arise in transactions involving sensitive data and technologies. She also edits and contributes to the Sourcing @Morgan Lewis blog, which comprises of outsourcing, technology, and strategic commercial transactions news for lawyers and sourcing professionals.
About Chris Archer: Christopher C. Archer focuses his practice on outsourcing, technology, and strategic commercial transactions. He regularly assists clients with global outsourcing deals that span a wide range of business processes, including information technology, finance and accounting, procurement, and other core and non-core functions. His work includes advising and supporting clients through each phase of an outsourcing transaction, from the RFP process through contract negotiations. He also drafts and negotiates licensing agreements, including cloud-based software license agreements, commercial contracts, technology and data-related agreements, and other services transactions. He is also a contributor on the Sourcing @Morgan Lewis blog.