In any outsourcing relationship, there are two especially critical times: when the services are transitioned to the provider (take-off) and when the relationship is terminated (landing). As counsel for a company outsourcing services, your objective should be to negotiate an agreement that facilitates both a seamless take-off and landing, in order to minimize business and service disruption at both points. Meeting these objectives will minimize repeat investment, recognize stranded investment and maximize your company's ability to successfully run its business. This article will address the key issues associated with the take-off of an outsourcing relationship.
A seamless take-off
A seamless transition to an outsourcing provider should include:
A detailed transition plan
The parties should develop a plan that addresses as many of the issues that could potentially arise during the transition as possible. Essential items to include are descriptions of the transition activities to be performed by the provider and, if applicable, by the company, and the significant components of each activity. It is also important to identify the transition deliverables promised by the provider, along with a week-by-week schedule of transition milestones, or when to complete these deliverables. In addition, the plan should spell out any deliverable credits—associated credits that the provider will owe the company if it fails to meet the transition milestones. In order to establish a metric to assess whether the transition has been successfully completed, the parties should also agree on procedures that the provider must adhere to when providing the transition services.
A dragnet clause
Although a transition plan is designed to describe all of the services to be provided, there may be additional tasks, functions, or responsibilities that it doesn’t specifically describe, but that are an inherent, necessary or customary part of the transition required for the proper performance of the described services. To ensure that the provider does not seek extra compensation for the performance of these additional tasks, the outsourcing agreement should include a "dragnet" clause that pulls these tasks into the scope of the defined term "services." Additionally, the agreement should clearly state that the provider’s obligation to perform the transition is primary; the company should not be obligated to perform any tasks, nor should it be obligated to cover any charges, fees or expenses in connection with the transition services other than those specified in the agreement.
Transition milestones ensure that the transition stays on schedule. If the provider fails to meet any of the milestones, it should provide deliverable credits to the company. These credits may be structured as a fixed amount or as a percentage of the transition charges. However, deliverable credits should not be the exclusive remedy for failing to meet transition milestones. If the company terminates the agreement for the provider’s failure to meet a transition milestone, then the company should be able to recover not just the deliverable credit, but also the actual damages it incurred in connection with the provider’s delay and the termination.
Reporting and meetings
Even if the transition plan is perfectly structured, effective communication between the parties is critical to ensure that the transition goes smoothly. A good way to promote open communication is to have weekly status reports and/or meetings with the provider. These communications should include an active obligation on the part of the provider to identify any potential delays in meeting the timetable and deliverables of the transition plan, along with proposals for how to remedy or mitigate any delays.
Rights to terminate for cause
In spite of a well-defined transition plan with clearly planned milestones and deadlines, a provider may still fail to comply with its obligations to provide transition services. If a failure seems likely to or actually causes a material disruption, or has a material adverse impact on the company’s operations or business, there should be a short cure period for the provider, after which the customer may terminate the agreement. If the provider ultimately fails to meet the transition milestone to complete the transition of all services to the company within an extended period of time (e.g. 180 days), the company should have an express right to terminate the relationship.
Meaningful transition charges
Even after determining the nuts-and-bolts issues for the transition plan, the parties should also establish meaningful incentives that will serve as a carrot-and-stick system to ensure that the provider is rewarded for timely completion of its responsibilities. Regardless of how they are structured, these payments should be tied to the achievement of the transition milestones, and subject to deliverable credits for the provider’s failure to meet critical transition milestones.
Additionally, to continue incentivizing the provider to complete the transition on time, the transaction may include a right for the provider to earn back any charges lost when it misses an interim transition milestone if it meets the final transition milestone on time. Conversely, the company can hold back a larger proportion of the total transition charges pending achievement of the final transition milestone. If the transition charges are spread out over the term of the transition, both parties should consider any accounting issues that this may create. Finally, if the provider exceeds expectations, and completes the transition early, the agreement can include a bonus in order to further encourage the provider’s future efficiency.
Every take-off has a landing
Once the parties have come to terms on a transition plan that ensures a seamless start, they are well on their way to creating a relationship that promises to be mutually beneficial for everyone involved. However, just as every beginning must have an end, so, too, must the parties prepare for what happens when the relationship reaches its end or goes south. This is where the exit issues are, and these will be discussed in part two of this series.