information technology outsourcing transactions process strategies and contracts 2nd ed phần 8 pptx

432 APPENDIX 9.1 GAINSHARING IN OUTSOURCING TRANSACTIONS: OVERVIEW A favorite buzzword during negotiations of outsourcing transactions is gain- sharing. Customers and vendors alike are intrigued by the concept of gainshar- ing. What is meant by gainsharing, however, is nebulous at best. On its face, the term means that the parties will share in the gain (interpreted as savings or reve- nue) realized by a party. Gainsharing has come to mean anything from simple cost-saving mechanisms included in the outsourcing contract (e.g., the vendor agrees to work with the customer to identify areas that can be eliminated or han- dled using fewer resources, without having a material impact on front-end ser- vices, and the parties will share in the savings to the customer) to options or warrants granted to the vendor in the customer (or granted to the customer in the vendor) and actual joint venture relationships (e.g., the parties will form a joint venture that will initially provide services to the customer and will ultimately provide similar services to other companies in the customer’s industry). The success of the implementation of gainsharing arrangements has been questionable. Often, at least early in the deal, the gainsharing provisions are overshadowed by transition and performance issues (e.g., if the customer is dis- satisfied with the level of service that it is receiving, the implementation of a gainsharing arrangement such as co-marketing of a new product or application becomes a secondary concern). Other common problems include (1) incentive payments or obligations becoming due at the same time a balloon payment is due under a financially engineered outsourcing deal, (2) a change in customer management, with the new management not able to understand why it is paying incentives to the vendor when services are not perceived as being satisfactory, and (3) the gainsharing incentive is tied to customer or vendor revenue/profit that skyrockets in a particular year for reasons not related to the business process and, therefore, results in an unforeseen windfall to a party. The attached chart provides examples of several generic gainsharing arrange- ments. These arrangements are intended to be illustrative only. Gainsharing arrangements tend to be the subject of much negotiation and are, therefore, spe- cifically tailored to the deal at hand. As with any business arrangement, gain- sharing arrangements should be reviewed carefully by the parties from a business, legal, and tax perspective. Halvey.book Page 432 Tuesday, August 9, 2005 8:58 AM Appendix 9.1 Gainsharing in Outsourcing Transactions: Overview 433 GAINSHARING AGREEMENT HOW IT WORKS ISSUES TO CONSIDER 1. The vendor receives an incentive based on the actual savings against budget realized by the customer. The customer submits base budget or the previous year’s spending to the vendor; the vendor commits to a certain percentage of savings over the portion of the budget/spend outsourced. The vendor should require that budget/spend numbers reflect inflation. The vendor receives an incentive based on the actual savings against previous year’s spending realized by the customer. The parties will need to discuss which inflation indices apply. Savings commitment needs to be adjusted to reflect scope changes, volume changes, capacity changes, additional/ fewer units, partial termination of services. The customer may wish to require that budget is adjusted to reflect unanticipated changes resulting in windfall savings. Savings commitment does not pertain to retained portion of the budget/spend. 2. The vendor commits to provide the services at prices that are comparable to the customer’s peer organizations; the vendor receives an incentive for any savings below peer index. The parties agree to benchmark services provided to comparable organizations. The parties will need to negotiate who will perform the benchmarking (e.g., independent third party), what organizations will be surveyed, and whether benchmark will apply to aggregate or unit services. If the vendor can show savings against market rates, then the vendor receives an incentive. Although vendors typically resist benchmarking provisions, this is an instance where benchmarking may be acceptable to the vendor. 3. The vendor receives an incentive based on the amount of areas or projects that the vendor eliminates or reduces without cutting front-end services. The incentive compensation is typically based only on the vendor’s ideas that are actually implemented. The vendor must have access to the customer’s organization. The process should be clear and agreed to during contract negotiations (e.g., what services will be targeted; ideas are submitted to a committee then added to a database). The customer may argue that the idea to eliminate certain services was not completely initiated by the vendor. Halvey.book Page 433 Tuesday, August 9, 2005 8:58 AM 434 Ch. 9 Measuring Performance GAINSHARING AGREEMENT HOW IT WORKS ISSUES TO CONSIDER 4. The customer provides incentive compensation to the vendor for any business improvements delivered over the term through business process reengineering. (Similar to item 3) 5. The customer commits to “respond” certain dollar amounts in services with the vendor to the extent vendor effectively eliminates/ reduces services. If the customer saves $______, then the customer must respend a certain percentage of such savings within a specified time period. 6. The vendor enters into a requirements contact with the customer. If cost savings are realized, then the customer must obtain certain types of services from the vendor only. 7. The vendor commits to performance or productivity levels; if the vendor does not meet the specified levels, the vendor must give the customer a credit; if the vendor exceeds the levels, the vendor receives an incentive payment. The parties need to agree to and set performance levels. Most contracts include some type of performance charge if performance levels are not met; few include a bonus for overachievement on the basis that after a certain level, the customer is not benefited from the overachievement (e.g., 98% vs. 99% uptime). 8. The vendor and the customer agree to share the risk or benefit of the implementation of new methodologies or technology. The parties may share in implementation costs or the vendor may agree to spread the up-front costs over the term of the contract in return for the sharing in realized cost savings. The vendor agrees to liquidated damages in the event the rollout is delayed due to the vendor’s fault; the customer will compensate the vendor if the rollout is delayed due to the customer’s fault. Halvey.book Page 434 Tuesday, August 9, 2005 8:58 AM Appendix 9.1 Gainsharing in Outsourcing Transactions: Overview 435 GAINSHARING AGREEMENT HOW IT WORKS ISSUES TO CONSIDER If certain milestones are achieved (e.g., rollout, achievement of requirements), the vendor receives an incentive payment. 9. The vendor receives a bonus if the customers [gross] [net] profits exceed a certain amount. Partnership approach The customer is often dissatisfied because there is no clear indication that the increased profits are directly linked to the business process services or improvements (as opposed to market or other business process improvements). Alternative to taking an equity interest and sharing in profits Arguably more relevant when the vendor is investing up- front resources in the customer The vendor is given an incentive to make the customer more efficient/more marketable. The vendor may become frustrated if the customer has unanticipated write-offs for the year that are not related to the business process. Provision typically applicable on an annual basis If profits are tied to annual report, financials may be subject to certain engineering. The parties will need to discuss appropriate caps or thresholds. 10. The vendor receives a bonus if the customer’s [gross] [net] revenues exceed a certain amount. (Similar to item 9) 11. The vendor receives options/ warrants in the customer in return for reduced fees. Typically implemented when the customer is in financial trouble 12. The customer receives options/warrants in the vendor as an incentive for entering into the outsourcing deal. Typically implemented in large transactions or when the customer has significant negotiating leverage 13. A party receives a seat on the board of directors of the other party. Halvey.book Page 435 Tuesday, August 9, 2005 8:58 AM 436 Ch. 9 Measuring Performance GAINSHARING AGREEMENT HOW IT WORKS ISSUES TO CONSIDER 14. The vendor has the right to use or market any newly developed methodology or technology with its other customers. The vendor either owns the methodology or technology with a nonexclusive, limited license granted to the customer or the customer owns the methodology or technology with a license granted back to the vendor. The vendor may provide a reduced development rate to the customer or commit additional resources/know-how to the development effort. 15. The parties agree to market methodology or technology to third parties and share in the revenues. Parties may enter into a co- marketing agreement, where both parties market new products and share in any generated revenues or may form a joint venture or new entity to market the methodology or technology (see items 16 and 17 below). 16. The parties form a joint venture or new entity to market methodologies, technology, or services to other companies in the customer’s industry. Formation of a joint venture or net entity Will the joint venture or new entity provide services back to the customer or will its sole purpose be to act as a vehicle to market methodologies, technology, or services to third parties? What resources or capital will each party contribute? How will equity or profits be allocated? 17. The parties form a joint venture/new entity to develop, implement, and market new methodologies/ technology/services. Formation of joint venture or new entity What resources or capital will each party contribute? How will equity or profits be allocated? Halvey.book Page 436 Tuesday, August 9, 2005 8:58 AM 437 APPENDIX 9.2 CHECKLIST OF ISSUES TO CONSIDER WHEN ESTABLISHING SERVICE LEVEL METHODOLOGIES 1 1. Defining Service Levels a. Define what service levels should be included in the Agreement. b. Include fixed service levels for those service levels which have his- torical data supporting the metrics or for those service levels to which the customer requires the vendor to commit as part of the vendor’s solution (there may be a ramp up period if the service level is significantly better than what the customer does today). c. Include a benchmarking provision for those services that do not have historical data. d. Determine which service levels are critical vs. noncritical—this determination may drive whether a service level failure triggers: • Service level credits • Expedited termination • Joint management rights • Step in rights • Rights to use alternate providers e. Use the right terminology—most customers want “commitments” not “targets” (though there may be instances where targets are appropriate). 2. Measuring Service Levels a. Define and document points of measurement (e.g., response time is measured from the time of receipt of a request to time that vendor actually speaks with a customer designee). b. Ensure that the tools/systems can capture the data that is necessary to measure the service level. 1. Note: This checklist is intended to illustrate the types of legal issues that customers may wish to con- sider in connection with contracting for application services. The items included in this checklist may not cover all of the issues that may arise in a particular transaction. Legal issues will likely vary de- pending on the type of service being provided and the scope of the services. This checklist or any part thereof should only be used after consultation with your legal counsel. Legal counsel should be consulted prior to entering into or negotiating any transaction covering the provision of application services. Halvey.book Page 437 Tuesday, August 9, 2005 8:58 AM 438 Ch. 9 Measuring Performance 3. Reporting on Service Levels a. Tools. • How will the service levels be measured—using customer or ven- dor tools? Are these tools in use today or will the tools need to be developed, purchased, or customized? • If customer tools will be used (e.g., to ensure that a standard prob- lem management tool is used), will it be necessary to purchase additional seats or use licenses? How will the costs for such licenses be allocated? • Are there any third party consents issues with respect to the use of any third party tools? • How will reports be generated? b. Measurement periods. • Daily • Weekly • Monthly •Quarterly • Annually c. Access to reports. • Real time • Electronic access 4. Adjusting Service Levels a. Include a mechanism for periodic reviews in the agreement? b. Will adjustments be unilateral or subject to mutual agreement? c. Are there any automatic adjustments to reflect guaranteed continu- ous improvement? 5. What Happens When There Is a Service Level Failure? a. Service level credits. • Consider whether a certain percentage of the fees should be put at risk each month for service level failures. How are the amounts at risk measured (e.g., for international deals, will the amounts be calculated locally, by region or globally)? How are the amounts at risk calculated (e.g., fees projected, fees invoiced or fees paid) • Will the service level methodology include weighting factors for the service levels (e.g., the customer has 300 percentage points to allocate amongst all service levels)? • Specify whether the credits are actually credits, fee reductions, or liquidated damages? Halvey.book Page 438 Tuesday, August 9, 2005 8:58 AM Appendix 9.2 Checklist of Issues to Consider 439 • Will service level credits be provided automatically or must the customer elect to take the credit? • Will the vendor have any opportunity to “earn back” the service level credit? • Will there be any grace periods prior to service levels applying? • Will service level credits apply during transition? b. Damages: The contract should specify whether the service level cred- its are an exclusive or nonexclusive remedy. If they are a nonexclusive remedy (which obviously is a more favorable position to the outsourc- ing customer), what other monetary remedies are available? c. Termination: The contract may allow for termination rights specific to service level failures that are in addition to the customary termination for breach rights. Such additional termination rights may include: • Expedited termination (e.g., if there is a failure to provide certain critical services, then the customer does not have to wait for the full cure period afforded other breaches). • Predefined termination rights, e.g.: C Termination for the failure to met xxx number of service levels in a specified period C Termination if the service level credit maximum is hit for one or more months d. Other remedies that may be available to the customer include: • Joint management rights • Customer step in rights • Right to go to an alternate provider e. Business continuity: The contract should specify what the vendor’s business continuity obligations are (e.g., disaster recovery—hot site/cold site) and when certain services should be triggered (e.g., at what point is a service failure a disaster?). 6. Examples of Excuses from Service Level Failures a. Force majeure (consider whether force majeure events should excuse service level failures, especially if the vendor has business continuity/back up/disaster recovery responsibilities). b. Problems with third party software (not managed by the vendor). c. Problems with third party hardware (not managed by the vendor). d. Problems with third party networks (not managed by the vendor). e. Customer actions (consider limiting to specific types of actions; e.g., failure to perform certain defined obligations). Halvey.book Page 439 Tuesday, August 9, 2005 8:58 AM 440 Ch. 9 Measuring Performance 7. Examples of Services Levels in IT Outsourcing Transactions a. System Availability b. Database Availability c. Network Availability d. System Response Time e. Application Response Time • Critical Applications • NonCritical Applications f. Call Center—Time to Answer g. Call Center—Number of Calls Put on Hold h. Call Center—Length of Automated Message i. Call Center—Number of Hang Ups j. Call Center—Average Time of Call k. Call Center—First Call Resolution l. Time to Respond • Severity Level 1 • Severity Level 2 • Severity Level 3 • Severity Level 4 m. Time to Resolve • Severity Level 1 • Severity Level 2 • Severity Level 3 • Severity Level 4 n. Percentage of Projects Completed On Time o. Customer Satisfaction p. Time to Implement/Integrate/Test Software q. Time to Implement/Integrate/Test Hardware r. Time to Install/Implement/Test Patch s. Asset Inventory Accuracy t. Fault Monitoring—Time to Detect and Respond u. Time to Move/Add/Change/Delete v. Time to Add/Change/Disable Passwords w. Batch Turnaround Time x. Batch Monitoring—Time to Respond to Job Failures y. Batch Scheduling—Time to Make Add/Change/Deletion z. Tape Storage—Time to Deliver aa. Data Restoration Time ab. Security—Time to Report Problem ac. Security—Time to Detect Virus ad. Security—Time to Install Virus Patch Halvey.book Page 440 Tuesday, August 9, 2005 8:58 AM 441 CHAPTER 10 TRANSFORMATIONAL OUTSOURCING 10.1 MOVING FROM A TO C 441 10.2 INTERNAL CONSIDERATIONS 443 10.3 PROJECT DEFINITION 445 10.4 MAINTAINING MULTIPLE ENVIRONMENTS 447 10.5 USING SUBCONTRACTORS 447 10.6 CONTRACT TERMS 449 (a) Project Definition 449 (b) Project Plan 449 (c) Customer Responsibilities 449 (d) Implementation Schedule 450 (e) Right to Reprioritize or Delay 450 (f) Change Orders 452 (g) Installation 452 (h) Risk of Loss 452 (i) Cutover/Parallel Environments 453 (j) Acceptance Testing 453 (k) Failure to Pass Acceptance Tests 454 (l) Incentives 454 (m) Staffing 456 (n) Project Management 456 (o) Progress Meetings and Reports 456 (p) Hardware and Software 457 (q) Software and Data Conversion 457 (r) Documentation 457 (s) Training 457 (t) Payment 458 (u) Warranties 458 (v) Indemnities 458 (w) Proprietary Rights 458 (x) Third-Party Licenses 459 (y) Right to Compete 459 (z) Marketing Arrangements 460 (aa) Additional Units 460 10.1 MOVING FROM A TO C Many customers view outsourcing as a means for implementing new technolo- gies or processes or standardizing existing technologies or processes of a type and at a rate that they would not be able to implement using their current IT resources without incurring significant up-front equipment, software, personnel, change management, and training costs. In most cases, if the customer trans- formed its IT environment on its own, the transformation typically would be implemented in three or more phases: A = Identify new systems or processes, continue to operate existing systems or processes B = Interim phase during which legacy systems or processes are operated in some locations and new systems or processes in other locations (may include refresh or upgrade of legacy technology before new technology is imple- mented; typically staff is trained in new technology at Step B and ramp up of staff and subcontractors is necessary) C = Full rollout of new technologies or processes Halvey.book Page 441 Tuesday, August 9, 2005 8:58 AM [...]... implementation and use of uniform policies and procedures at all sites Examples of procedures that should be standardized include procedures relating to management, operations, change control, training, reports, invoicing, and dispute resolution To the extent possible and practical, the vendor should be required, as part of the outsourcing arrangement, to develop procedures manuals for use by the customer and. .. specified in the Project Plan for the preceding month The customer shall pay to the vendor (a) percent of the deferred amount for a milestone if the milestone is achieved in days from the scheduled milestone date, (b) percent of the deferred amount if the milestone is achieved in days from the scheduled milestone date, (c) percent of the deferred amount if the milestone is achieved in... technologies/processes? Will ongoing IT costs be reduced as a result of implementing the new technologies/processes Will any non-IT costs be reduced? Is the cost of the new technology/ process, warranted by the business benefit achieved? • Worst-case scenario What is the worst thing that can happen during implementation? What is the most the project could cost? How can the worst case/costs be minimized? How... Implementation Schedule is extended as a result of delays materially caused by the vendor or subcontractors or agents of the vendor, (i) the customer shall pay the Base Fees subject to the customer’s deferral rights and (ii) the vendor shall be responsible for the customer’s direct costs that would have otherwise been reduced or eliminated if the migration had occurred as scheduled (4) In the event customer and. .. technologie or processes and experienced in implementing comparable systems or processes, thereby allowing for a quicker implementation of the target technology or processes and reducing ramp-up and training costs Common scenarios in which customers look to the outsourcing vendor to provide transformational services include (1) the implementation of new, stateof-the-art front-end technologies or processes,... customer and the vendor need to consider several ownership issues, including the following: (w) PROPRIETARY RIGHTS 10.6 Contract Terms • • • • 459 Will the equipment be leased to or owned by the customer? Will the software/processes be licensed or owned by the customer? Will the documentation be licensed or owned by the customer? Will improvements, modifications, enhancements be licensed or owned by... operations in the United States This list is by no means exhaustive.) Often the international outsourcing transaction is part of the customer’s global initiative to consolidate geographically dispersed and distinct IT organizations and resources throughout its company or organization, to standardize systems and processes and information output across the company or organization and, in most instances,... 37 38 39 40 463 BT IBM BT CSC LogicaCMG EDS HP EDS EDS Accenture IBM Cognizant Tata CSC Getronics IBM EDS EDS EDS IBM Cap Gemini CSC Cap Gemini CGI CSC IBM CSC CSC CSC (Alliance) CSC Keane Unisys HP CSC CSC EDS (Consortium) CSC Fujitsu Australia Fujitsu CSC Abbey (Grupo Santander) Allianz Life Korea Allied Irish Bank Anglian Water (UK) Aon UK Australian Taxation Office Bank of India Bank of Queensland... its competitive edge The customer is looking to the vendor to provide actual handheld equipment pieces and new registers as well as installation, implementation, field support and maintenance Example 2 An outsourcing customer wishes to replace outdated mainframe systems with server-based technology The customer wants the vendor to maintain the existing technology and implement the new technology with... customer? Ownership and right-to-use issues relating to software, processes, and documentation are often contentious The customer ideally would want to own or have unlimited rights to use the software, processes, and documentation The vendor, however, may try to limit the customer’s use (and re-use) or obtain a license back to certain software, processes, and documentation The parties will need to determine . technol- ogies/processes? Will ongoing IT costs be reduced as a result of imple- menting the new technologies/processes. Will any non-IT costs be reduced? Is the cost of the new technology/ process, warranted. different or new staffing needs? Will any functions be reduced or eliminated? Will personnel need to be reorganized? Will tasks need to be reprioritized or restructured? Will the existing management. include refresh or upgrade of legacy technology before new technology is imple- mented; typically staff is trained in new technology at Step B and ramp up of staff and subcontractors is necessary) C