eWorld Purchasing & Supply Conference Day 1 - September 28th, 2010 10:20 to 10:50 AM Outsourcing and Procurement: The Hot Points and Pitfalls Overview: On paper, outsourcing holds significant potential for delivering much-needed efficiency gains and cost savings. But it can also present a legal minefield for procurement departments and getting the contract right from the outset is one of the most significant factors for realising these benefits. This information-packed briefing explains the key considerations for a successful outsourcing contract, including: defining project scope, employment issues & TUPE, intellectual property rights, agreeing service levels, benchmarking, reporting & audit rights, liability, data protection, confidentiality & Freedom of Information, dispute resolution, duration, termination and exit management. Speaker: Debbie Venn, Associate at asb law LLP

1. Outsourcing and procurement:
the hot points and pitfalls
Debbie Venn
Associate
asb law LLP

2. Type of outsourced arrangements
Traditionally outsourced functions
• HR
• Payroll
• Accounting
• Facilities management
IT functions … now outsourced frequently:
• Hosting
• Website development
• Data security
• IT support

3. Benefits of outsourcing
Reduced costs, or obtain better value
for money
Lower staff costs internally
Obtain specific expertise and benefit
from new technologies

4. Potential disadvantages of outsourcing
Lack of control on how goods/services provided,
or quality control
Potentially increased costs, if no control over
how costs are dealt with
Ability to exit the arrangements – may be limited
or prohibited
Information security threats, or disclosure of
confidential/commercially sensitive information

5. Important initial questions
How will the outsourced project be managed?
Full description of goods/services required, to be
set out in a specification
How long is it intended that the arrangements last
for?
Who is bringing what to the table?
As the customer, how do you go about finding
the right supplier?

6. The outsourced supplier
Due diligence checks
Public Contracts Regulations 2006
Financial checks – performance bond or parent company
guarantee?
Demonstrations – additional service levels?
Site visits
Additional insurance cover required?
Data security levels sufficient?
Does the customer’s basic infrastructure need changing in
order to receive the goods/services?
Any proposed sub-contractor? Same checks?

7. What is being outsourced?
Scope the project and agree any relevant
specifications
Consider whether any existing arrangements
need to be terminated or adapted in order to
receive the new goods/services and what impact
this might have, eg, TUPE

8. Term of the project – long term or short term?
How long is it anticipated that any services are to
be provided for?
For short term agreements, consider termination
for material breach or insolvency
For longer term agreements, additionally
consider whether a party may terminate for
convenience and/or having a minimum initial
period in the agreement

9. Who is contributing what?
Will there be any initial transfers of assets or
rights that the supplier needs in order to provide
the goods/services?
Will the supplier be providing bespoke services
or standard services – will this impact on whether
intellectual property rights in connection with the
services are licensed or assigned to the
customer?

10. Who is agreeing to do what?
Obligations of the supplier
Obligations of the customer
Will the supplier be working at the customer’s
premises? Licence required? Access and H&S
issues?
Timetable for delivery of the services
Make sure obligations and promises are realistic
and achievable!

11. How are employment issues to be dealt with?
Who is providing the services?
Ensure personnel of supplier are fully trained and
skilled, plus all relevant licences, consents and
permits in place
Key personnel – should they be tied in to
providing the services?
Transfer of Undertakings (Protection of
Employment) Regulations 2006

12. Service levels
Describe services clearly
Attribute service levels to the described services
Are service credits to be applied if the service
levels are not achieved?

13. Benchmarking
Agree review of the costs over the lifetime of the contract
Informal process?
External verification?
If external, agree process for appointment of an external
third party and agree on how costs of the external third
party will be dealt with
Depends on bargaining power of the parties
What happens if the supplier slips behind in the market
place?
What happens if the supplier does not improve against the
set benchmarks following a review?
Establish regular review for ‘health check’

14. Price and payment
How is price to be dealt with?
• Fixed pricing structure
• Variable pricing structure
• Indexation increases, supplier’s pricelist or other allowed
increases to price?
Payment methods and frequency need to be agreed and set
out in the contract
Advance payments:
• Refund if terminated early?
• Reconciliation formula for fixed prices based on usage - how
frequent to carry out reconciliation?

15. Warranties
Supplier:
• to use reasonable care and skill
• perform the services in accordance with any agreed
specification?
• no breach of any third party intellectual property rights
• ownership of any assets provided under the agreement?
Customer:
• any content or materials provided do not violate any
applicable laws
• provide any premises, etc, in order for the supplier to provide
the services (if appropriate)

16. Liability
Types / heads of loss
What heads of loss are reasonable to exclude or limit in the
circumstances?
Is an exclusion of loss of data reasonable?
Will exclusions or limitations apply to both parties?
What is an appropriate ‘cap’ on liability:
• value of contract?
• level of insurance cover?
• over lifetime of contract or annual?
No exclusion or limitation of liability under English law in respect
of death or personal injury caused by negligence, or for fraud or
fraudulent misrepresentation, or as to title of goods
Consider ‘force majeure’ events

17. Data protection, confidential or commercially
sensitive information
Confidential or commercially sensitive
information
Data Protection Act 1998 – need to ensure
compliance
Freedom of Information Act 2000 –
consider when providing information
to public bodies
Information security:
BS7799/ISO17799

18. Contract management and dispute resolution
Contract management
• Change control procedure
• Review meetings
Dispute resolution
• Escalation procedure
• Arbitration or mediation?
• Binding or non-binding?

19. Termination and consequences
Termination
- Expiry of a fixed term?
- On happening of events: material breach,
insolvency, persistent non-material breach,
change of control?
Consequences
- Return of confidential information
- Do licences terminate?
- Escrow arrangements?

20. Exit management
Process to be set out in the contract
May depend on whether services are being
transferred back in-house or to a third party
provider
TUPE provisions – how will employees who have
been providing the services be dealt with?

21. What happens if it all goes wrong?
BSkyB Limited and another v HP Enterprise Services UK
Ltd (formerly Electronic Data Systems Ltd and another
[2010] EWHC 86 (TCC)
EDS failed to implement a new customer relationship
management system in accordance with the contract
Liability capped at £30 million
Claim made for £709 million
Claims of fraudulent misrepresentation
HELD: EDS knew representation to meet deadlines was
false or reckless and BSkyB relied on representation
EDS held liable, although case recently settled with EDS
paying £318 million to BSkyB in damages

22. Summary
Scope the project carefully
Ensure term, termination and exit management
provisions in place
Carefully consider and draft liability clauses
Consider intellectual property rights and TUPE
FINAL MESSAGE: GET THE CONTRACT RIGHT!
Ensure it reflects what has been agreed between
the parties, it is recorded correctly, signed by
authorised representatives of both parties and
dated!

23. Any questions?