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TRANSCRIPT
PRE AND POST CONTRACT ISSUES IN OUTSOURCING PROJECTS
Kit Burden
Partner
Technology Sourcing and Commercial Group
DLA Piper
Date of presentation38584570 2
Introduction
Outsourcing projects are complex and time consuming, both in terms of procurement and delivery
Inevitable then that there is scope for ambiguity, misunderstanding and simple mistakes
Less inevitable that there be mis-scoping, mis-pricing, misrepresentation…and yet there often is!
Focus today is to examine the reasons for this, some of the "usual suspects", and to offer suggestions for improvement
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Areas to Cover
Approach to Negotiations
The Due Diligence Process
Service Scope
Pricing Mechanisms
Assumptions and Dependencies
Customer Obligations
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Approach to Negotiations
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Approach to Negotiations
Outsourcing "just like M&A"…?
Point scoring lawyers and penny pinching procurement teams, say hello to evasive and risk averse supplier teams
The reality = an unbalanced deal is inherently fragile and suits no-one
Case Study #1:
Airline company has two large outsourcing agreements
Networks deal negotiated aggressively and in bad humour; characterised thereafter by escalations and formal contract notices
Desktop deal negotiated with openness and trust; supplier "cut some slack" when scope and pricing issues arose, and relationship is running smoothly
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Due Diligence Process
Reality check - available information is rarely complete!
Result? Too few customers are honest/up front about this
simple denial
wide clauses to require supplier to "satisfy itself" as to adequacy of DD, with waivers of any rights to claim relief thereafter
What happens next?
"your mess, for less" principle…problems will rarely go away
impacts on delivery, usually leading to (reluctant) renegotiation
Case Study #2:
customer provides information which is inaccurate re historic service level performance
supplier fails to perform (using inherited staff and infrastructure), but services still better than they used to be
supplier still characterised as having "failed….."
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Service Scope
Core premise = the perfect service description has never been written…and will never be written!
Protective forms of wording:
reasonably/necessarily implied services
services undertaken by transferring personnel
services undertaken within a transferred budget/business function
services undertaken by "displaced" contracts
Case Study #3:
overly brief service description (prepared by team who "knew what they meant")
change in personnel as services move into delivery phase
customer faces "death by change control"
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Pricing Mechanisms
Lots of ways in which outsourcing deals can be priced, but unitary/transaction based pricing is very much "best practice"
Pitfalls to watch for:
getting the baseline right
choosing representative units/transactions
eliminating one time costs
dealing with material change
Case Study #4:
"your current cost, less X%" basis of the deal
post contract DD to verify baseline, with auto variation to unit prices
supplier fails to reflect this in its supply chain arrangements
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Assumptions and Dependencies
Often buried deep in the detail of proposals and/or service descriptions
In practice, will frequently be one of the primary causes of cost creepage
Key = ascertaining the "what if…." impact of assumptions not being met, eg:
pre-set price adjustments?
complete exemptions from contractual responsibility?
simple escalation for discussion?
right to exit the agreement?
none of the above?!
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Customer Obligations
Frequently (and sometimes aggressively!) opposed by customer counsel
Is this the right approach….?
Linkages to the "Relief Event/Notice" concept
supplier obliged to provide written notification of customer defaults within reasonable period/set time period
supplier obliged to use "reasonable endeavours" to circumvent impact
relief is pre-conditional upon compliance with the process
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Conclusions
Surprising how often the "usual suspects" end up being the ones which create issues
These are matters which can be pre-empted, and largely (albeit not completely) addressed via the contract mechanisms
Three key requirements, however:
transparency
co-operation
goodwill
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THANK YOU
Kit Burden
Partner and Co-Head of Global Technology,Sourcing and Commercial Group
(+44) 0207 796 6075
PRE AND POST CONTRACT ISSUES IN OUTSOURCING PROJECTS
Kit Burden
Partner
Technology Sourcing and Commercial Group
DLA Piper