Clifford Chance

When conducting an outsourcing, ensure you are aware of the key considerations to ensure that your transaction runs smoothly.

1. What do you want to outsource, and why?

This may seem like a basic question, one that should be asked right at the outset as it is fundamental to the shape of the deal. Unfortunately, experience shows that buyers of outsourced services fail to have a clear understanding of what they actually want to achieve until very late in the process. High-level objectives need to be communicated to the deal team and they should be converted into very real and very practical requirements, otherwise the outsourcing is bound to lead to disappointment – or even failure. As an example: cost-saving tends to be a high-level objective in almost every outsourcing transaction, but how will you actually measure this and what does success look like? Costs are a function both of the charges under the new agreement and the organisation's retained costs, so are we focusing only on the supplier's charges or the overall cost within the organisation? We can help by formulating what success will look like, what the contract needs to include to deliver against those and finally tracking delivery against those through risk and benefits logs.

2. What is your preferred solution?

While the solution will be heavily influenced by your provider, you should have a clear idea of what you want to achieve and the extent to which you wish to control that solution and its evolution. In particular, if you are considering off-shoring, do you understand the legal environment that the service provider will be operating in and what impact that will have on the arrangement, as well as the risks of off-shoring and how to deal with that? Will enforcing the contract be a challenge? Do you understand the local regulatory frameworks that will apply? How will local employment laws impact on the staffing and economics of the project? There are a myriad of issues to bear in mind; our team will provide guidance on the issues you have already identified, but crucially will also help you think about issues you may not even have considered yet.

3. What service levels will you require?

Service levels are a vital means of ensuring service delivery and should not be an afterthought. Decide early on what standard of service you expect and what metrics will be used to measure them. The process of formulating SLAs will start as a technical and operational exercise, but in setting the key standards for delivery, the SLAs will ultimately form the cornerstone of the legal framework of the outsourcing project. In a "lift-out" sourcing project in particular, you will need to demonstrate the current levels achieved over a meaningful period of time, otherwise your provider is unlikely to accept responsibility for meeting those once the service goes live. Failure to provide meaningful data prior to signature often leads to a "true-up" exercise post-signature, at which point you will have little to no control over what the service levels will be. We can help you avoid these risks both by helping tour organisation understand what your supplier community will expect to see in terms of historic data, and by structuring a contract that allows sufficient control if service levels have to be set after signature.

4. How will the relationship be managed?

Embarking on an outsourcing contract means the internal management control you had over the delivery organisation will be replaced by a contract. That can be a scary thought, as a poorly drafted contract structures that lacks proper controls will quickly result in a failed relationship. At the very heart of every outsourcing is the relationship that you will have with your provider. Have you thought about how that relationship will be managed (at various levels), what interaction will be required at what level of the relationship, what oversight you will need and how issues will be escalated and resolved quickly and to your satisfaction? You should start thinking about overall governance as early as possible and in particular about the resources you will need to devote to managing that relationship. It is very important to remember that outsourcing is not a "fire and forget" solution. An outsourcing is a complex relationship will require a significant amount of time and effort from your side, and you need to ensure you have the right people on your team to manage this (including subject matter experts).

5. How will you deal with change?

Another feature of the long-term commercial relationship is that you will have to allow for the fact that things will change. No contract can cater for every possible future scenario, but a well drafted contract will give the parties the right mix of legal certainty and flexibility to deal with contingencies. A pertinent issue with modern day outsourcing contracts is how to ensure that you, as customer, will have access to and benefit from the latest technology and delivery solutions that come to market. This is a very real issue, especially given the meteoric speed of change within the technology sector, and many organisations have found themselves locked into long-term solutions that do not move with the times. We have helped our clients implement practical and innovate structures in their outsourcing contracts to ensure that they are always at the leading edge of technology development, and not an organisation that sees its competitors streaking ahead while it has to make do with redundant technology.

6. What is your asset strategy?

Another fundamental question that shapes every outsourcing deal is what will happen with the current resources (assets, contracts, people, premises, software, tools, etc) that support the legacy environment. Will the new provider be expected to take them over (or even pay to acquire them), will they be made available on a "managed" basis, who bears the cost of refresh and additional resources needed for volume growth, and what happens to these assets on exit? Do you have accurate and complete data of the resources that currently support the operations that will be outsourced, as providers will ask you to take the risk of incorrect data? This is a complex area that will define both the start of and exit from the outsourcing, the provider's solution and, of course, the build-up of the price and potential exit costs. This is one of the first items on our agenda when we start to work on outsourcing transactions: we spend time with our clients to help them understand the multiple implications that each decision with respect to the asset strategy will have on the way in which the contract is structured, which avoids unnecessary surprises down the line.

7. How will you manage data?

The value of data as a business asset is growing fast across a wide range of sectors – as are the risks surrounding data. What arrangements will need to be in place for you to export personal data to an overseas service provider? How will you ensure your data is kept secure when it is exchanged with external systems or under the control of the provider? How do you get access to this data at any given point in time (especially if the provider is experiencing difficulties or you are exiting the relationship in less-than-friendly circumstances)? Who bears the cost of reconstituting data if it should be lost or corrupted? What liability do you expect a provider to take in the event of a security breach that affects your reputation, brand and business? We work with technical and security teams to focus not only on the technical and operational requirements that you would expect your providers to have in place, but will also identify how the contract should deal with the aftermath of a data incident.

8. Are you clear about your own obligations and dependencies?

The customer in every outsourcing will have any number of obligations or dependencies, whether at the start, during the transformation phase or throughout as part of the "run" services. If those obligations or dependencies are not met, the provider will, quite reasonably, not expect to be responsible if it is unable to deliver. Unfortunately the delineation between customer and provider responsibilities is far from clear in most outsourcings and is one of the leading causes of disputes. We have developed a number of strategic approaches to customer dependencies that we advise clients to adopt in the negotiation and structuring of their sourcing contracts, that are designed to provide a clear understanding to both sides about their duties, that raise failed dependencies as early as possible to avoid or minimise the impact and (crucially) that helps the customer avoid a large bill for additional resources it may have to deploy to .deliver against all f its dependencies.

9. How will you resolve disputes?

The long-term nature of the outsourcing relationship and the effort involved in moving to a different provider mean that you will only want to walk away from it in the most serious circumstances. Resolution of issues is by far the preferred approach. However, traditional dispute resolution avenues may not afford enough opportunity to resolve issues amicably or at all. We can help by establishing mechanisms that introduce personal accountability for senior people within the supplier's team not only to resolve issues to get the service back up in the shortest possible timeframe, but also to resolve the root cause of those issues so they are unlikely to occur again. 

10. What happens when it all ends?

No matter how long-term an outsourcing project is intended to be, you should be clear from the outset on what will happen when the time comes to unwind the outsourcing. Your outsourcing contract should be specific about the process, transitional arrangements and costs of terminating the relationship, or you may find yourself inhibited from terminating simply because of the legal uncertainty of how it is to be achieved. A clear and real danger is that you will be "tied" to your provider's solution and that an exit will be very (or even prohibitively) expensive. Remember, all outsourcings come to an end, and you cannot wait to deal with this when the time comes. Your contract must include a well-documented approach to exit.