Outsourcing and Procurement: The Hot Points and Pitfalls


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eWorld Purchasing & Supply Conference
Day 1 - September 28th, 2010

10:20 to 10:50 AM Outsourcing and Procurement: The Hot Points and Pitfalls


On paper, outsourcing holds significant potential for delivering much-needed efficiency gains and cost savings. But it can also present a legal minefield for procurement departments and getting the contract right from the outset is one of the most significant factors for realising these benefits. This information-packed briefing explains the key considerations for a successful outsourcing contract, including: defining project scope, employment issues & TUPE, intellectual property rights, agreeing service levels, benchmarking, reporting & audit rights, liability, data protection, confidentiality & Freedom of Information, dispute resolution, duration, termination and exit management.


Debbie Venn, Associate at asb law LLP

Published in: Business, Technology
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Outsourcing and Procurement: The Hot Points and Pitfalls

  1. 1. Outsourcing and procurement: the hot points and pitfalls Debbie Venn Associate asb law LLP
  2. 2. Type of outsourced arrangements Traditionally outsourced functions • HR • Payroll • Accounting • Facilities management IT functions … now outsourced frequently: • Hosting • Website development • Data security • IT support
  3. 3. Benefits of outsourcing Reduced costs, or obtain better value for money Lower staff costs internally Obtain specific expertise and benefit from new technologies
  4. 4. Potential disadvantages of outsourcing Lack of control on how goods/services provided, or quality control Potentially increased costs, if no control over how costs are dealt with Ability to exit the arrangements – may be limited or prohibited Information security threats, or disclosure of confidential/commercially sensitive information
  5. 5. Important initial questions How will the outsourced project be managed? Full description of goods/services required, to be set out in a specification How long is it intended that the arrangements last for? Who is bringing what to the table? As the customer, how do you go about finding the right supplier?
  6. 6. The outsourced supplier Due diligence checks Public Contracts Regulations 2006 Financial checks – performance bond or parent company guarantee? Demonstrations – additional service levels? Site visits Additional insurance cover required? Data security levels sufficient? Does the customer’s basic infrastructure need changing in order to receive the goods/services? Any proposed sub-contractor? Same checks?
  7. 7. What is being outsourced? Scope the project and agree any relevant specifications Consider whether any existing arrangements need to be terminated or adapted in order to receive the new goods/services and what impact this might have, eg, TUPE
  8. 8. Term of the project – long term or short term? How long is it anticipated that any services are to be provided for? For short term agreements, consider termination for material breach or insolvency For longer term agreements, additionally consider whether a party may terminate for convenience and/or having a minimum initial period in the agreement
  9. 9. Who is contributing what? Will there be any initial transfers of assets or rights that the supplier needs in order to provide the goods/services? Will the supplier be providing bespoke services or standard services – will this impact on whether intellectual property rights in connection with the services are licensed or assigned to the customer?
  10. 10. Who is agreeing to do what? Obligations of the supplier Obligations of the customer Will the supplier be working at the customer’s premises? Licence required? Access and H&S issues? Timetable for delivery of the services Make sure obligations and promises are realistic and achievable!
  11. 11. How are employment issues to be dealt with? Who is providing the services? Ensure personnel of supplier are fully trained and skilled, plus all relevant licences, consents and permits in place Key personnel – should they be tied in to providing the services? Transfer of Undertakings (Protection of Employment) Regulations 2006
  12. 12. Service levels Describe services clearly Attribute service levels to the described services Are service credits to be applied if the service levels are not achieved?
  13. 13. Benchmarking Agree review of the costs over the lifetime of the contract Informal process? External verification? If external, agree process for appointment of an external third party and agree on how costs of the external third party will be dealt with Depends on bargaining power of the parties What happens if the supplier slips behind in the market place? What happens if the supplier does not improve against the set benchmarks following a review? Establish regular review for ‘health check’
  14. 14. Price and payment How is price to be dealt with? • Fixed pricing structure • Variable pricing structure • Indexation increases, supplier’s pricelist or other allowed increases to price? Payment methods and frequency need to be agreed and set out in the contract Advance payments: • Refund if terminated early? • Reconciliation formula for fixed prices based on usage - how frequent to carry out reconciliation?
  15. 15. Warranties Supplier: • to use reasonable care and skill • perform the services in accordance with any agreed specification? • no breach of any third party intellectual property rights • ownership of any assets provided under the agreement? Customer: • any content or materials provided do not violate any applicable laws • provide any premises, etc, in order for the supplier to provide the services (if appropriate)
  16. 16. Liability Types / heads of loss What heads of loss are reasonable to exclude or limit in the circumstances? Is an exclusion of loss of data reasonable? Will exclusions or limitations apply to both parties? What is an appropriate ‘cap’ on liability: • value of contract? • level of insurance cover? • over lifetime of contract or annual? No exclusion or limitation of liability under English law in respect of death or personal injury caused by negligence, or for fraud or fraudulent misrepresentation, or as to title of goods Consider ‘force majeure’ events
  17. 17. Data protection, confidential or commercially sensitive information Confidential or commercially sensitive information Data Protection Act 1998 – need to ensure compliance Freedom of Information Act 2000 – consider when providing information to public bodies Information security: BS7799/ISO17799
  18. 18. Contract management and dispute resolution Contract management • Change control procedure • Review meetings Dispute resolution • Escalation procedure • Arbitration or mediation? • Binding or non-binding?
  19. 19. Termination and consequences Termination - Expiry of a fixed term? - On happening of events: material breach, insolvency, persistent non-material breach, change of control? Consequences - Return of confidential information - Do licences terminate? - Escrow arrangements?
  20. 20. Exit management Process to be set out in the contract May depend on whether services are being transferred back in-house or to a third party provider TUPE provisions – how will employees who have been providing the services be dealt with?
  21. 21. What happens if it all goes wrong? BSkyB Limited and another v HP Enterprise Services UK Ltd (formerly Electronic Data Systems Ltd and another [2010] EWHC 86 (TCC) EDS failed to implement a new customer relationship management system in accordance with the contract Liability capped at £30 million Claim made for £709 million Claims of fraudulent misrepresentation HELD: EDS knew representation to meet deadlines was false or reckless and BSkyB relied on representation EDS held liable, although case recently settled with EDS paying £318 million to BSkyB in damages
  22. 22. Summary Scope the project carefully Ensure term, termination and exit management provisions in place Carefully consider and draft liability clauses Consider intellectual property rights and TUPE FINAL MESSAGE: GET THE CONTRACT RIGHT! Ensure it reflects what has been agreed between the parties, it is recorded correctly, signed by authorised representatives of both parties and dated!
  23. 23. Any questions?