Outsourcing Agreements – Under the Bonnet

November 26, 2013


The success of any outsourcing relationship is contingent on putting in place a flexible but concisely defined arrangement which clearly sets out the parties’ requirements and includes a structure which enables the parties to adapt to evolving requirements and an evolving environment.  An outsourcing agreement is similar to any other commercial agreement in that it provides a blueprint for the parties relationship. It also provides for certain outsourcing specific issues, the negotiation and drafting of which, will largely govern the overall success of the outsourcing venture.  This article focuses on transition, service levels and exit assistance.

Transition – The Way In

The outsourcing agreement must include detailed provisions on how the services are to be implemented by the supplier and the benchmarks for measuring a successful transition.  Whether it is a transition from the supplier directly or from an incumbent service provider, it is fundamental that the parties’ responsibilities are clearly defined in the agreement.  An outline of the transition plan with key milestones is often attached to the outsourcing agreement.  The detailed transition plan is then agreed between the parties after the signing of the agreement on the basis of the pre-agreed milestones.

The costs associated with a delayed transition, both in monetary terms and in terms of confidence, can be significant.  So how can the parties avoid such delays?  The outsourcing agreement must contain a mechanism that will ensure the transition phase is completed in accordance with certain milestones.  If the supplier fails to achieve any milestone dates for reasons directly linked to the supplier’s effort, the customer should be entitled to predetermined delay payments. Equally, if the suppliers’ failure is down to actions and inactions on the part of the customer, then arguably the supplier should be entitled to delay payments.

Service Levels

Many outsourcing agreements signed pre-recession did not allow for the dramatically changing revenue profile that many Irish, and indeed international companies, experienced during the recession. Consequently, we are now witnessing a shift away from the exclusive focus on service levels to a requirement that suppliers provide business value, innovation and a customer focused experience.

Notwithstanding the increased emphasis on flexibility and value, the service level arrangement remains a lynchpin of any outsourcing arrangement.  The outsourcing agreement must clearly define the scope of the services to be provided to avoid the potential for conflict or ambiguity stemming from vague or ambiguous terms.   The agreement should clearly set out what the supplier is required to provide and what the customer expects to receive.

Once the scope of services has been determined, the customer must determine what level of service is required and the supplier must determine what level of service it is willing or able to provide. Too few service levels and the supplier may provide an inconsistent level of service which cannot be accurately measured. Conversely, the use of too many service levels may result in confusion and excessive reporting, undermining the very thing that the arrangement was intended to achieve, namely efficiency.

Service levels are toothless in the absence of a mechanism to address the possible failure of the supplier to achieve the required service level. The service level arrangement must address the monitoring of the service levels and include a service level credit structure to address any failure to achieve the required service levels.  In addition to service credits the customer may be entitled to seek damages and/ or terminate the agreement should the supplier consistently fail to achieve the required service levels.

Exit Assistance – The Way Out

While neither party wants to begin their relationship with discussions in relation to the end of the relationship, it is important to keep one eye on the exit to ensure an effective transition of the outsourced services back in-house or to a replacement service provider.  Once the agreement has ended, it will be much more difficult to agree the terms of the exit assistance particularly as these terms will be invoked at a time when the parties’ interests are no longer aligned, and when the commercial relationship between the parties has potentially broken down.

To avoid any potential conflicts, the outsourcing agreement should contain a clear and unambiguous exit strategy. Key issues to consider are:

(i) the exit assistance services;
(ii) the duration of exit assistance;
(iii) the payment of exit assistance fees;
(iv) relief from service levels during the exit phase;
(v) the transfer of know how; and
(vi) return of assets, customer data, documentation, etc.

By planning for the worst and hoping for the best, companies can be well equipped for a smooth and efficient exit.

For more information on this topic please contact Elizabeth McCann at emccann@mcdowellpurcell.ie.

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