Three rules for switching outsourcing providers

Outsourcing arrangements are often modified in midstream. For example, adjustments in performance levels allow the customer to stay current with changes in technology that occur over the years.

But the customer's expectation of change may go even further -- namely, the customer may try to end the relationship and move to a new provider before the agreement has expired. This may be true even if the existing provider has not actually breached the agreement, e.g., when the customer perceives that the provider is nonresponsive to new requests. In such cases, customers sometimes consider buying out the existing service provider.

How should the parties handle the transition to the new provider? It is useful to keep three words in mind: professionalism, pricing and personnel.

Professionalism

Following the letter and the spirit of the existing outsourcing contract is a good rule of thumb. The current contract should contain terms that enable the parties to begin the conversation regarding a transition in a businesslike manner. Despite the awkwardness of the situation, the parties should act professionally.

Why? Practicality. From both parties' perspective, lack of cooperation or undue resistance exacerbates the difficulty of ending the relationship before the contract was set to expire. Although it is easier said than done, rehashing bad memories of a missed service level or unfair feedback should be avoided.

Reputation is another reason. Professionalism in handling a transition situation is important to both companies' images. Word will get around if one party gave the other party a hard time during the transition. Also, there is always a chance that individuals will be on the other side of the fence later in their careers, so if nothing else, professionalism is in one's self-interest.

Pricing

To enable a buyout of the remainder of the provider's contract, the parties should review the existing agreement. Agreements containing early termination clauses often provide for a payment to the nonterminating party. (One example of such a provision is found in a rare reported case, decided about a year ago, Southern Union Co. v. CSG Systems International Inc.

The size of the buyout payment will vary based on when the termination took place, and it will decline in proportion to the amount of time that would have remained of the contract. The agreement will usually require several months between the time of the terminating party's notice and the effective date of such a termination.

Early-termination provisions typically are for canceling the entire service, although they sometimes may be broken down for termination on a service-by-service basis. The provider will want to have drafted this clause to make sure that an unbundling of the services will not penalize the provider if there was any customization work done for which fees ought to be recouped.

Personnel

The customer and the outgoing provider will likely need a new "transition contract" to cover the period in which services will be taken over a new provider. This contract will enable designated employees to become employees of the new provider and waive any contractual nonsolicitation provisions that had been in effect.

Other employee-related issues may already be covered by the existing contract, such as "make-whole costs." These can include the costs of paying severance to terminated employees or moving the provider's own personnel to other states. It may also be necessary to offer bonuses to properly motivate certain personnel to stay on during the transition period.

Conclusion

If the customer is set on terminating an agreement before it's due to expire, the parties nevertheless need to remember certain "rules of the road" for this to occur as smoothly as possible. In the end, remembering the "Three P's" is in both parties' best interests.

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