Corporate
Jun. 27, 2002
Exhibits Are Essential in Any Contract Involving Outsourcing
Focus Colum - By Greg Short - Whether negotiating an information-technology outsourcing contract or a business-process outsourcing arrangement, documenting the agreement is like creating a roadmap for a business-critical mission. Each party seeks to deliver or receive efficient information-technology or administrative service, but the paths that they want to travel to get to that destination often are quite different.
By Greg Short
Whether negotiating an information-technology outsourcing contract or a business-process outsourcing arrangement, documenting the agreement is like creating a roadmap for a business-critical mission. Each party seeks to deliver or receive efficient information-technology or administrative service, but the paths that they want to travel to get to that destination often are quite different.
However, if the parties work together in the negotiation and drafting process to detail their mission and prepare thoroughly for hazards that might crop up along the way, then they are far more likely to complete their mission successfully and attain their mutual goals.
Although the main agreement (the terms and conditions) includes the majority of the "legal" provisions for an outsourcing transaction, the exhibits (or schedules) to the terms and conditions set out a significant portion of each party's obligations. In fact, if the terms and conditions can be considered an overall map of the transaction, the exhibits are the vital street-level guide - in essence, the guts of the deal.
The exhibits usually detail most aspects of the services to be outsourced in accordance with the terms and conditions, including the scope of services to be performed by the vendor, the performance standards to which the vendor will be held, the pricing structure for the services and fee-adjustment procedures, the milestones for guiding the transition of functions from customer to vendor and the rules governing how the customer's personnel will be hired and transferred from customer to vendor.
Without complete documentation of, for example, the vendor's service obligations and the customer's payment obligations, the outsourcing mission may be derailed. Customers may find themselves dissatisfied when they do not get what they expect, facing additional charges when service volumes and charges have been inaccurately categorized. Customers may enter into frequent disputes with the vendor over additional and unanticipated costs.
Exhibit templates simplify the drafting process but using them without customizing them to the particulars of the deal can lead the parties down the wrong path. A vendor's templates often will contain language favored by the vendor, while experienced outsourcing attorneys and consultants can provide customer-oriented sample documents.
Whether the template comes from the vendor or the customer's advisers, it is essential that the parties revise and tailor the exhibit to meet the unique specifications of the outsourcing arrangement.
For example, the "statement of work" exhibit describes services that the vendor has agreed to provide. A customer may elect to use the vendor's template because it includes a base description of the services. At the same time, the template likely will contain other conditions related to the vendor's services that the customer needs to review cautiously during negotiations.
There will be some exhibits that the parties can create without a template. For example, the parties can pull from existing data sources or spreadsheets the listing of locations involved in the outsourcing, a description of the reports that the vendor will produce and an identification of the assets that may be transferred.
However, keep in mind that just like a form statement-of-work exhibit, an existing spreadsheet of company data should be re-examined in the context of the outsourcing transaction.
A related consideration is controlling the flow of revisions to the exhibits as the negotiations develop. As in other deals with exhaustive documentation, it is wise to agree at the start of drafting on procedures for inputting approved changes to ensure version control. This caution holds true even when the parties exchange redlined drafts electronically.
With those general factors in mind, there are several specific avenues that the parties should develop carefully as part of the outsourcing roadmap.
The "service level" exhibit identifies the criteria that the parties will use to evaluate vendor performance of the services. An effective exhibit contains specific performance targets and other service-level benchmarks that will serve as the standards by which the company measures a vendor's performance. The exhibit also may contain, if appropriate, targets below or above which the vendor will incur credits or receive bonuses for its performance.
Failure to identify specific types of measurement and the methods used to measure performance can jeopardize management of the outsourcing relationship. In fact, it is useful to include examples of the calculations to be used so there is less room for disputes later.
In some cases, it may be difficult to agree on targets and benchmarks during the negotiation process because historical data on the process does not exist. In such cases, the exhibit may set forth a limited "verification" period, or window, after the outsourcing has begun to evaluate applicable service levels and develop appropriate measurements. The exhibit should, however, spell out exactly how the parties will establish and measure service levels during this period.
The "pricing" exhibit establishes the fees to be paid for the services. The exhibit sets out the base charges, lists the service categories, describes the individual units of service and catalogs the rates on which the parties will base fee calculations.
It is key that the exhibit explain the mechanism for applying incremental charges or deductions for additional or reduced services and address whether cost-of-living increases will (or will not) affect the pricing structure. Again, to illustrate the pricing formulas, it is a good idea to include sample fee calculations.
Remember that the content in the pricing and service-level exhibits must correlate back to the statement-of-work exhibit so that both vendor and customer are able to assess what level of services the vendor will provide at what cost.
The details regarding how a customer's assets, systems and personnel, as applicable, will be transferred to the outsourcing vendor also generally are set out in the exhibits. In most cases, one exhibit will address the transfer of services, and a second will examine how employees will be transitioned.
The "transition services" exhibit should assign responsibility for planning and implementing the transition tasks, including a transition timeline with deadlines for the completion of required activities and possible repercussions for the vendor if it does not meet milestones. The parties may use a supplemental transition-services exhibit to address how any facilities, equipment, materials or licensing rights will be transferred back to the customer at the expiration or termination of the outsourcing agreement.
The "personnel transfer" exhibit will outline procedures and terms that the vendor must follow when interviewing and hiring customer employees. The exhibit typically sets forth guidelines for salaries and benefits and, in some cases, for the rehiring of employees by the customer after the outsourcing arrangement expires or is nullified.
In addition, whether set out in the terms and conditions or, more often, in the exhibits, it is important to document provisions that will govern the parties' responsibilities with respect to ongoing operational issues, such as the organizational and management structure of the outsourcing relationship, change control and informal dispute resolution and policies prescribing the security of facilities, data and personnel.
While such exhibits may incorporate by reference existing customer or vendor procedures, careful review of such documentation and responsibilities by both parties will help ensure that they are tailored to the outsourcing environment.
Parties to an outsourcing transaction should give proper attention to the "nonlegal" aspects of the deal during the negotiating process. Too often, customers and vendors focus their attention on the terms and conditions and neglect to adequately craft the supporting exhibits, which generally contain significant legal obligations for the parties.
Indeed, the terms and conditions developed in the exhibits often do as much, if not more, to ensure the proper functioning of an outsourcing arrangement as the actual terms and conditions. Starting with exhibits that are drafted carefully, negotiated and reviewed by the business, technical and legal team members can go a long way toward ensuring that the overall agreement reflects the parties' intentions, avoiding disputes over the responsibilities of the parties and establishing a roadmap for an outsourcing relationship to run more smoothly.
Greg Short, formerly counsel with Shaw Pittman's Los Angeles office, has his own practice based in Los Angeles. He has handled a variety of transactions for vendors and customers of technology products and services, including domestic and international outsourcings.
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