2. IT Outsourcing and software contracting
entering new decade
Benchmarking and exit clauses: how to knock
down the exit barriers
Helsinki, 10 June 2010
RA Ulrich Bäumer, LL.M.

3. Agenda
I. Benchmarking
II. Exit clauses
III. Lessons learned

4. …but first
How do we know ?

5. Advice of IT companies in
Europe* – Legal and Tax Services
Int. IT company Indian IT company Indian IT company Indian IT company
• IT procurement • IT contracts
• outsourcing • M&A • IT contracts • HR
• tax • IT contracts • HR / employment
• data protection
• structuring the • employment law • corporate law
• M&A
distribution in the EU • competition law • strategic advice
• data protection • data protection • antitrust
Indian IT company Int. IT company Indian IT company Int. IT company
• M&A •Commercial •M&A
• corporate law • tax law
contracts • HR
• IT contracts • HR / employment
• data protection • outsourcing
• HR / employment • corporate law
• HR
• data protection • strategic advice
• transactional work • transactional work
*Some examples of our recent projects

6. Recent Quotes
Information Technology
Particular strengths: Strong outsourcing
expertise
JUVE, November 2009
Another extraordinary success is based on the
Indian Group led by IT partner Ulrich Bäumer
JUVE, November 2009

7. Quo Vadis outsourcing IT service
providers in Europe?
• trend No. 1:
• The IT outsourcing service providers have discovered
Europe as an attractive market
• The reasons are the strong Europe and a saturated US
market:
• US market for outsourcing in 2006:
148 transactions (2005: 163)
• EU market for outsourcing in 2006:
157 transactions (2005: 142)
(Source: Technology Partners International, TPI Index)

8. Quo Vadis outsourcing IT service
providers in Europe?
• trend No. 2:
• Outsourcing IT service provider climb the value chain:
• 2000: Y2K problems
• 2004: larger outsourcing projects (IT-, Application
Management-, Infrastructure-, Business Process
Outsourcing)
• 2006: takeover of smaller companies in Europe /
Business Consulting
• 2008: Collaboration / takeover of business units
• 2009: takeover of larger companies in Europe (e.g.
Axon)

9. I.
Benchmarking

10. I. Benchmarking
• "Benchmarking is the search for industry best practices that lead to
superior performance" (Robert Camp, founder of the Benchmarking
approach)
• "A process of identifying and learning from the best practices in other
organisations" (Performance Improvement Group, "Benchmarking Code
of Conduct")
• "Process of comparing one's business processes and performance
metrics to industry bests and/or best practices from other industries.
Dimensions typically measured are quality, time and cost" (Wikipedia)

11. I. Benchmarking
• Principles of Benchmarking:
 Identifying and learning from other companies
 Identifying the Best Practice
 Benchmarking as management tool
 Benchmarking as essential part of dynamic process of continuous
improvement and performance breakthroughs
• Benchmarking is appropriate if:
 Outsourcing volume is of a bigger scale (> 1 Mio. €)
 Outsourcing project covers various and complex services
 Term of project is lasting over several years
 Both parties intend to continue the cooperation

12. I. Benchmarking
Customer's Interest Supplier's Interest
• Preference: • Preference:
• Shorter contract term • Longer contract term
• Reasons:
• Reasons:
• Risk management
• Flexibility/Adjustment to
• Better return on ramp-up
changing situations
costs, such as personal,
• Prices, services and place time, material and costs
of Performance are re- through long-term co-
negotiable operations
• higher customer loyalty

13. I. Benchmarking
• Types of Benchmarking:
 Internal Benchmarking
• Benchmarking within one company and its affiliates or within one industry over
time in light of established goals
 Competitive Benchmarking
• Benchmarking of practices and processes of competitors from one business
sector or areas of activity
 Functional Benchmarking
• Benchmarking of similar practices of processes in companies from different
business sectors or areas of activity with regard to a certain services/functions
 Generic Benchmarking
• Broad benchmarking of generic practices and processes of companies from
different business sectors

14. I. Benchmarking
• Essential elements of a contractual clause:
 What is the time and periodicity of the benchmarking?
 What is the scope/subject of the benchmarking? Who is the
comparative group?
 What agent/company will conduct the benchmarking?
 Who will choose and pay the benchmarking agent?
 How is the benchmarking process structured?
 What is the calculation of price average?
 How are the parties be bound by the benchmarking results? How will
they execute the benchmarking results?

15. I. Benchmarking
Template of a Benchmarking clause from our last
outsourcing contract:
a. Benchmarking Test
• Scope of Benchmarking, cost bearance
b. Result of benchmarking
• Price adjustment proceedings (one-sided)
b. Supplier's right to examine/escalation proceedings
c. Qualifications and requirements for benchmarking agent
d. Use of comparison data
• In case of existing NDA: Supplier's consent to disclose information to
Benchmarking agent.

16. II. Exit clauses
Exit
Termination of Back-/Insourcing to Transition to 2nd
Supplier's Services Customer Generation Supplier
Detrimental Risk: § 613a BGB
• Risk for Customer's business ("TUPE")
• Loss of outsourcing benefits
Transfer of Operations
(Know-how, data, processes)
Transfer of Employees

17. II. Exit clauses
• Risks of Lacking Exit-Management
 Loss of
• Services provided by Supplier
• Know-how developed by Supplier
• Licenses granted by Supplier on Supplier's pre-existing or
on third party's IP-rights
• Equipment delivered by Supplier

18. II. Exit clauses
Risk of § 613a BGB
• Transfer of Operations: Change of the owner of operations
 Transferred operations remain single economic unit
• Critera:
 Takeover of resources (e.g. hard/software, licenses)
 Takeover of client base and of key personnel
 Similarity of services provided prior and after transfer
 Rather short interruption period of service provision
 Same tower structure or same organisation across towers
• Consequences:
 Transfer of Employees: Customer/2nd Generation Supplier become new
employer = Liability for all employee's claims, even occurring before transfer

19. II. Exit clauses
Essential Elements of Exit Management
I. Transition Plan:
• Parties' responsibilities and tasks
• Milestones/delay
• Non-Compliance with Transition Plan

20. II. Exit clauses
II. Personnel
• Binding key personnel: old Supplier shall not withdraw key
personnel before end of transition
• Disclosure of information on qualification of key personnel by old
Supplier to Customer/2nd Generation Supplier
 e.g. Bitkom "Code of Conduct: Transfer of Employees with
2nd Generation Outsourcing"
• Structure of transition to be out of scope of § 613a BGB,
alternately: specifying costs and obligations under § 613a BGB
(e.g. company pension scheme)

21. II. Exit clauses
III. Information and Disclosure
• Transition of know-how
• Data migration, delivery of required documentation/information
• Training of Customer's/2nd Generation Supplier's personnel
III. Assistance
• Old Supplier's obligation to temporarily continue service provision
• Customer's/2nd Generation Supplier's right to request for
additional services
• Old Supplier's obligation to provide follow-up support services

22. II. Exit clauses
V. Equipment
• Asset-Management
• Transfer of licenses
• Transfer of existing third party service contracts
VI. Dispute Resolution

23. III.
Lessons learned

24. III. Lessons learned
• Make sure
• the outsourcing service provider understands what you
will do and what you expect of him (e.g. TUPE – who
will make the redundancies)
• you explain to the outsourcing service provider who
will bear the financial risks (of a benchmark, of a TUPE
risk)
• you have the right team on the project (e.g. business,
finance, tax, legal, pension experts, local HR team, etc)
• you have a workable timeline (for benchmark and exit,
but also for possible merger and HR notifications) and a
workable conflict resolution mechanism

25. III. Lessons learned
• you can practically enforce your rights against the outsourcing
service provider
• you have the right conditions precedent and subsequent (for a
smooth exit scenario)
• you involve management and all stakeholders (including, where
applicable, works councils) at the right time
• you use the right legal entities in the right geographies
• you are prepared to take some risk and some costs
• you address the compliance issues
• you are prepared to deal with all cultural issues in an exit
scenario

26. Questions?

27. Contacts
Ulrich Baeumer, LL.M. / Attorney-at-Law (NY)
Osborne Clarke, Cologne (Germany)
Partner/ IT
t +49 (221) 5108 4164
m +49 160 969 36 939
e ulrich.baeumer@osborneclarke.com