information technology outsourcing transactions process strategies and contracts 2nd ed phần 10 pptx

562 Ch. 14 Post-Negotiation Activities • Determine how many copies of the documentation will be signed and make sure that number is ready and available at signing. • If the parties have a formal signing with all parties present, confirm who should be invited to signing and ensure invitations are made. • Prepare, gain approval of, and implement internal notification/ announcement plan. This should include general announcement, man- agement announcements, and affected employee announcements. The affected employee announcements may be phased (general and individ- ual) to ensure that timing is coordinated. • Determine whether a press release will be issued. Prepare content and obtain approval. Determine when and how press release will be made. Determine whether press will be invited to signing. • Determine how communications will be made to the customer’s third- party vendors affected by the outsourcing transaction. Determine a schedule for distributing consent letters to third parties from whom con- sent is necessary to allow the outsourcing vendor access to third-party assets or to manage third-party contracts (if applicable). 14.2 THE PRESS RELEASE In many instances, particularly with respect to large outsourcing transactions, the parties agree to issue a press release outlining the major objectives and high- lights of the transaction. In other transactions, the parties choose not to alert the press. This typically applies with respect to smaller transactions or in situations where the customer does not wish to draw attention to the transaction or is con- cerned that the outsourcing, coupled with other corporate events, will be viewed negatively by the press. If the parties agree to issue a press release, one of the parties will need to take control of the drafting. Bigger companies or organizations will rum the task over to their public relations departments. Both parties will need to review and approve the content and form of the release, as well as to whom the release will be issued and the mechanics of the release. The framework for a brief press release is set forth in Exhibit 14.1. In addition to issuing a press release, the parties will need to consider how inquiries from the press and outside parties will be handled. Typically, each party prepares procedures that should be followed by all employees and subcon- tractors receiving inquiries from the press. These procedures should be dissemi- nated in an employee newsletter or bulletin so that employees and subcontractors are put on notice. In most cases, inquiries must be directed to a particular manager or to the public relations department who will then have (to the extent possible) prepared preapproved responses to inquiries. Halvey.book Page 562 Tuesday, August 9, 2005 8:58 AM 14.3 The Autopsy 563 14.3 THE AUTOPSY Depending on the availability of the outsourcing team, a useful exercise is to perform an autopsy of the RFP, proposal, and negotiation process to determine whether the team achieved its objectives and to identify the strengths and weak- nesses of the team’s positions and tactics. If the team elects to do an autopsy, it should prepare an outline of the objectives of the autopsy and what areas will be reviewed. (This process also allows the team to vent its frustrations and share its positive experiences—often a healthy idea for a bunch of people who have been working around the clock in a closed area for many months.) The first step in performing the autopsy is to retrieve the initial objectives pre- pared by management and the outsourcing team. The team should review the objectives one by one and analyze whether each objective was achieved. For example, in the area of cost reduction, what are the overall projected savings? The analysis should take into account the customer’s retained responsibilities (financial and administrative) as well as value-added services that the customer would not have been able to perform with its own resources. Other areas that the team may wish to consider in the autopsy include the following: • Dissect each part of the process—the RFP, the proposal, proposal evalu- ation, vendor selection, employee communications, and negotiations. What were the high points? What was done well? What could have been done better? How? • Look at the different components of the deal—the legal provisions, the description of services, transformational services, service levels, project management, staffing, pricing. Contact: FOR IMMEDIATE RELEASE. CUSTOMER CHOOSES VENDOR TO MANAGE COMPUTER OPERATIONS [ADDRESS; DATE] – Customer chose Vendor, a [ ] company, to provide [ ] services in a $_____ outsourcing agreement. The outsourcing agreement will cover Customer's operations in [ ]. [DESCRIBE CUSTOMER’S BUSINESS AND BUSINESS OBJECTIVES IN OUTSOURCING] [QUOTE FROM CUSTOMERIVENDORI _____ of [Customer] [Vendor] who is [ ] noted that [ ]. The Vendor agreement covers [ ] technologies. [DESCRIBE HIGHLIGHTS OF DEAL]. E XHIBIT 14.1 FRAMEWORK FOR PRESS RELEASE Halvey.book Page 563 Tuesday, August 9, 2005 8:58 AM 564 Ch. 14 Post-Negotiation Activities • Look at the organization of the outsourcing team. Was it the right group of people? Should other areas have been involved? • Look at the performance of the different parts of the outsourcing team— management, team leaders, technical, financial, human resources, risk assessment, audit, public relations, consultants, legal. 14.4 RISK ANALYSIS Another useful task that can be done immediately before or after contract sign- ing is to analyze the potential risks of the transaction and how the contract han- dles such risks. Often the general counsel’s office, senior management, or the board will ask for such an analysis usually followed by a recommendation as to whether the benefits outweigh the risks. An example of a risk analysis is pro- vided in Exhibit 14.2. The terms in the risk analysis are for illustrative purposes only and would need to be modified to reflect the particular transaction. INFORMATION TECHNOLOGY SERVICES AGREEMENT BETWEEN _____ AND _____ A. RISK ASSESSMENT 1. RISK: SERVICE FAILURES. CONTRACT PROVISIONS FOR REDUCING RISK: a. Service level requirements (with associated liquidated damages in the event of a failure to meet such service level requirements and the right to terminate if the liquidated damages exceed certain amounts) b. Critical milestone requirements for the data center migrations/project imple- mentations c. Root cause analysis in the event of a failure to meet service levels 2. RISK: LOSS OF CONTROL OVER IT OPERATIONS. CONTRACT PROVISIONS FOR REDUCING RISK: a. Flexibility to use third party package software rather than developed software b. Approval rights over: C any material changes to the services and the systems C new service locations C project executive and certain key employees c. Benchmarking d. Customer satisfaction survey e. Audit rights of services and charges 3. RISK: ABILITY TO INSOURCE OR CONTRACT WITH A THIRD PARTY FOR SERVICES CONTRACT PROVISIONS FOR REDUCING RISK: a. Right to contract with third parties b. Termination assistance c. Rights to use software and hardware upon termination E XHIBIT 14.2 RISK ASSESSMENT Halvey.book Page 564 Tuesday, August 9, 2005 8:58 AM 14.4 Risk Analysis 565 4. RISK: CHANGES IN CUSTOMER BUSINESS/REGULATORY REQUIREMENTS CONTRACT PROVISIONS FOR REDUCING RISK: a. Right to increase/decrease services b. Right to add/delete business units c. Renegotiation rights if change in usage above/below certain percentages d. Parties’ responsibilities for changes in laws/regulations 5. RISK: INFLEXIBLE PRICING CONTRACT PROVISIONS FOR REDUCING RISK: a. Right to use discretionary resources for additional work/new projects b. Adjustments of baselines/fees to reflect increases/decreases in services c. Sharing in savings resulting from new technology d. Technology indexing 6. RISK: ABILITY TO TERMINATE CONTRACT CONTRACT PROVISIONS FOR REDUCING RISK: a. Convenience in whole or in part b. Change in control c. Cause d. Failure to provide critical services e. Insolvency 7. RISK: POTENTIAL LIABILITY CONTRACT PROVISIONS FOR REDUCING RISK: a. Indemnities b. Deferral rights/Liquidated damages for failures to meet critical milestones/ service levels c. Direct damages up to ______ (except for______ ) d. Consequential damages for ______ e. Insurance B. AREAS OF SIGNIFICANT EXPOSURE 1. Conditions Precedent/Changes in Circumstances a. Provision of the services b. Effect on rollout of new systems c. Effect on human resources d. Additional costs 2. Customer Readiness for Rollout of New Systems 3. Vendor as exclusive provider of ______ services 4. Consents 5. Human Resource Issues a. Transition b. Severance c. Litigation exposure 6. Cost of Living Adjustments 7. Taxes 8. Limitation of Liability E XHIBIT 14.2 (CONTINUED)RISK ASSESSMENT Halvey.book Page 565 Tuesday, August 9, 2005 8:58 AM 566 Ch. 14 Post-Negotiation Activities 14.5 CONTRACT ADMINISTRATION Once the contract is executed and the vendor is commencing work, the cus- tomer’s most important task (in addition to managing the impact of the change) is administering the contract. A great contract is of little help to the customer if it is not administered effectively. Depending on the size and scope of the transac- tion, the customer may want to appoint an individual or team responsible for contract administration, including following up on any to-be-determined items in the schedules to the contract, tracking customer and vendor tasks that are to be performed taking deliverables, managing customer use of vendor resources, and auditing invoices. The contract administrator(s) may be part of the customer’s team responsible for strategic IT decisions and issuing approvals or a separate administrative team. A thorough understanding of the contract is the key to suc- cessful contract administration. If possible, the contract administrators) should be involved in contract negotiations. As a starting point, the contract administrator(s) may wish to prepare several documents that have proven to be helpful in the understanding and management of the contract: • The executive summary. A summary of the key contract provisions. This document can serve as a big picture checklist for the contract adminis- trators and as a useful tool when briefing senior management on the terms of the contract as well as the status of key items. • Tracking the to-be-determined (TBD) list. A list of items in the contract that were not agreed upon at contract signing because of insufficient information. Examples of such items include service levels for which there was no historical data, project definition, deliverables, and mile- stones for projects that were only in the conceptual stage as of contract signing. This list will need to be revised and updated regularly. • Tracking the deliverables. A list of items to be provided by the vendor during the term of the contract. Examples include project deliverables, new equipment (including pursuant to refreshes) inventory lists and reports. This list will need to be revised and updated regularly. 14.6 IMPLEMENTING THE TRANSITION PLAN The first of the vendor’s tasks will be to manage the transition of responsibility for the systems and facilities being outsourced from the customer to the vendor, as well as to manage the transfer of employees from the customer to the vendor. In some instances, particularly in data center transactions, the transition plan will include the migration of systems from a customer to vendor site. If the vendor will continue to operate the customer’s systems at a customer site for a period before migration to a vendor site, the migration plan may be provided in a sepa- rate document with separate completion dates. The time frame for implementing Halvey.book Page 566 Tuesday, August 9, 2005 8:58 AM 14.7 Notifying Third Parties 567 the transition plan is typically from 30 to 180 days, with the employee transition portion taking from 0 to 60 days depending on the transaction. 14.7 NOTIFYING THIRD PARTIES An action item that is often part of the transition plan is the notification of third parties of the transaction. The third parties to be notified should have been iden- tified during due diligence and contract negotiations. Relevant third parties typi- cally include the following: • Third-party vendors. If the vendor requires access to certain customer software/equipment or certain software/equipment contracts are being transferred to the vendor, are consent letters to the relevant third-party vendors being sent out? If not, should certain vendors at a minimum be notified of the transaction (particularly those whose invoices will now be paid by the vendor)? Have any addresses for the purposes of invoic- ing and sending notices changed? Have contact names changed? Are any third-party vendors being terminated? Are any third-party vendors’ duties changing? If so, the customer should consider which vendors should be notified and how the notifications should be sent out. • Government/regulatory authorities. Should any government, regulatory, or taxing authorities be notified? For example, it is typical in an out- sourcing transaction involving a financial institution that the financial institution notify (and possibly obtain the consent of) certain regulatory authorities. (The financial institution should assess the timing of this notice, which in some instances must be made before the vendor begins providing outsourcing services.) • Stockholders. The customer (and the vendor) should consider whether it needs to notify its stockholders of the transaction (or at least include it in securities reports). The customer (and the vendor) should also consider whether any special securities filings are necessary as a result of the transaction. This is particularly applicable in large transactions and transactions with large asset pieces. Halvey.book Page 567 Tuesday, August 9, 2005 8:58 AM Halvey.book Page 568 Tuesday, August 9, 2005 8:58 AM 569 CHAPTER 15 RENEGOTIATION AND TERMINATION 15.1 OVERVIEW 569 15.2 RENEGOTIATION/TERMINATION PROCESS 571 15.3 WHAT DOES THE CONTRACT SAY? 571 (a) Term of Agreement 573 (b) Right to Renegotiate/Terminate 573 (i) Renegotiation 573 (ii) Termination 573 (c) Termination Fees 573 (d) Data 573 (e) Intellectual Property 574 (f) Equipment/Facilities 574 (g) Third-Party Service Contracts 575 (h) Service Levels 575 (i) Customer Satisfaction 575 (j) Deliverables or Milestones 575 (k) Fees 576 (l) Benchmarking 576 (m) Gainsharing 577 (n) Damages 577 (o) Confidential Information 577 (p) Dispute Resolution 577 (q) Continued Performance 577 (r) Termination or Transition Assistance 578 (s) Rights to Resource/Insource 578 (t) Assignment 578 (u) Employee Issues 578 (v) Strategic Alliance or Joint Venture 579 (w) Ancillary Agreements 579 15.4 ADDITIONAL ISSUES TO CONSIDER 579 (a) Internal Politics 579 (b) Publicity 580 (c) Termination/Transition Costs 580 (d) Transition Time Frame 580 (e) Assessing In-House Capabilities 580 (f) Other Service Providers 580 15.5 TERMINATION PLAN 580 15.1 OVERVIEW The contract is signed, operations are being or have been transferred to the out- sourcing vendor, and, in many cases, employees have been transitioned and/or assets have been sold or disposed of—the customer essentially has handed over to the outsourcing vendor ownership of the infrastructure used to manage the in- scope IT on a day-to-day basis. Then something unanticipated happens. There is an organizational change or a real or perceived performance problem. The cus- tomer feels vulnerable and the vendor feels overburdened, causing both parties to become at least a little defensive. Although this is an unpleasant and dreaded sce- nario (and one that neither party wants to think about during the precontract court- ship phase), it is a common one. A surprisingly high percentage of outsourcing contracts are renegotiated during the first few years of the term. Although fewer contracts are actually terminated (at least in their entirety), it is not unheard of for outsourcing contracts to be terminated for convenience or for breach. Although there are no prescribed reasons that drive a party’s desire to renego- tiate, we have attempted to highlight in Exhibit 15.1 some of the more common Halvey.book Page 569 Tuesday, August 9, 2005 8:58 AM 570 Ch. 15 Renegotiation and Termination reasons for renegotiating the IT outsourcing arrangement from both the cus- tomer’s and the vendor’s perspective. Termination is a more draconian consequence than renegotiation in the event of an organizational change or dissatisfaction with the IT outsourcing arrangement, but many of the reasons underlying a party’s desire to terminate the IT outsourcing contract are the same as the reasons for renegotiating high- lighted in Exhibit 15.1. In fact, termination is often viewed as the next step if CUSTOMER REASONS FOR RENEGOTIATING • Unrealized cost savings • Unanticipated charges • Excessive pricing (real or perceived) • Change in management (with new management having different objectives) • Unsatisfactory performance (real or perceived) • Inadequate service levels • Change in organizational structure • Acquisition, merger, or divestiture • Increased or reduced volumes • New projects (not reflected in contract) • Implementation of new environment (not reflected in contract) • Delay or cancellation of rolLiout of new environment • Desire to bring certain services in-house • Change in scope or project definition • Change in strategic or infrastructure direction • Desire to restructure relationship • Contract expiration VENDOR REASONS FOR RENEGOTIATING • Unanticipated costs • Unrealized profit • Need for additional resources • Unsatisfactory input from the customer • Acquisition, merger~or divestiture • Increased or reduced volumes • Desire to increase or decrease scope • New projects (not reflected in contract) • Implementation of new environment (not reflected in contract) • Delay or cancellation of rollt~ut of new environment • Change in scope or project cr'efinition • Desire to restructure relationship • Means to avoid termination • Desire to increase length of term E XHIBIT 15.1 REASONS FOR RENEGOTIATING Halvey.book Page 570 Tuesday, August 9, 2005 8:58 AM 15.3 What Does the Contract Say? 571 renegotiation is not a successful or viable option. A common, often effective strategy is for the customer or the vendor to head down the path to termina- tion, when the party’s real objective is to bring the other party to the table to renegotiate. (This strategy, however, is typically effective only if there are sub- stantive reasons for termination.) Some of the more common reasons that both the customer and the vendor seek to terminate the IT outsourcing contract are set forth in Exhibit 15.2. 15.2 RENEGOTIATION/TERMINATION PROCESS Once a party has decided to consider renegotiating or terminating the outsourc- ing contract, the next step is to outline the renegotiation or termination process. As was the case when negotiating the contract that is now the subject of renego- tiation or termination, the party’s objectives underlying renegotiation or termi- nation largely drive the process. For example, if a customer’s primary objective in renegotiating is to obtain better pricing, the process will be different than if it is renegotiating to adjust the contract to reflect a change in scope. Some of the action items that each of the parties should consider as part of any renegotiation or termination are provided in Exhibit 15.3. 15.3 WHAT DOES THE CONTRACT SAY? When renegotiating or terminating a IT outsourcing contract, the precise lan- guage of the contract, which was once considered the dalliance of lawyers, is now extremely important. Seemingly innocuous provisions are being closely CUSTOMER REASONS FOR SEEKING TERMINATION • Excessive pricing (real or perceived) • Unsatisfactory performance (real or perceived) • Change in organization structure • Acquisition, merger, or divestiture • Implementation of new environment • Failure to roll out new environment • Poor customer or vendor relations • Change in scope or project definition • Change in strategic or infrastructure direction • Means to initiate renegotiation VENDOR REASONS FOR SEEKING TERMINATION • Unanticipated costs • Acquisition, merger, or divestiture • Nonpayment by the customer E XHIBIT 15.2 REASONS FOR SEEKING TERMINATION Halvey.book Page 571 Tuesday, August 9, 2005 8:58 AM [...]... not successfully implemented, not implemented on time, delayed, or cancelled The parties will need to review the IT outsourcing contract to determine each party’s obligations with respect to the 576 Ch 15 Renegotiation and Termination project and the impact on the IT outsourcing contract if the project was not implemented as designed or on schedule or was delayed or cancelled As is frequently the case... Providing copies of all customer-owned and -licensed methodologies or technology (for software: object and source code) • Providing access to vendor methodologies or technology and copies of all vendor methodologies or technology to be licensed to the customer or the customer’s designee • Providing access to vendor tools and copies of all vendor tools to be licensed to the customer or the customer’s... consultation • Providing copies of all customer owned and licensed methodologies /technology (for software: object and source code) • Providing access to vendor technology and copies of all vendor methodologies /technology to be licensed to customer or customer’s designee • Providing access to vendor tools and copies of all vendor tools to be licensed to customer or customer’s designee • Providing documentation... Procedures C Work product C Third-party agreements (e.g., licenses, leases, service contracts, tariff agreements) • Identifying which party owns which assets and how ownership was determined (i.e., under which contract provision) • Identifying whether assets are used in a dedicated or shared environment • Identifying where assets are being used • Identifying which customer entity the asset is being used... parties will need access to confidential information What does the contract say regarding disclosing information to consultants, lawyers, and so on? In addition, if there is a termination, the parties should determine their obligations regarding proprietary data and confidential information upon termination (o) CONFIDENTIAL INFORMATION Most renegotiations and terminations are preceded by a dispute... levels/stay competitive • Changes in technology: C More efficient hardware/software C New developments in industry-specific applications • Need for significantly more/fewer resources than contemplated by outsourcing contract: C C b Need to adjust baselines Additional/reduced resource charges not in-line with market Not Publicly Announced • Poor performance by Vendor (real or perceived): C Service outages C Failure... fee may be according to: • A fixed amount (agreed upon during contract negotiations) • A fixed formula (agreed upon during contract negotiations) 596 Ch 15 Renegotiation and Termination • General statement basing the termination fee on expenditures incurred by vendor and amortized over the contract term (e.g., upfront costs for equipment /technology) • Fixed amount plus wind down costs (e.g., costs of... include: • Continued provision of certain services for a period of time • Continued processing • Parallel processing • Testing • User acceptance • Provision of back-up tapes • Provision of operating documentation • Freezing of all methodology /technology changes • List of procedures to be followed during transition • Review of all systems libraries • Analysis of space required for databases and systems libraries... resolved and escalates What are the dispute procedures in the contract? Must dispute claims be made in writing and referred to certain individuals? Is there an escalation track? Can action be taken without going to the management committee or senior management? Has proper notice been given? Must disputes be arbitrated or litigated? (p) DISPUTE RESOLUTION The parties will need to review the IT outsourcing. .. right to request liquidated damages? • Did any third parties not perform that have impacted project implementation? If so, which party bore the risk of third-party nonperformance? • If a party delayed or cancelled a project, how was the contract impacted? Is there an adjustment or renegotiation mechanism? • Have the fees associated with the project been segregated or bundled into one base fee? (k) . 15 Renegotiation and Termination project and the impact on the IT outsourcing contract if the project was not implemented as designed or on schedule or was delayed or cancelled. As is fre- quently. customer-owned and -licensed methodologies or technology (for software: object and source code) • Providing access to vendor methodologies or technology and copies of all vendor methodologies or technology. proprietary data and confidential information upon termination. (p) DISPUTE RESOLUTION. Most renegotiations and terminations are pre- ceded by a dispute that is not resolved and escalates. What