Outsourcing and procurement: the hot points and pitfalls

Debbie VennAssociate

asb law LLP

Type of outsourced arrangements

Traditionally outsourced functions• HR• Payroll• Accounting• Facilities management

IT functions … now outsourced frequently:• Hosting• Website development• Data security• IT support

Benefits of outsourcing

Reduced costs, or obtain better value for moneyLower staff costs internallyObtain specific expertise and benefit from new technologies

Potential disadvantages of outsourcing

Lack of control on how goods/services provided, or quality controlPotentially increased costs, if no control over how costs are dealt withAbility to exit the arrangements – may be limited or prohibitedInformation security threats, or disclosure of confidential/commercially sensitive information

Important initial questions

How will the outsourced project be managed?Full description of goods/services required, to be set out in a specificationHow 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?

The outsourced supplier

Due diligence checksPublic Contracts Regulations 2006Financial checks – performance bond or parent company guarantee?Demonstrations – additional service levels?Site visitsAdditional 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?

What is being outsourced?

Scope the project and agree any relevant specificationsConsider 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

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 insolvencyFor longer term agreements, additionally consider whether a party may terminate for convenience and/or having a minimum initial period in the agreement

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?

Who is agreeing to do what?

Obligations of the supplierObligations of the customerWill the supplier be working at the customer’s premises? Licence required? Access and H&S issues?Timetable for delivery of the servicesMake sure obligations and promises are realistic and achievable!

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 placeKey personnel – should they be tied in to providing the services?Transfer of Undertakings (Protection of Employment) Regulations 2006

Service levels

Describe services clearlyAttribute service levels to the described servicesAre service credits to be applied if the service levels are not achieved?

Benchmarking

Agree review of the costs over the lifetime of the contractInformal 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 withDepends on bargaining power of the partiesWhat 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’

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 contractAdvance payments:• Refund if terminated early?• Reconciliation formula for fixed prices based on usage - how

frequent to carry out reconciliation?

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)

Liability

Types / heads of lossWhat 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 goodsConsider ‘force majeure’ events

Data protection, confidential or commercially sensitive information

Confidential or commercially sensitive informationData Protection Act 1998 – need to ensure complianceFreedom of Information Act 2000 –

consider when providing information to public bodies

Information security: BS7799/ISO17799

Contract management and dispute resolution

Contract management• Change control procedure• Review meetings

Dispute resolution• Escalation procedure• Arbitration or mediation?• Binding or non-binding?

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?

Exit management

Process to be set out in the contractMay depend on whether services are being transferred back in-house or to a third party providerTUPE provisions – how will employees who have been providing the services be dealt with?

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 contractLiability capped at £30 millionClaim made for £709 millionClaims of fraudulent misrepresentationHELD: EDS knew representation to meet deadlines was false or reckless and BSkyB relied on representationEDS held liable, although case recently settled with EDS paying £318 million to BSkyB in damages

Summary

Scope the project carefullyEnsure term, termination and exit management provisions in placeCarefully consider and draft liability clausesConsider intellectual property rights and TUPEFINAL 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!

Any questions?