A Cloudy Outlook for Outsourcing Service Levels?

October 5, 2010

This was an interesting and engaging seminar for many reasons, but perhaps the most thought-provoking was the shadow that the uncertainties that of cloud computing is casting over the current wisdom of outsourcing deals. This was brusquely acknowledged by Alistair Maughan who, in response to a question from the floor, stated that you could ignore all he had said over the previous 40 minutes if everyone goes to the cloud. A very harsh and unfair judgment on his own contribution but a sobering reminder of the rapid development of IT services – and of the challenges that legal expertise faces keeping up with the pace. 

But all the speakers agreed that there is still much uncertainty on how outsourcing in the cloud will develop, so this half-day seminar sensibly concentrated on the day-to-day practicalities of negotiating outsourcing deals now. Along the way many practical insights were dispensed by the team of experienced speakers, adroitly marshalled by the Chair, Mark Taylor of the hosts Hogan Lovells. 

Christian Bartsch of Bird & Bird kicked off where all outsourcing projects should: due diligence, one of the most frequently cited reasons for the failure of outsourcing projects. He was keen to emphasise the role that lawyers can play in this process as they can bring a wider view and some ‘light’ to the process. While they should not lead the process they ‘should be in the room’. He also noted dolefully that the financial viability of the supplier is now a more important part of the due diligence process, which was not the case a couple of years ago. 

Joel Harrison of Milbank Tweed Hadley & McCloy then provided a thorough, lively, overview of how best to draft the service schedules. In his view, the contract is only as good as the service schedules and that is a good reason why lawyers should be involved at this stage, even though some feel it should be left to the consultants and technical team. An underlying theme of his talk was the judgement required to decide whether to set out the ‘what’ or the ‘how’ in a schedule: for example should it specify the specific server to be used or just that a server will do the job. Although there was no definitive answer on the issue, he was clear that the schedule should reflect the business objectives as closely as possible as, in the event of project failure, there may be a greater likelihood of protecting the customer’s consequential losses. He also provided many useful drafting tips, such as use mandatory language so that something will do something rather than be designed to do something, avoid joint responsibilities as the supplier will usually leave it to the customer and make sure that customer responsibilities are as explicit as those of the suppliers. 

Alistair Maughan of Morrison and Foerster then ran through 10 things you need to know about service levels. Throughout his talk he was keen to point out that every service level has a price, so customers should be realistic about what levels they need and they should not seek to measure everything that can be measured as that will only add to the costs. The service levels should also align with the key operations of the customer. He cited the example of the HMRC web site that went down on 31 January, the most important day of the year for self-assessment returns.; although the site was down when most needed, the supplier had still performed within the agreed service levels so the lesson is that such factors should be considered at the service level stage. He also noted that if you tell a customer that a monthly 99% up-time service level equates to 7 hours 13 minutes of down-time every month their attitude changes. More stridently, he is of the view that service credits are most definitely not compensation but merely a reduced payment for a defective service. It is too difficult to consider issues of loss in SLAs so those should be dealt with in the normal way. 

So finally we came to the crunch question, what should all of these service levels cost? The final speaker, Richard Hawtin of Baker & McKenzie, ran through some of the issues that arise in costs schedules and also provided an understanding of the realities of outsourcing contracts. Outsourcing can be an excellent way of building in micro-flexibility to the customer’s costs: if you require fewer seats to answer calls, you will be charged less. But at the macro level the customer is locked in to a contract and can only ask for a reduction in costs if it needs to slash budgets by 30%. Richard also highlighted the bald financial fact that suppliers price contracts to make their profits as the project progresses, something that customers often forget when they try to re-negotiate. Interestingly, Richard compared the costs of outsourcing to insurance. By building in flexibility at the micro level the customer is effectively insuring against the financial risks of doing the task in-house. Understanding what those risks are and how they are insured in the costs structure is the key to a successful deal. 

A final panel session elicited some further illuminating ‘war stories’, but it was strictly off the record!     

David Chaplin is an SCL member and director of Bath Publishing, online law publishers.