Outsourcing with success

Outsourcing can be a powerful tool for improving performance, achieving efficiencies, and driving business change within an organisation. However, arrangements should always be carefully considered as many outsourcing deals require significant upfront investment from the customer including the costs of transition and transformation.  Our case study below outlines some of the key elements involved in a typical outsourcing arrangement.

Scenario

We dealt with the outsourcing of a business critical function (value £15M over 5 years) for our client over a number of years. It was the largest and most important outsourcing that our client had ever undertaken as it was for the provision of services that our client’s prospective customers would typically experience first. It was initially outsourced in early 2000. After that there were a couple of renegotiations with the existing supplier and then a couple of transitions to other suppliers (second and third generation outsourcings) as the result of periodic tenders.

Task / Solution

At each new tender we:

1. were an integral part of our client’s project team; and
2. managed the legal aspects of the outsourcing

with the objective of ensuring that the outsourcing contract contained the necessary mechanisms to protect our client and also appropriately incentivise the counterparty to perform (and thereby help our client achieve its business goals).

Action / approach / issues / challenges

The comments below are taken from the perspective of the second and third generation outsourcing of the service provision.

Life cycle:

1. Analyse requirements – our client’s project team would carry out a business analysis of what it was seeking to outsource; why it was outsourcing; what it saw as the value; and how it would measure that value. Early engagement with key stakeholders – input, alignment and buy in – was needed, at this stage, from various stakeholders.
2. Scope project – our early involvement was needed, at this stage, for the following issues:
   • Commercial considerations – this included:
     • identifying the commercial risks that needed to be managed (e.g. the impact on the customer service if things went wrong);
     • an assessment of how the chosen supplier might be incentivised to ensure such risks were well managed (e.g. step-in rights, service credits, liquidated damages, part termination rights);
     • establishing the current cost of utilising the service in its current form and likely future costs to establish a baseline for charging;
     • an assessment of what contractual tools (be it service credits or step-in rights) might be required to ensure the technical requirements were met – these acted as incentives but also as deterrents.
   • Technical considerations – analysing technical constraints; assessing customer skills needed to manage service provision; what third party agreements were needed to support project; and how to define service levels.
   • Employment law and HR considerations – assessing the impact of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE Regs); employment costs; and management of employee expectations.
   • Privacy and DP – cloud issues – needed to consider these early as, although manageable, data protection compliance requirements could impact both the technical and commercial aspects of the deal by making it more complex and/or expensive. This stage included the need for due diligence on processors, sub-processors and cloud storage.
   • Deal structure – this was based on a typical outsourcing and structured as a contract between the customer (our client) and the chosen supplier with the supplier agreeing to manage the transfer of services and the delivery of those services to our client.
3. Procurement process – having worked through our client’s requirements, it was then a question of undertaking the formal process of procuring a deal. We and the project team collaborated to draft the tender and request for proposal (RFP). We drafted the outsourcing agreement which included the terms and conditions and schedules (the latter was drafted based on the RFP). The approach taken, for the bidder due diligence, was to keep two bidders involved throughout the process. Part of this process involved the bidders signing up to our client’s confidentiality agreements (NDAs).
4. Selection and contract – we were involved in:
   • reviewing the responses and carrying out the due diligence on the legal aspects;
   • helping choose the preferred bidder; and
   • negotiating and finalising the contract (including the commercial and technical schedules) with the preferred bidder.

The contract terms we drafted formed an important baseline to establish and maintain a strong business relationship between our client and the outsourcing provider. We ensured that the contract would have the relationship at its heart, through a strong governance structure. We also ensured that the contract rewarded good performance where there was a tangible upside for our client’s business.

5. Delivery and contract management
6. Contract end/renewal – the analysis described above would typically start 12-18 months before the expiry of the contract.

Result / resolution / outcome

The outsourcing contract was well-structured and managed with a dedicated project management team, which we were an integral part of. It consistently delivered very good value for both our client and the supplier who was sufficiently incentivised in the contract towards good performance.