Key Documents for Your Outsourcing Transaction

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    I just tuned into a free Deloitte Consulting webinar and want to share some of the highlights from attorney Philip Porter, a partner on IP and Technology for Hogan & Hartson LLP.

    Mr. Porter gave a 10- or 12-minute talk on essential documents you’ll want to have for your IT-oriented outsourcing engagements as well as key contract issues you’ll probably face during negotations.

    Here are the key documents he identified:

    1. The main agreement, sometimes called the master services agreement, which includes standard terms and conditions, nothing new or surprising. The major responsibility for getting this in order lies with the attorney for the outsourcing transaction.

    2. The description of services or statement of work, which describes what the services provider will deliver and what the customer will get. If it’s not in the list, don’t expect to get it as part of the proposed bid.

    3. The service level agreement (SLA), which sets forth performance standards. It will probably include deadlines, frequency, or just requirements (“this is the way it has to be done”). Its goal is to describe in detail the services delivered in a way the client needs them.

    4. The payment schedule. Sound simple? Mr. Porter says it involves a host of issues that have to be dealt with: What are the fees? How are charges levied? When are due dates? How does invoicing happen? Who invoices whom? What happens if there’s a late payment?

    Two optional forms of documentation he said are becoming more common include these:

    5. Tower documents, which represent separate agreements for distinguishable services. For example, you might have a separate agreement that describes help desk services and requirements and another for telecom. The advantage to this approach is that weaknesses in one area (such as unmet service levels) don’t have to affect the business dealings or services in another area. Tower documents bring focus to individual transactions.

    6. Governance documents: These describe the processes for communications between the provider and the customer. The idea, Mr. Porter explained, is to focus “both parties on the importance of communication at the outset of the relationship.”

    Much of the contract work is simply business as usual — the kind of legal text you’d find in any business transaction agreement.

    Yet key contract issues are those that are controversial. These require, being “negotiated very intently.”

    These include:

    • Performance bond: This is an incentive for a service provider to provide the services for the customer when the customer needs them. They’re typically short-term and protect the actual transition of the services. As he said, it is often crucial for that process to be completed and for the service provider to get its “hands on the operation and be operating at a specific time.” The performance bond is used to ensure the transition happens at a given time.
    • Parent guarantee: When you’re dealing with the subsidiary of a larger provider, it’s important for the customer to know that if the subsidiary can’t deliver the services, the parent company is standing by to do so. These generally last throughout an outsourcing contract.
    • Scope definition: These define what services are in scope and what services are out of scope so that the provider can accurately price what’s being delivered.
    • Change control: Companies’ needs change over time. This is a mechanism for recognizing this fact of business; it serves both parties. The provider can assume that the client won’t dramatically modify the terms of the agreement down the road without an impact on price and the client expects the provider to respect modifications to business demand without exacting an unreasonable financial punishment.
    • Responsibility for resources (employees, technology, etc.).
    • Transition (contracts, employees, technology).
    • IP allocation
    • Indemnities
    • Limitations on liability: If something goes wrong, who’s going to be liable for what? That’s part of every commercial transaction. There are specific formulas followed.
    • Termination provisions: These are long-term transactions. The provider has made a price proposal based on specific termination date. What happens if that changes?
    • Post-termination assistance: Making sure customer is able to transition services back in house or to another service provider.
    • Service levels and remedies: To spell out incentives and punishments.
    • Invoicing and payments: How it’s done and what happens in long-term agreements. (The same price for services delivered today won’t work 10 years from now. So how does the transaction handle cost -of-living increases?)

    Mr. Porter offered these negotiation strategies:

    • Begin negotiations before final provider selection.
    • Handle negotiations in parallel (business person to business person, lawyer to lawyer).
    • Set up document and version control to manage who’s making changes and how to ensure everybody is looking at current versions of documents.
    • Identify and internally resolve issues to “keep things moving.” Move on and allow individual parties to think internally on those issues that are turning out to be contentious.
    • Figure out a way to handle “negotiation sidebars.” If you have an issue that becomes difficult to solve, put it in a “parking lot” for later negotiation.

    Hogan & Hartson is online here:

    http://www.hoganhartson.com/site/default.aspx

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