Why outsource? How to do it safely.

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Overview
Key Contract Clauses
– Base Services Description
– Service Levels / Credits
– Fees
– Benchmarking
– Third Party Consents
– Regulatory Compliance
– Disaster Recovery and Force Majeure
– Termination Rights and Fees
– IP Ownership
Trends and Lessons

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What is outsourcing
Common customer goals
– save money
– force change
– tap into expertise
Off-shore vs. On-shore
– Enforcement / disputes
– IP
– Taxes
– Legal compliance
– Data privacy and security

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Base Services Description
– Multi-pronged definition
• Tasks described in SOW
• Everything Customer employees & contractors were doing before the Effective Date
• Items contained in Customer budget
• Inherently related services (“Sweep” Clauses)
– Specificity (Vendor) vs. dragnet clauses (Customer)
– If it’s not a Base Service, it’s a New $ervice
• New Services
• Change Control

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Service Levels / Credits
– Service Levels define key performance measurements
– “What gets measured is what gets done”
– Customer should establish Service Levels early
• Collect data prior to contract negotiations
• What defines success/satisfaction
• What is a higher service level worth to the Customer
– Service Level Credits
• Vendor reports and pays
• Service Level Credits should not be exclusive remedies
– Include termination for failure to meet Service Levels

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Fees
– Fee structure drives many other contract provisions
– Pay for defined service vs. pay for effort
– Price Protection
– New Services
– Minimums vs. Exclusivity
– Taxes

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Benchmarking
– Test Vendor pricing throughout term
– Remedies -- fee adjustment, termination right
– Problem -- each deal is unique
– Market test is the best
• Short term agreement
• See termination

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Third Party Consents
– Identify third party agreements and required consents
– Address front end and back end consents (Exit Rights)
– Who will obtain the consents
– Who will pay the cost of consents

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Regulatory Compliance
– Monitoring changes in law
– Who bears the cost of changes required by law?
• Vendor Laws
• Customer Laws
• “Outsourcing” Laws
– How does the Vendor market itself?

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Force Majeure & Disaster Recovery
– Watch for overbroad force majeure
• Reasonable backup plans and facilities
• Third parties
– Disaster Recovery
• Will Vendor create a DRP
• Will Vendor execute or coordinate under Customer DRP
• Customer may need right to seek alternate sources or terminate

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Termination Rights and Fees
– Termination for convenience
• In whole or in part
• Termination for convenience fees
• Change in Control = lower termination fees
– Termination for cause
• Material, uncured breach
• Bright-line terminations (transition milestones, service level credits, prolonged force
majeure)
– Termination is often not practical remedy
– Exit Rights

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IP Ownership
– No “one size fits all”
– Depends on deal
• IT Infrastructure management
• Development services
– Depends on parties businesses
– Ownership vs. license
• A license is usually sufficient in order to have freedom
of use
• Ownership is important to control use by others (e.g.,
competitors)
– Joint ownership is complicated

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Trend toward smaller deal sizes and multi-sourced environments
Customers more sophisticated
Increased focus on Governance
Customers have evolving view of what is “core competence”
Expectations for “first generation” deals were rarely realistic
Focus on immediate cost savings led to problems later