SCL Meeting Report: The Outsourcing Lifecycle

July 17, 2012

The meeting was introduced by Clive Seddon, Pinsent Masons head of TMT, and chaired by Bristows partner Toby Crick. It comprised presentations covering key aspects of the lifecycle of major sourcing projects.  The panel of speakers discussed themes and changing practices in the ICT sourcing market, and wrapped up with a panel question and answer session.

The topics and speakers were:

·       ‘Determining the Drivers for Outsourcing’ – Andrew Walker, ISG

·       ‘Procurement Process and the Negotiation Dynamic’ – Anthony Day, DLA Piper UK LLP

·       ‘Charging and Pricing Provisions’ – Alistair Maughan, Morrison & Foerster LLP

·       ‘Services and Service Levels’ – Andrew Joint, Kemp Little LLP

·       ‘Exit, Termination and Transition’ – Iain Monaghan, Pinsent Masons LLP

·       ‘What Happens if It All Goes Wrong’ – Duncan McCall QC, 4 Pump Court

Andrew Walker discussed market activity and trends, and the drivers for outsourcing. ISG (formerly TPI) observed a busy global IT outsourcing market in 2011 but noted a decline in transaction value in 1Q12.  While the market and the nature of services delivered has changed, the drivers for outsourcing have remained relatively static.  Customers’ top four reasons for outsourcing are to improve quality (84%), save costs (74%), introduce a variable cost structure (47%) and improve focus on core/strategic areas (47%).  While ISG see a continuation of long-term trends towards increased leverage of multi-sourcing and offshoring in transactions, they are also seeing customers source more aggressively – in a market that has seen long-term growth in the number of service providers. Increases in multi-sourced transactions and new service providers means challenges arise in relation to integration.  Andrew commented that 7% of all outsourcing spend is on service integration – and that there is an industry adage that ‘no one is doing it well’.  We may soon see a trend where service integrators procure on behalf of the customer.  Like many, ISG also sees increased incidence of cloud in transaction scope.  Andrew cautioned that customers are often not comparing like with like when evaluating cloud opportunities.

Anthony Day talked about the customer’s role in the early procurement lifecycle, stressing the importance of ‘pre-planning’ and commented on a number of practical issues and pitfalls.  Pre-planning includes understanding the deal drivers, setting realistic timeframes, and ensuring the customer understands the market for the deal (including the risk appetite of likely bidders). It is at this early stage that a customer should seek to choose, for example, between a sole supplier or a multi-sourcing approach – each of which can have certain inherent benefits.  Customers should also spend time developing a project team and undertaking basic financial modeling.  At an RFP stage customers should ensure they maximize leverage, for example by managing timing of down selection.  Anthony also discussed negotiation from the supplier perspective, and practical tips for the negotiation – for example, the importance of an audit trail – and other transaction issues such as stakeholder management.  Finally, Anthony covered the important considerations applicable to customers moving toward ‘shared service’ models of IT delivery – particularly the inherent business change – and to those using reverse e-auctions.

Alistair Maughan described a trend toward increasing complexity in transaction pricing methodologies and provided guidance on how to achieve pricing success. Complex pricing structures are hard to evaluate from a value for money perspective and can be difficult to adjust. However, while there is no ‘one size fits all’ solution, good pricing structures do have certain hallmarks – such as aligning parties’ goals and objectives, providing budget certainty, planning for change, ensuring there is an element of profit for the buyer – and so on. Alistair’s ‘4 Steps to Pricing Success’ were (1) know your base model – where and when to use fixed price, or cost plus and time and materials, (2) know what you’re paying for – be clear how any variable pricing works, (3) plan for changes – brainstorm the most obvious changes and do not compromise on flexibility and (4) monitor and adjust – consider value for money, productivity, benchmarking and technology refresh positions. Alistair described a BPO and an ITO case study that included various different and inter-related price mechanisms, and concluded by setting out the ‘key aspects’ of a good charging mechanism – which included goals of fairness, balance and flexibility, as well as being workable and enabling the customer to retain leverage.

Andrew Joint talked through the legal and practical considerations surrounding services and service levels, and their definition, beginning with the importance of recognising their central role in the agreement. A number of common-sense rules apply – define the scope clearly, group services together logically to assist the operation of other areas of the agreement such as change and termination, and so on. Consider whether services should be described on an input or output basis, and consider the relationship between customer requirements and supplier specification. These approaches will have a direct impact on contractual risk transfer and ultimately cost. For example, in the service area, agreements often rely on assumptions and dependencies. It is critical to ensure these operate clearly within the agreement so the parties can understand to what consequences their operation can give rise. The typical function of service levels is to objectively define how well the supplier needs to perform, and allow determination of consequences for failure. Although they can take many forms, they essentially allow the supplier to agree with the customer what ‘good enough’ looks like, and associated contractual credits provide a route for financial address that is better than suing for breach of a warranty. Clearly, they also link in with many other areas of the agreement such as liability, termination, warranties, governance and MI. Service levels and credit regimes can be constructed in a variety of ways – eg using weightings and multipliers – and can include glosses such as earn back, but it is important to ensure their application is targeted on the key aspects of service.


Iain Monaghan discussed some of the practical difficulties that arise in exit scenarios drawing in particular on the recent AstraZenica v IBM case. Good planning for exit is difficult as the appropriate exit plan can be determined only once the particular exit circumstances are known. Nevertheless, planning for exit in advance is essential. The key constraints in an exit scenario are typically (1) the circumstances of the termination – for example, expiry or termination, (2) the nature of the replacement solution, (3) the time needed to procure the replacement solution and transition to it and (4) the customer’s internal constraints. These are all considerations for the exit plan. In AstraZenica, the litigation had arisen despite a remarkable level of complexity in the drafting of the exit obligations. Iain’s conclusions included advising that parties focus on agreeing an exit process rather than seek to agree the details of the exit; ensure the customer has access at all times during the contract to relevant materials; avoid the position where the replacement becomes urgent; maintain flexibility by (for example) agreeing to pay for exit on a time and materials basis (with estimates) and having rights to extend the exit period; and keep in mind the importance of maintaining relationships at a high level. 

Duncan McCall QC stressed the importance, when a matter becomes contentious, of clearly understanding and defining your objectives by considering what is realistically achievable. These objectives will then guide a party in its strategy – its plan to meet the objectives – and tactics – the means of achieving the strategy. These all also need to be underpinned by sufficient resources. Outside of disputes, companies should have a litigation response plan that addresses, for example, preservation of software and documents and, similarly, an effective document retention policy. When it comes to issuing proceedings, companies should have clear objectives and cost planning – including a cost-benefit analysis. Once proceedings have started ‘the ball will not stop rolling’, and the litigant should keep the pressure up by seeking to manage work in parallel and consider tactics such as Part 36 offers.

Thanks go to Pinsent Masons for hosting and sponsoring the event, to the chairman, and to the speakers for their contribution and participation.

Chris Mann is a solicitor in the Technology Media and Telecommunications group at Pinsent Masons LLP.