REASONS FOR RENEGOTIATING

This posting originally appeared on Slaw at http://www.slaw.ca/2010/11/29/reasons-for-renegotiating%c2%a0/.

In his July 30, 2010 posting, Plus Ça Change at http://www.slaw.ca/2010/07/30/plus-ca-change-2/, Dan Logan of Torys talked about the difficulty of addressing the implications of change as part of a long term outsourcing arrangement. Dan referred to the results of a recent Gartner Group survey that indicated:

* 55% of organizations have renegotiated their outsourcing agreement terms within the lifetime of the contract;
* 15% of the renegotiations occurred within the first year;
* 23% of the organizations did not expect to enter into the renegotiations; and
* nearly 8 in 10 outsourcings will go through renegotiations.

The Gartner Group survey identified one of the major issues leading to this level of contract renegotiation as a lack of sufficient flexibility in the outsourcing contract to accommodate the unforeseen changes. Dan’s July posting, and his follow on posting on October 13, 2010, Managing Change in Contracts, used this point from the Gartner Group survey (the absence of the flexibility necessary to accommodate change) as the launch pad for an examination about anticipating and accommodating change in an outsourcing. They are worth the time to read and I don’t want to repeat or disagree with his analysis.

It is not just ineffective change processes or unanticipated issues that give rise to the necessity to renegotiate an outsourcing agreement. At least as frequently, the requirement to renegotiate an agreement stems from the failure to resolve issues at the operational level on a regular basis: the issues then fester, or the consequences of the failure to resolve an issue expand to infect the relationship, reaching the point where the unresolved issues overwhelm the ability of the normal governance processes to accommodate them. What I want to look at, in this posting, are three sets of circumstances that inhibit the ability of the parties to resolve issues effectively at the operational level and that, in my experience, have been significant factors leading to the renegotiation of an outsourcing agreement.

I. Lack of Continuity of Key Personnel

The lack of continuity of the key personnel of the service provider and customer can set up the conditions leading to a renegotiation. In an outsourcing transaction, relationship history and an ongoing commitment to the arrangement can be as much a factor in resolving issues as the contract wording itself. If the representatives of both parties have the same history, understand the compromises that were made on contentious issues and appreciate the points that were left unresolved, they have the opportunity to resolve issues more quickly, if for no other reason than that there will be a shorter learning curve. And if the key personnel are also committed to working on the transaction for an extended period of time, they are more likely to take a longer term view of the outsourcing relationship. The shorter learning curve and longer term perspective may more easily allow the two parties to resolve issues in the best interests of the outsourcing.

Conversely, when the parties’ representatives do not have the history of the outsourcing relationship and are there only for the short term, they are more likely to approach issues on a standalone basis and seek a “win-lose” solution. As in a gun fight, there isn’t much motivation or inclination to compromise. Minor irritants that should be resolved as part of normal day-to-day operating or governance procedures quickly evolve to become major problems that are not easily dealt with as part of regular governance procedures and that can require a renegotiation or contract restructuring to resolve.

There are clear benefits to the outsourcing transaction, therefore, if both the service provider and the customer commit to maintaining continuity in their key personnel. Unfortunately however, in most outsourcings, the commitments around key personnel are one-sided. Customers will typically include “Key Supplier Personnel” clauses in their agreements that require the service provider to identify its key management, technical and perhaps business personnel and that restrict the service provider’s ability to replace these personnel. Yet the outsourcing agreements that include any corresponding commitment on the part of the customer appear to be few and far between. This is to the detriment of the parties’ ability to resolve issues in the relationship.

II. Misalignment of Interests

Outsourcing relationships almost always impact more than just the customer and the service provider. For each party, there will be a coterie of other persons who are interested in or impacted by the outsourcing, e.g. for the customer, its stakeholders may include other business units within the customer, affiliated entities, clients or other contractors. If the parties do not deal with the interests of these stakeholders in the outsourcing agreement in an appropriate manner, they may be creating circumstances in which normal operational procedures are unable to deal with day-to-day issues and a renegotiation is the only option.

These circumstances are best illustrated by an example. Consider an application development agreement between a government entity and a private sector service provider. While one government ministry is the contracting party and responsible for the costs of the development, the resulting application will be used by, say, three other government ministries. In recognition of the critical interest that the three other government ministries have in the functionality of the application, the service provider agrees with its government ministry customer to establish an Executive Committee comprised of representatives of the three other government ministries and that the Executive Committee’s approval will be required at critical junctures in the application development, e.g. for approval of the functional and technical specifications.

In these circumstances, it may be extraordinarily difficult for the government customer and the service provider to resolve the issues that inevitably arise in an application development. The principal interest of the Executive Committee is the functionality of the application and this interest is not tempered by the practical concerns around costs that often motivate the parties to reach an equitable resolution.

While this is a hypothetical example, the underlying problem it is meant to illustrate is not. The customer and the service provider have created a situation in which the interests of the parties are misaligned and where the normal governance procedures may not be adequate or able to resolve the resulting issues.

III. The Dangling Change Process

It is customary for outsourcing contracts to include comprehensive change processes dealing with all varieties of change from minor production changes right up to mandatory changes that allow the customer, in urgent situations, to mandate implementation of a change. One of the purposes of the change processes is to allow the parties to deal with unanticipated change and avoid the necessity of renegotiating the agreement. In at least one respect however, most change processes fall short of this objective.

The change processes normally require the service provider to submit a change proposal for the customer’s review and consideration within a specified period of time of the customer’s request or on the service provider’s own initiative. The customer then has a defined review period within which to accept the service provider’s change proposal, to reject it or to request that the change proposal be amended. It now appears to be the norm (arguably unlike the 1990’s) that where the customer does not accept the service provider’s change proposal within the applicable review period, the change proposal is deemed to be rejected.

That is usually the end of the matter as far as the change processes are concerned. They do not deal with the consequences of the customer’s failure to accept the service provider’s change proposal. And those consequences can be very severe, e.g. the idling of teams of software developers, significant delays in development or the failure to implement new systems in a timely fashion. These are just the sort of consequences that can easily lead to the necessity to renegotiate aspects of the outsourcing agreement.

The outsourcing agreement should include, as part of the change processes, specific procedures for dealing with change requests that are not accepted by the customer. It should no longer be sufficient just to say that the change proposal is deemed to be rejected. Instead, in the interests of dealing with issues as part of normal governance, the change processes should require immediate escalation within governance of: (i) any change proposal that is not addressed by the customer during the applicable review period; and (ii) change proposals that are identified by the service provider as “Essential” that are not accepted by the customer.

IV. Conclusion

The three sets of circumstances identified above were not suggested by any proper survey so they may lack the statistical validity of the Gartner Group results. Still, they identify issues, in addition to inadequate change management processes, that drive the parties into renegotiating their outsourcing and that should, therefore, be dealt with as part of the agreement.

Do We Really Need to Know This?

As I comb through online news articles about the latest WikiLeaks disclosures, I keep on asking myself: what was the purpose of this round of disclosure beyond embarrassing the U.S. and causing more discord in increasingly difficult diplomatic times? Is WikiLeaks anything more than a vehicle through which disgruntled employees wreak havoc on their current/former employers?

Does it surprise anyone that there are unflattering descriptions of world leaders and other countries positions – even a country's allies – in any country’s archives?

Forthright assessments of the strengths and weaknesses of the various players and situations in world politics are in fact some of the most important tools any country has in its diplomatic bag of tricks. However in the past these time honoured traditions would not come to light for a sufficient period of time after the immediate situation so as to permit crises to resolve – for better or for worse - without these distractions.

How has deterring the current nuclear situations in North Korea and Iran been better served by the recent WikiLeaks publications? Isn’t this just going to enflame the situation by feeding their paranoia?

The fact that everyone is spying on everyone else to gather some of this information should also not be surprising. Spying is after all one of the world’s oldest “professions”.

Does the fact that CSIS – or any spy agency for that matter - think that it is “hamstrung” by the rule of law actually a revelation to anyone? Again I hope not; and I also hope that the courts world wide continue to play a strong role in reigning in the desires of secretive organizations to run amok.

I am all for appropriate protected whistle blowing that sheds light on illegal activities. Turning the spotlight on malfeasance, particularly when it is being carried out by governments that purport to adhere to higher standards, is an admirable pursuit.

But so far, this round of disclosure WikiLeaks has not done this, nor has it served the better good.

An Attitude to Outsourcing Agreement Disputes (Not a Course of Action)

The problem surfaced recently in a casual, hallway conversation with an in-house colleague. The customer, my colleague’s employer, had contracted with an unnamed IT service provider for significant software development services but now, some months into the contract, was encountering difficulties. The software developer was not performing and the customer didn’t know what to do. In-house counsel realized just how costly, time-consuming and disruptive it would be to seek to terminate the contract for the service provider’s breach. Yet, at the same time, counsel didn’t see an obvious path to a resolution. Should the customer just cross its fingers and hope that the issue would be resolved as the parties worked through the normal project and contract governance procedures? Should the customer try, outside the contract governance procedures, to renegotiate the agreement? Was it time to invoke the contract dispute resolution process?

I thought about that casual hallway conversation over the next couple of days, trying to work out in my own mind the best way through a very large issue in an outsourcing agreement (about which, as a result of the exceptionally discrete statement of facts, I admittedly knew almost nothing). After some thought, and recognizing that with so few facts the best one can do is suggest an attitude to resolving the issue rather than a course of action, what I should have said to my in-house colleague is this:

I. Dispute Resolution

There are clearly times in an outsourcing relationship when the parties need to invoke the dispute resolution process, e.g. if the other party is not paying attention to or remedying contract or performance issues, is in material breach of its contractual obligations (which need not be repeated breaches – one can be enough), has inflicted serious damage on the other or is acting fraudulently. However it is probably not the right time to do so if an issue has just surfaced or the parties have just started to meet to work out how to respond. Invoking the dispute resolution process will change the dynamics of the outsourcing relationship: it will transform cooperative, problem-solving sessions into acrimonious for-the-record meetings orchestrated by counsel in anticipation of litigation that will paper the file but not contribute to resolving the problem. In such circumstances the parties focus on building their case, not resolving the problem, because in the midst of dispute resolution, what’s right for the dispute matters more than what’s right for the problem. And even if the outsourcing relationship survives the resort to dispute resolution, the trust and cooperation that is fundamental to a successful outsourcing will likely have been significantly if not irreparably damaged by the process.

While the initial stages of dealing with a problem may not be the right time to invoke the dispute resolution process, that doesn’t mean the dispute resolution process should be ignored. It should not. The customer needs to understand its situation and, before proceeding further, the customer should review the contract carefully to ensure it understands how the dispute will be treated under the agreement, the remedies available to it (or the liability to which it is exposed) and any limitations and limitation periods affecting the dispute. If the customer understands its legal situation, it will be able to use this knowledge in discussions around the problem. It just is not clear that the right first step to resolving serious contractual issues is to invoke the dispute resolution process.

II. Contract Governance

There are almost always benefits to leveraging the governance procedures documented in the outsourcing contract:

• Presumably, the procedures were prepared by the parties with the specifics of the outsourcing agreement in mind: at one time at least, the parties thought they would be adequate to deal with the operational issues arising under the outsourcing agreement.

• The customer and the service provider can apply the documented governance procedures to trying to resolve their problem, not spend time working out new processes to resolve the issues.

• Using the existing governance procedures may allow the parties to limit the discussions to a single issue or irritant (if it is in fact such) rather than triggering a review of multiple and possibly time-consuming issues.

• There is probably an escalation procedure already built in to the governance procedures, perhaps from the regular “joint governance committee” to a defined “executive committee”.

• Using the existing governance procedures will likely not require the parties to incur significant additional expenses.

That doesn’t mean however that the regular governance processes will be adequate to deal with every issue that comes up. Many of the contract governance procedures I have seen have concentrated on dealing with issues arising in the normal course of day-to-day operations. Such procedures are unlikely to be appropriate to resolve very large or material issues (such as those that can be involved in the failure of a software developer to perform its application development responsibilities in a timely fashion). That is because the larger or more material issues will likely require the parties to deal with a coterie of complex questions, e.g.:

• Who needs to be notified of the issue?

• Are the discussions without prejudice?

• What happens to interim agreements if the issues are not resolved?

• Do discussions under the existing governance procedures satisfy any steps in the dispute resolution processes?

These are not the sort of questions that are typically addressed as part of the governance procedures defined in an outsourcing agreement.

III. Custom Processes

Faced with very large or material issues, the parties may be well advised to ignore the contract’s defined governance procedures and to develop customized procedures to deal with the issue at hand. The customized procedures will allow the customer and the service provider to address the issues identified in the previous section as well as to discuss all of the other questions that should be considered such as:

• Who should be involved in the discussions from each party?

• Should one of the parties deliver a notice of default?

• Are the parties deemed to have waived any claims to damages or otherwise by engaging in the negotiations?

• Will the parties attempt to resolve all of the issues affecting their outsourcing relationship, or only the immediate issue at hand?

• How will the results of the discussions be documented? In a term sheet? By letter agreement? By a contract amendment or in a restated and amended agreement?

• Will the parties sign mutual releases at the end of the renegotiations?

Of course, it will require some time for the parties to agree on what these customized procedures will be. However, for larger disputes at least, this may not result in any actual delays: at the same time as the parties are working to define the bespoke procedures for the issue at hand, they can be undertaking the reviews and investigations that are likely necessary for them to prepare for the actual negotiations.

Much more analysis around many more questions is required to decide the best approach to resolving a dispute. What outcome does the customer hope to achieve? How is the service provider likely to respond? Are there any time constraints? The point, perhaps, is that the customer should think as much about these questions and about how to resolve the dispute as about the dispute itself.

THE LAST ORIGINAL IDEA by Alan K’necht and Geri Rockstein

I have found Alan K’necht worth listening to, ever since he introduced me to the arcane world of web analytics, Search Engine Optimization and Internet Marketing. And so it is with The Last Original Idea - A Cynic’s View of Internet Marketing, a new book written by Alan K’necht and Geri Rockstein.

The Last Original Idea is not a “legal book”. It doesn’t talk about misleading advertising, web agreements, jurisdictional issues, intellectual property matters or the multitude of other issues associated with the Internet that consume lawyers’ time. I don’t think there is a single statutory reference in the book and even in talking about Napster, there is not a lot of discussion about copyright infringement.

What it is is an entertaining, highly-readable and insightful look at Internet Marketing. The book examines each of the elements of Internet Marketing, not as a dramatic, late twentieth/early twenty-first century technological innovation, but rather as the latest flavour of issues in commercial communications that stretch back hundreds or thousands of years. The routes of banner ads for example, first used on the Internet by AT & T in 1994 in the online magazine Hot Wired, are traced back to electoral propaganda messages written on homes in Pompeii in 71 A.D.

In the course of this examination, we see how today’s Internet Marketing challenges are similar to prior issues in commercial communication, but also how they differ. This appreciation for the past and the understanding of the similarities and differences are crucial for companies looking to succeed in Internet Marketing. Without them, companies will fail in their Internet Marketing attempts. Organizations that have failed to understood that a corporate website is not just an online brochure, for example, have not been successful in their attempts to entice customers to visit and to return to their websites.

K’necht and Rockstein drive home their point that:

“companies who understood the mistakes of the past were able to be profitable in the present. Others are a mere memory, lost in cyberspace”

in the final chapter of their book. It is a case study of Gun Dog Supply, a small business that applied the historical lessons of what works and what doesn’t in retailing to create a successful and evolving business.

The Last Original Idea is not a long book. But it is fun and thoughtful and worth the read for anyone interested in Internet Marketing.

(The Last Original Idea is available through Amazon.com.)

Fingers in the Cookie Jar

In his Globe and Mail article of November 8, 2010, Ivor Tossell posited that there is a generational divide in public thinking as to when it is okay to violate someone else’s copyright and when it is not.

I am not going to in anyway defend Ms. Griggs. She egregiously violated copyright and seemed to think she was justified in doing so because the material that she plagiarized was posted on a web site. However, hers is not a unique or generational attitude towards material on the Web.

There seems to be a general misunderstanding of what constitutes copyright infringement. Witness the comments posted on line connected to this article.

The commenters misinterpreted what constitutes “fair dealing” use of copyrighted material, stating that all personal use was okay. However, you are in fact violating multiple copyrights when you download music/books/articles etc. from pirate web sites that make copyrighted material available for “free”. Just because you are using it in a non-commercial private setting, does not mean that you have not infringed copyright(s).

They protested that as young authors they were required to sign away all copyright (without addressing the fact that they probably also had waive all of their moral rights) associated with their works if they wanted to be published. That is the economic reality of starting out in any field. You have little or no bargaining power until you have established yourself. Then if you are good at your craft you will be paid more, and may also get to carve up how you “sign away” your copyright for commercial exploitation – hardback, paperback, e-book, movie rights etc. But the bottom line is if you want to make money, you are going to sell some or all of your copyrights in a work.

The commenters seemed to think that there is copyright in ideas and information – which there is not - as opposed to the expression of the ideas and information – which is what is in fact protected by copyright.

Just because I am writing this posting about a published article does not mean I am violating copyright. I have acknowledged the source of my information, but I am expressing my ideas about the information in an original – I didn’t want to suggest it is unique because I don’t think I am that much of a thinker – work. It may also arguably be protected by the fair dealing of use for scholastic criticism (but this could be a stretch).

I am not naïve. While a better understanding about copyright is of course preferable, I do not think that it will curb copyright violators of any age. It may, however, give them a nanosecond of pause before they do it.

And remember, this posting is protected by copyright…

Now for the Flip Side

So a few weeks ago I posited in “Don’t Need It, Don’t Want It” that service providers should not be the sacrificial lamb regarding handling of personal information (“PI”), or personal health information (“PHI”), where the service provider does not need access to this type of information to provide the services. Now for the flip side.

If the services that a service provider is providing do in fact necessitate an entity entrusting this type of information to it, then the service provider does have to accept more stringent controls and security that are legislated in a number of jurisdictions – e.g. Personal Health Information Protection Act, 2004 (Ontario), Personal Information Protection and Electronic Documents Act (Canada) etc..

By way of examples: service providers to the health care industry who have to have access to the PHI in a client’s care should have in place, as a matter of course, use and security standards that meet regulatory requirements for the handling of PHI. Service providers to the financial services industry who have to have access to the PI in a client’s care should have in place, as a matter of course, use and security standards that meet regulatory requirements for the handling of PI. As part of their business model these standards should be “baked into” the services provider’s fees.

What becomes tricky is if a particular client stipulates a stricter standard than industry standards or regulatory requirements. In these instances the client needs to be prepared to lose some of the cost benefits of using the service provider’s standard services, and the service provider needs to evaluate the extra cost associated with it accommodating the special requirements. Both parties have to work together to address their respective concerns in these circumstances.

To quote the philosophical geniuses that are The Rolling Stones (Mick Jagger and Keith Richards),

“…You can’t always get what you want
But if try sometimes you just might find
You get what you need…”

Employee Provisions in Outsourcing Agreements

Note: This posting first appeared at http://www.slaw.ca/2010/09/16/employee-provisions-in-outsourcing-agreements/.

The provisions of outsourcing agreements relating to employees have grown more complicated. There was time, in the early 1990s, when the obligations of the service provider under the Outsourcing Agreement focussed almost exclusively on describing in detail the services to be performed. There was little mention of the service provider employees used to perform the services (or privacy, software or subcontractors for that matter). The times have changed however: in my experience at least, it is now customary for outsourcing agreements to include extensive provisions relating to the personnel used by the service provider to perform the services.

In this blog posting, I want to consider the different perspectives with which customers and service providers approach the employee provisions of an Outsourcing Agreement. If each party understands the interests and objectives of the other, it may be easier to reach an agreement that will support the long term health of the outsourcing arrangement and avoid creating a standard that the service provider will never be able to satisfy or that will leave the customer unprotected. I have also included, as part III and for completeness, some provisions from a sample outsourcing agreement.

One preliminary point is in order. The provisions being discussed here deal with the service provider’s employees who will be providing services after signing. In that sense, these provisions are concerned with the future relationship. Many outsourcing agreements also involve a transition of employees from the customer to the service provider. There is a separate set of issues around employee transitions, e.g. pre-and post-transition liabilities, the service provider’s concerns about the ability and experience of the transitioning employees and the customer’s obligations to disclose past misconduct, that also need to be considered but that are beyond the scope of today’s posting.

I. The Customer Perspective

The customer’s objectives in negotiating the employee provisions of the Outsourcing Agreement depend of course on the circumstances of the specific outsourcing. It is not uncommon for the customer’s concerns to include the following:

(1) Avoid a bait and switch: The customer may be looking for certainty around the employees who will be providing the services to it. The customer does not want to contract with the service provider on the basis that the services will be provided by the “A team” indentified in the service provider’s RFP response only to discover, some months later, that the A team is now working on the next pursuit and it is the candidates for the service provider’s C team who are actually attempting to deliver the services to the customer. To avoid this outcome, the customer is likely to require that key service provider personnel be identified in the Outsourcing Agreement and that such personnel not be replaced (except in circumstances beyond the service provider’s control) without the customer’s consent.

(2) Risk mitigation: The customer may attempt, through the employee provisions in the Outsourcing Agreement, to mitigate the risk that the service provider will be in breach of the agreement or, even if not in breach, that the services will be sub-standard or only barely rise to the level of acceptability. This interest involves the customer trying to impose an additional set of obligations on the service provider that, if complied with, will increase the likelihood that the services will be satisfactory and will achieve the customer’s objectives. This is equivalent to focusing on a building’s foundation, on the basis that, if the foundation is solid, the building is less likely to fall down. These obligations may include provisions that: (i) the personnel performing the services will have the knowledge, skills and experience necessary to perform their responsibilities under the agreement or even that such employees have specific certifications; (ii) the personnel will comply with customer’s policies; (iii) the employees will perform the services to the standards set out in the agreement; and (iv) the service provider will provide the employees with regular training on critical issues to ensure the employees’ knowledge and skills remain current.

(3) Maintenance of control: Notwithstanding that the services have been outsourced, the customer may continue to want significant control over how the services are to be performed. In effect, the customer is demonstrating a concern about whether the service provider will be sufficiently proactive in identifying issues or, if an issue is identified, whether the service provider will respond appropriately and in a timely fashion. And, in the customer’s mind, if the service provider cannot be relied upon to take the appropriate action, then the customer needs to retain the ability to do so. I have heard this expressed by one counsel as wanting the ability “to have the train track repaired without having to wait for the train wreck to happen”.

The desire to maintain control can manifest itself, in the employee context, by requests for control over employee screening, the number or location of the employees used to perform the services or the training to be received by them. It can show up in the customer’s insistence on the right to require that individual employees be prohibited from providing services to the customer. It can even be translated into requirements for input on employee base or bonus compensation (which may or may not be funded by the customer). In the government context, this emphasis on maintaining control can reveal itself in the establishment of whistleblower hotlines and requests that the employees provide direct confidentiality or other covenants in favour of the government customer.

(4) Competitive Concerns: The customer may well understand that the service provider delivers services to other customers in the same industry segment. Indeed, one of the critical factors in the customer’s selection of the service provider may well have been the service provider’s deep industry knowledge and experience. That does not mean that the customer is willing to have the service provider use the knowledge and experience it gains in delivering services to the customer for the benefit of other clients of the service provider, whether in the same or different industry segments. Nor does it mean that the customer will be satisfied with the standard confidentiality and non-disclosure provisions of the Outsourcing Agreement. The customer will focus on the service provider employees who are performing the services for the customer and try to limit their ability to perform work for the customer’s competitors. These limitations may take the form of restrictions on the service provider’s ability to transfer its employees. In some cases however, the customer’s competitive concerns may be such that the customer requires that the limitations be flowed down to and accepted by the employees who are providing the services.

The customer will certainly have other interests and concerns that it will attempt to address through the employee provisions of the Outsourcing Agreement, e.g. ensuring that any commitments or employment guarantees made by the customer are honoured by service provider. Rather than attempting to enumerate all of customer’s issues however, I now want to consider the some of the countervailing interests of the service provider.

II. The Service Provider Perspective

The customer tries, through the employee provisions in the Outsourcing Agreement, to restrict the service provider’s freedom and flexibility in order to prevent the service provider acting in a manner detrimental to the customer. In contradistinction, the service provider is generally attempting to minimize the customer’s control over the service provider’s employees and to preserve as much freedom as possible to determine how and by whom the services are provided. The service provider’s objectives may be based on the following interests:

(1) Limiting Control over how the Services are provided: The service provider’s fundamental responsibility to the customer is to deliver the “Services” and the service provider wants the freedom to direct and manage its resources – the ability to re-align, rationalize, replenish or even reduce resources as it deems appropriate – to achieve this objective. From the service provider’s perspective, it has the knowledge, experience and expertise to know how best to deliver the services, at least as compared to the customer, and it will bear the financial or other consequences under the Outsourcing Agreement for any failures to comply. Therefore, the service provider will be focused on preserving its ability to manage the services and minimizing the control of the customer. Employee provisions that the customer sees as necessary or beneficial to its interests will be viewed through the service provider lens of whether they restrict the service provider’s ability to manage the services and fulfill its responsibilities under the Outsourcing Agreement. If they do, the service provider may well object to the employee provisions on the basis that they constitute “micro-management” by the customer. For example, if the customer’s interest in having dedicated service provider employees who are focused on providing services to the customer restricts the service provider’s ability to develop a planned leveraged service offering, the service provider will object on this basis. Accommodating any controls requested by the customer is problematic for the service provider because, in evaluating any such limitations, the service provider needs to consider both the immediate impact and how such controls will play out in the future when the employees, technology, environment and business will have changed.

(2) Maintain control over costs: Under most Outsourcing Agreements, the service provider is delivering cost savings to the customer: there are very few customers who are really interested in entering into an agreement with a service provider where the cost of the services will be greater than the amount the customer is currently spending. If the service provider is going to turn a profit on an outsourcing transaction, the service provider will need to manage its costs. As personnel costs will be a significant component, if not the most significant component, of the service provider’s costs, it will be important for the service provider to retain the ability to manage these costs. This means that the service provider is likely to resist any employee provisions requested by the customer that will impose additional costs on the service provider (e.g. the costs of additional employee screening) or limit the service provider’s ability to manage its costs (e.g. limitations on the personnel reductions), unless such costs have been explicitly included as part of the service provider’s cost model or can be passed through to the customer.

(3) Manage the Work Force: The service provider will be fundamentally concerned to maintain the ability to manage its workforce and will view many of the employee provisions requested by the customer as unreasonable or counter-productive attempts to restrict its ability to do so. For example, the service provider wants the ability to promote or provide new challenges to high-potential employees and to allow its employees to seek new opportunities without the employees having to terminate their employment relationship and go elsewhere. (Some service providers have even established personnel policies that allow employees to request a transfer to a new account or to a different position after a certain period of time.) The service provider is likely to resist provisions that require employees to be dedicated to a customer indefinitely or for more than some reasonable period of time. From the service provider’s perspective, these provisions will make it difficult to attract qualified employees and will not likely achieve their objective of retaining skilled resources on the customer account: such employees, faced with what they perceive to be a life sentence to a specific account, will look elsewhere to the detriment of both the customer and the service provider.

In a similar vein, it is important for the service provider that its employees be focussed on the service provider’s business objectives and that they understand that their career and compensation depend on their level of performance at the service provider. But it is exactly this principle that the customer is seeking to counteract when it asks for input on employees’ base or bonus compensation: the customer is seeking to undermine the employment relationship and to motivate the service provider employees to act in the best interests of the customer, not the service provider. It is analogous to the situation in which a bank is asked to determine the compensation of a bank loan officer based on how pleased borrowers are with their borrowing experience and not with the loan officer’s adherence to prudent lending practices. Not surprisingly, it may be problematic for the service provider to allow the customer to provide input into any employee assessment programs or to impact the employee’s base or bonus compensation.

(4) Grow the Business: The service provider wants to be able to grow its business. This requires the flexibility to respond to new situations and to pursue new opportunities using its available resources including those employees who are currently providing services to the customer. Employee provisions such as those requiring the customer’s consent before key service provider personnel can be transferred or that impose a “cooling off period” before the employees can provide services to a competitor of the customer undermine the service provider’s ability to grow. The service provider can also argue, not completely disingenuously, that such restrictions are not in the interests of the customer. This is because the larger the service provider’s customer base in a specific industry segment, the more likely the service provider is to be able to develop leveraged tools or leveraged service offerings or make investments in providing the services.

III. Sample Provisions

Without attempting to define what the appropriate balance between the interests of the customer and service provider is (something that is impossible to do in the abstract), the employee provisions in an Outsourcing Agreement may be similar to the following:

(a) The Service Provider shall ensure that all Service Provider Personnel performing the Services shall:
(i) possess knowledge, skill and experience appropriate to the tasks to which they are allotted and the performance including service levels which they are required to achieve and that such personnel have received appropriate training (which training shall be regularly updated during the term of this Agreement);

(ii) perform the Services to the standards set out in this Agreement; and

(iii) strictly comply with all Customer’s policies and guidelines applicable to the Service Provider’s obligations under this Agreement and of which notice has been given to the Service Provider, as such policies and guidelines may be revised from time to time.

(b) The Service Provider shall not transfer or re-assign individuals filling Key Service Provider Positions to other positions with the Service Provider during the period set out in the Key Service Provider Positions Schedule, except: (i) with Customer’s consent; or (ii) where forced to do for reasons beyond its reasonable control such as employee sickness, disability, resignation or death. In the event of the transfer of any Key Service Provider Personnel a suitable replacement must be approved by Customer.

(c) The Service Provider shall not permit any individuals: (i) filling any Key Service Provider Positions; or (ii) having access to Customer Confidential Information in the course of performance of their responsibilities for the Service Provider; to perform services for any Customer Competitor for a period of two years after such individuals cease to be involved in any manner whatsoever in the Services provided to the Customer.

(d) Upon written request by the Customer setting out reasonable grounds, the Service Provider shall promptly, and in any event within ten Business Days, replace any Service Provider Personnel with another individual, acceptable to the Customer, of suitable ability and qualifications. Notwithstanding the foregoing, where the Customer notifies the Service Provider that the Customer has determined that the concern is of such a serious nature that such Service Provider Personnel should be removed immediately from the Customer’s account, the Service Provider shall immediately remove such individual from the Customer’s account.

IV. Conclusion

Reaching agreement on the employee provisions of an outsourcing agreement involves reconciling the customer’s desire for control over the employees providing services to it and the service provider’s insistence on having the flexibility to manage how and by whom the services are provided. This reconciliation can best be accomplished if each of the customer and the service provider understand the interests and objectives of the other. While the customer and service provider interests that are identified above can in no sense be regarded as a complete list, they provide an indication of the nature of the interests that need to be taken into account to reach agreement.

Don’t Need It, Don’t Want It

I understand that enterprise - both private and public – has obligations with respect to the handling of personal information, including special standards for health care information.

But if a party advises that it does not need, nor does it want, access to such information in order to engage in business with the enterprise, then is it not incumbent upon the enterprise to ensure they don’t get give it?

Most entities have standard confidentiality and security practices – commercially available firewalls, virus protection etc. - that are suitable for their industry as a whole. It is not a viable business model to have to continually change these standards – different levels of encryption, special screening programs etc. - to comply with the differing requirements of each client. Unless of course the client is willing to pay all associated initial and ongoing costs for these measures.

I cannot see how an enterprise would be fulfilling its responsibilities with regard to the proper handling of personal information if all they do is insist that the other party agree to comply with its often amorphous standards of care regarding handling personal information, that the enterprise also reserves the right to change from time to time at its discretion.

I have been pleasantly surprised when enterprise has understood this. It agrees that it is not going to provide the personal information, but if it inadvertently does the other party’s obligation is to advise when they become aware of having received such information and to return and/or destroy it as soon as possible. This is a reasonable solution that both parties can live with.

Putting some Relationship into Relationship Management

Most Outsourcing Agreements now include a complete article dealing with Governance that focuses on managing the relationship between the customer and the service provider. The article typically defines working groups and committees with responsibilities for managing different aspects of the relationship. There may well be a planning committee for the transition, a joint governance committee to manage the relationship going forward and an escalation committee to deal with issues that cannot be resolved at a lower level. The Governance article will likely include sections, maybe even diagrams and flowcharts, dealing with the responsibilities and authority of each committee, their membership, quorum and meeting frequency, escalation of issues and much much more. Given the importance of effective governance to a successful outsourcing arrangement, this detail and the specificity around governance is all for the good.

What there does not seem to be a great deal of, in all the relationship management, is relationship. The mandates, structures and responsibilities of the governance committees are defined in great detail, setting out how the customer and service provider will manage the contract and their relationship. But in most Outsourcing Agreements and regardless of how detailed the Governance provisions are, there is unlikely to be any mention of joint social or educational activities or of any events with a non-business purpose. The only parties are likely to be the Parties to the agreement.

There are many possible reasons for not referring, in an Outsourcing Agreement, to any form of social or educational interaction between the customer and the service provider. In some cases, the absence of such provisions may be attributable to a modern day commercial manifestation of the “no fraternizing with the enemy” rule. In other cases, the agreement may be silent on these matters out of a concern that, if one party or the other were to pay for purely social or educational events, such payment could be considered a form of improper inducement. (This could be an especially serious issue for government outsourcings.) It might be from a sense that the non-commercial aspects of the relationship should not be referred to in what is fundamentally a business agreement. Or it could be that the social and educational interaction between the customer and service provider teams is not mentioned because of the parties’ expectation that this is something that will happen naturally and, if it won’t happen naturally, then it cannot and should not be forced.

In my view, this is unfortunate. The governance provisions of current outsourcing agreements should provide for some social or educational interaction between the customer and service provider personnel. The interaction could take the form of seminars on current technological or business issues, advisory committee meetings in which the customer and service provider teams are invited to share ideas, lunch and learn programs, joint fundraising events, holiday parties or even bowling parties, golf tournaments or family days. The point of these activities is that: (i) they are concerned with developing a relationship between the customer and service provider teams; and (ii) they are not focussed on dealing with or solving specific types of business issues or even with establishing procedures to do so.

This type of social or educational interaction between the customer and the service provider benefits both parties: it allows for empathy and understanding to develop between the teams that can be the basis for the collaborative and cooperative relationship so important to successful outsourcings. Teams are more likely to approach the myriad issues that arise in a cooperative, problem-solving spirit, to the benefit of the outsourcing arrangement, when they know their counterparts as individuals rather than just as anonymous representatives of the other party. In effect, it is easier for the teams to work together because they have played together.

The interaction between the customer and the service provider can happen spontaneously during the term of an Outsourcing Agreement. However there are benefits to addressing the issue specifically in the agreement. First, if the Outsourcing Agreement does deal with the issue, then the social and educational activities are more likely to happen and not depend solely on serendipity. Moreover, it is possible that they will continue to happen even at times of relationship stress when they could have an especially important impact. Second, dealing with the issue in the Outsourcing Agreement allows the parties to define the activities that are appropriate in an organized and systematic way that can encourage the growth of a healthy relationship and maximize their impact. The customer and service provider can also, in the process, establish codes of conduct as to what is acceptable and exclude the events that may be only disguised marketing activities. Finally, the parties can deal specifically with the costs of these arrangements, deciding whether they are to be the responsibility of one or the other of the parties, shared between them or funded in some other way.

Having said all that, there does not seem to be any groundswell of support for including as part of an Outsourcing Agreement provisions concerned with the non-business aspects of the outsourcing relationship. Requests For Proposal in connection with outsourcing arrangements are not asking bidders to identify the social or educational activities they are recommending to nurture a healthy relationship between the customer and service provider teams. Nor do these sorts of provisions seem to be a part of any of the precedent outsourcing contracts I have seen. Perhaps however, if good relationships between the customer and the service provider do actually increase the likelihood of a successful outsourcing, it is time to rethink the issue.

Swimming for a Good Cause

Last Thursday Venture Law Associates LLP - represented by me - attended at the Ontario Track3 Ski Association® annual charity golf tournament. The rain was of biblical portions so we started late, got wringing wet and ended early. But it was a wonderful event.

Track3 teaches disabled children how to ski - hence the name as a number of the children use special equipment that leaves three tracks in the snow. The children have varying degrees of physical and mental disabilities, and it requires a number of volunteers to help each child.

While I don't ski, I was introduced to Track3 by a friend of mine who was the President of the charity for a number of years. The stories that the volunteers and participants tell at the after golf dinner are truly inspiring; without any of the maudlin BS that so often kills something that is supposed to be motivating.

The tournament has traditionally been hockey-themed. This year was no exception, with retired NHL referee Ron Wicks regaling us with stories about his 25 years on the ice. And Hockley Valley Resort graciously gave us a rain check for 18 holes, so it was by no means a washout...


So I urge you to consider volunteering if you are a good skier. Or donate to the cause. And if you are a non-skier, but a good après skier and mediocre golfer like me, join them next year for the annual golf tournament. The information can be found at www.track3.org.

Shake Your Money Maker

Despite the fact that Harpy and Iggy seem to be doing the election dance – in at least one instance literally - and as a result all bills will die, yet again; and while I may be late – although I would like to think fashionably late – to rant (as all bloggers, but particularly legal bloggers, do) about what is right and wrong with the proposed copyright amendment legislation, I have been saving my energies. But, now that we are back to school…

I am not going to go into the details of what Bill C-32 the Copyright Modernization Act is all about. Others have done so better than I would: Michael Geist’s comments are as usual insightful and thorough, and the larger Bay Street firms have had their pundits pontificate.

While they may disagree as to whether this has been suitably drafted to take into account fair dealings, they do agree that Bill C-32 puts more teeth into a copyright holder's ability to pursue violators – higher fines and the addition of an infringement for circumventing DRM/TPM.

What I find more interesting, however, is how the reality of “new technologies” and social media’s impact on “traditional” business models that rely upon copyright protection are finally being exploited more effectively by the “old school”.

In September 2, 2010 NYT’s Technology Section, Claire Cain Miller in an article entitled “YouTube Ads Turn Videos Into Revenue” wrote:

"…TomR35, uploaded a clip from the AMC series “Mad Men”…. In the past, Lions Gate, which owns the rights to the “Mad Men” clip, might have requested that TomR35’s version be taken down. But it has decided to leave clips like this up, and in return, YouTube runs ads with the video and splits the revenue with Lions Gate.
Remarkably, more than one-third of the two billion views of YouTube videos with ads each week are like TomR35’s “Mad Men” clip — uploaded without the copyright owner’s mission but left up by the owner’s choice..." (emphasis added.)

The article goes on to note that in the beginning copyright holders spent a significant amount of time and money getting their material taken down. Now they are reaching agreements with YouTube (aka Google) to get recompense from the inevitable misappropriation of their copyrighted materials that current technology makes possible. Cain Miller notes that this market will likely grow exponentially with new entrants and the interweaving of TV, Internet and mobile devices.

And isn’t this is really what copyright is all about: enabling the owner of a copyright to exploit the copyrighted material for profit? If you can’t beat them, join them.

TRANSITION MEMOS – THE LAWYERS’ DELIVERABLE

There is a lot of focus in outsourcing agreements on client or service provider deliverables. In this blog posting, first published on slaw at http://www.slaw.ca/2010/08/10/transition-memos-%e2%80%93-the-lawyers%e2%80%99-deliverable/, I talk about what should perhaps be the first deliverable in any outsourcing – a transition memo, prepared by counsel, that summarizes the parties' duties and responsibilities.

On more than one occasion, clients have complained to me about what happens after the outsourcing contract is negotiated. The customer or service provider is sobering up from the euphoria brought on by signing the contract, often after months of intense, complicated discussions. They are starting to grapple with the overpowering reality of managing a complex outsourcing relationship on a day-to-day basis. That is exactly the moment when large components of the negotiating team disappear, usually including the lawyers who have supported the delivery organization throughout the contract negotiations. Members of the delivery team aren’t lawyers, but they are left with the responsibilities of digesting, managing and delivering to a complicated contract that often runs to hundreds of pages.

These complaints are not really focussed on the disappearance of the lawyers but, rather, on the loss of the knowledge, insight and expertise accumulated over the months of negotiations. It is an ironic point. As a lawyer, during the contract negotiations, I would have focussed on a “Key Personnel” provision to ensure that critical members of the pre-contract delivery team did not evaporate on contract signing. I would also have worried about the “Transition Out” clauses, reviewing them closely to confirm that they mandated, on termination of the outsourcing contract, the appropriate transfer of knowledge from the service provider to the customer or new service provider. However, the transition of knowledge, from the legal team that negotiated the deal to the “Stay Behind” organization, often did not get the same attention as the negotiations of these clauses did.

I want to focus on that transition – the transition of knowledge from the Legal team – by discussing the contents of a sample Transition Memo. There are many other activities that should be completed as part of shutting down negotiations and starting-up the outsourcing, e.g. the collection and archiving of documents in accordance with an organization’s Record Retention and Destruction Policies or presentations on the new outsourcing contract, but they are beyond the scope of today`s comment.

The content of the Transition Memo will be influenced by the reasons for which it is being done. These reasons may include:

(i) Education: to provide an introduction to the outsourcing relationship for new personnel;

(ii) Contract Management: to assist with the day-to-day management of the outsourcing relationship by identifying the rights and obligations of the parties; and

(iii) Knowledge Retention: to maintain a record of issues, agreements, compromises, trade-offs and open points as background to future questions about the interpretation of specific clauses or in case of a renegotiation of the outsourcing agreement.

Because the contents of the Transition Memo will depend on the reasons for which it is being prepared and the specific circumstances of the outsourcing, it is not possible to define any universally applicable template. The information that is identified below is a sample only, prepared in the abstract, and it will need to be adapted to reflect the individual outsourcing transaction. Before looking at it however, two preliminary points are in order. First, the contents of the Transition Memo should not be dictated by any “Entire Agreements” clause that may be included in the outsourcing contract. The tests to apply to determine if information should be included in the Transition Memo are: (i) whether the information will facilitate a smooth handoff from the Legal team; or (ii) will the information be useful in future?; and not whether the document may be produced as part of a subsequent dispute. Second, some of the material proposed to be included in the Transition Memo may raise questions of legal privilege that are beyond the scope of this comment but that should certainly be considered by counsel in the course of preparing the memo.

The Transition Memo may include the following parts:

I. Introduction:

The focus of this part is to provide an introduction to the Transition Memo and a roadmap to the key documents. It should:

(i) set out the purpose of the Transition Memo;

(ii) specify who is the audience for the memo or at least for specific parts;

(iii) identify key players in the outsourcing negotiation and the role they played. This will be helpful in the years after signing, when the deal team is no longer present and memories have faded, in locating the individuals involved in the different aspects of the pursuit; and

(iv) provide an index to and the location of the pursuit documents. The Transition Memo is not intended to be a Closing Book for the outsourcing. Instead, it should identify the RFP, its various amendments, the RFP response, any related contracts such as non-disclosure agreements or (in the case of the service provider) teaming agreements, meeting minutes, cost models and due diligence information as well as stating where copies of the information can be found.

II. Outsourcing Overview

The purpose of this part is to provide a general overview of the business deal and the structure of the contract. It should include:

(i) a history of the transaction. It can be especially important, where the outsourcing has evolved perhaps by additions to or deletions from scope or extensions or reductions in the term, to document the changes while the details and circumstances are still fresh in the participants’ minds;

(ii) an overview of the business relationship. This should include information about the structure of the transaction, the parties’ objectives in entering into the contract and high level information about the contract itself, e.g. the term of the agreement. This is the “executive summary” and it should establish the context for the detailed contract information identified below.

III. Contract Terms

The part of the Transition Memo is intended to summarize key aspects of the contract. As set out above, this will depend on the contract. However, a sample of the issues that this part may cover includes:

(i) scope of the outsourcing relationship. This section should describe the current scope of the outsourcing relationship and the impact of any “sweeps” clause. It should also refer to any scope that was originally part of the outsourcing relationship but was subsequently removed and what rights, if any, the service provider has to perform this scope in future;

(ii) service commitments and services levels. Service quality issues are likely key to the customer and it is worth summarizing the parties’ obligations in this area very carefully. What are the service provider`s obligations with respect to the services including with respect to service levels? How do any service level credit or earnback regimes operate? What rights does the customer have to adjust the services levels, whether as part of an annual planning process or otherwise?

(iii) financial matters. The Transition Memo should describe the financial aspects of the outsourcing relationship including: (1) invoicing and payment provisions; (2) interest obligations; (3) rights of hold back, set-off and dispute; and (4) benchmarking or most favoured customer clauses; and

(iv) contract timeline and the timing of deliverables. This is an opportunity to provide a calendar of the outsourcing obligations and deliverables that takes account of the time required by the parties to perform their obligations. Such a calendar will be very helpful in the day-to-day management of the outsourcing. This may also be the right section in which to summarize any activities designated as follow up matters in the outsourcing agreement.

In addition to the four sample items identified above, it may also be appropriate to include sections in the Transition Memo dealing with items such as confidential and personal information, personnel and assets, unusual or contentious provisions and open points.

Properly prepared, the Transition Memo should provide information to the Stay Behind team that will be useful on a daily basis. Regardless of whether the contract “ends up in a drawer”, the Transition Memo should not.

Patents Patents Everywhere...

While I do not in anyway purport to be a patent expert, I have noted with interest two recent US decisions that are “rocking” the IT world: the U.S. Patent and Trademark Office’s issued a re-examination certificate (i.e. it has upheld) i4i Inc.’s XML technology patent, and the business methods patent decision of the US Supreme Court Bilski V. Kappos.

Canadian IT firm i4i Inc. holds patents related to Extensible Markup Language (“XML”), which are method and system patents relating to processing and storing content and metacodes of text documents separately and distinctly (I found this out at their web site, as a lot of this is Greek to me). In a “David versus Goliath battle”, i4i sued Microsoft for infringement of its XML related patents. It won a US$200,000,000+ verdict in Texas in which willful infringement was found, the decision has survived the US Court of Appeal, and the i4i patent has now been “endorsed” by the US PTO.

Microsoft’s now has three options: appeal to the US Supreme Court (likelihood of success slim), pay the damages and remove the offending XML or come to a commercial licensing arrangement with i4i. Score one for the “little guys”.

The US Supreme Court recently had a chance to address the scope of what is in fact patentable in Bilski v. Kappos. Unfortunately it did not “grab the bull by the horns”. The decision indicates that business method patents are acceptable in certain circumstances, and it noted that it is not solely the “machine or transformation test” that will be determinative in assessing patentability. So business method patents are still alive, yet the circumstances of successfully defending/obtaining one is still not clearly ascertainable. Hopefully this will be better defined in some of the upcoming cases.

Key Customer Personnel Provisions: More than Service Provider Petulance

Recently, the newly-appointed contract manager on a customer account explained to me the history of a provision in an outsourcing contract including why the clause had been included in the contract and the evil that it was intended to remedy. I appreciated the information and the education. Unfortunately, it was all wrong. I knew this because, unlike the contract manager, I had been involved in drafting the contract. However this incident did get me thinking about the turnover of key personnel in outsourcing relationships, the subject of today’s post.

“Key Supplier Personnel” clauses, a little bit like marriage vows, are all about establishing the foundation for a successful outsourcing relationship. Typically, these provisions:

• require the service provider to identify in a schedule to the outsourcing contract the key management, technical and perhaps business personnel who will be involved in performing the outsourced services for the customer;

• include confirmation from the service provider that such individuals have the qualifications, experience and skill to perform their respective responsibilities;

• restrict the service provider’s ability to replace the key personnel; and

• provide the customer with a right to interview and approve any replacement individuals.

The focus of Key Supplier Personnel clauses is not on service levels or the quality or reliability of the services being performed by the service provider. Instead, the focus is on the service provider personnel responsible for the outsourcing relationship. By naming in the contract the specific individuals who will fill the critical leadership roles on the service provider’s delivery team and by restricting its ability to replace these individuals, the service provider is making significant commitments to the quality of the outsourcing relationship. The customer is able to take comfort that the individuals who were involved with it during the sales process, and who from the many long days and nights working on the transaction built up detailed knowledge and understanding of the customer’s business and operations, continue to be involved. The customer should also be satisfied, from its experiences during the sales process, that these individuals have the qualifications to deliver the services and that the customer will be able to work with these individuals in the years to come. (Otherwise, the customer should have insisted during contract negotiations that the individuals be replaced with others who do have the qualifications or with whom it can work.)

Key Supplier Personnel clauses support the stable, healthy and long term customer/service provider relationship that is at the root of successful outsourcings. It is odd then that, in this respect, only the service provider seems to be taking its vows and to be committed to the marriage. While Key Supplier Personnel provisions may be a standard part of most outsourcing agreements today, “Key Customer Personnel” provisions are not. Customers do not normally include clauses in an outsourcing contract that identify their key personnel (other than their account manager), restrict their ability to replace the unnamed persons or allow the service provider any input on influence on the selection of replacements. In short, there is no corresponding contractual commitment by the customer to the outsourcing relationship.

This is more than just service provider petulance or a blind insistence on unthinking mutuality. There are clear benefits to the health of any outsourcing relationship in having people, with the knowledge and history of the relationship and the ability to work together, on both sides of the table. If the representatives of the two parties - the customer and the service provider - have the same background and context, then management of the day-to-day relationship will be easier and disputes, when they arise, will require less effort to resolve. If these representatives are both committed to the relationship, have similar tenures and have an investment in its future success, then they are more likely to be able to make the give-and-take decisions that are in the long term interests of the arrangement rather than being insistent on resolving the immediate issues in their favour.

For many of the same reasons that customers are concerned about rapid turnover in service provider personnel or having the service provider’s “B team” delivering its services, the service provider should be concerned with the quality and longevity of the customer’s account team. Service providers should be trying to negotiate a form of “Key Customer Personnel” provisions into their outsourcing agreements. It is not necessary that these clauses give service providers the right to approve any decision by the customer to replace members of its leadership team. There are softer commitments that will go a long way to nurturing the sort of relationship that benefits both parties including:

• an express recognition of the benefits to both parties of reducing employee turnover and maintaining continuity in key positions (or at least a statement in the contract that this is one of the parties' outsourcing objectives), together with a commitment to use reasonable efforts to achieve this objective;

• a commitment to keep key positions filled so as to ensure the continuous and uninterrupted provision of the services;

• confirmation that the individuals appointed as key customer personnel have the qualifications, experience and skill required to perform their duties and responsibilities;

• an obligation to provide the service provider, if possible, with advance notice of any change in key customer personnel together with a commitment to consult with the service provider with respect to any replacement; and

• an appropriate transition plan and period.

These provisions may be similar to the substance of many Key Supplier Personnel clauses. This isn’t about mutuality however. It is about recognizing that a successful outsourcing relationship requires commitments from both the parties.

K.I.S.S. and the Protesting at the G20

I warned you in my intro to this blog: while we usually address legal issues, from time to time we get to vent. And this is one of those times. If you prefer to stick to legal issues, please refer to Richard’s excellent post of Friday June 25.

As a person who came of age in the ‘70s, I can appreciate a good protest. Zero in on an issue, come up with a good chant or two, prepare some pithy placards, get as near to the site of the party you are protesting against as is legally permitted, and proceed to peacefully exercise your rights to free speech and congregation. Keep It Simple Stupid.

The protests surrounding the G20 are useless. There are too many issues vying for attention. The protesters’ lack cohesion as to what they actually want to accomplish. The protests are for the most part chaotic. And the apparently inevitable violence just detracts from the message, unless you are an anarchist in which case that is your only goal.

Further it is disingenuous for the "peaceful" protesters to blame a lack of police response for the violence that occurred in Toronto on Saturday when the rioters were being shielded by the crowd; and then declaim a more vigorous police response on Sunday, in which there was little or no bodily injury, as a violation of civil rights which Amnesty International needs to get involved in. Canada and its police forces are not perfect, but the protesting violence is the repugnant cause of any potential overreaction, not per se flaws in the Canadian protections of rights.

If as a protester you naively think (see below as to why you are being naive) that protesting at the G8 and/or G20 meetings will actually accomplish something, go back to basics. And don't let the "Black Bloc" hijack your protest.

And to the G8 and G20: if you really think it necessary to have these meetings when you have already prepared the communiqué about the “agreed principles” – which are rarely effectively acted upon by the participating nations - in advance of the actual meetings, have the frigging meetings in a remote location and stop disrupting urban centres.

End of rant.

Objectives vs. Ideals: The "Objectives Clause" in an Outsourcing Contract

More and more, outsourcing agreements include a section early on in the agreement about the objectives of the customer and the service provider in entering into the agreement. The provisions will typically do three things:

(i) state the parties’ objectives in entering into the agreement;

(ii) acknowledge that the objectives are not intended to create legal obligations for the parties; and

(iii) provide that, where there is any uncertainty concerning the meaning of specific provisions of the outsourcing agreement, the provisions are to be interpreted in light of the primary objectives of the parties in entering into the agreement.

The specific objectives identified in the section depend, of course, on the nature of the transaction. It is not unusual to see objectives such as:

• To achieve economies of scale through standardization and integration and in the delivery of services;

• To invest in leading edge information technology infrastructure, to remain current in today’s technology and to leverage future advances in technology;

• To reduce the customer’s operating costs; and

• To achieve regular, ongoing and meaningful improvement in the quality, accuracy and timeliness of the services.

Notwithstanding that “Objectives” clauses talk about the parties’ objectives and the parties’ intentions in entering into an outsourcing agreement, they seem, invariably, to be focussed on what the customer hopes to achieve from the transaction. It was always very hard, acting as counsel for a service provider, to get agreement to remove these types of Objectives clauses from the contract, regardless of how heavily weighted they were in favour of the customer. It characterized you as the devil’s advocate, suggesting that outsourcing agreements should not seek to implement leading edge technology, reduce operating costs or improve the quality of services. That was a difficult and foolhardy position to take, a set-up for ridicule (albeit politely expressed) and failure. The better option, in the circumstances, was to try to amend the clause so that it more accurately reflected the reality of the outsourcing transaction.

Against this backdrop, I want to touch on three types of potential amendments to Objectives clauses. The first one relates to the relationship aspect of outsourcing transactions. It is customary to describe outsourcing as a partnership, a relationship or a continuum, all as a way of distinguishing it from discrete, single event exchanges. If an outsourcing transaction is going to be a successful one, it will in no small part be because the parties have established a healthy relationship between themselves. This healthy relationship should certainly be an objective of both the customer and the service provider and it should be referred to in the Objectives clause. For example, in a 2007 outsourcing agreement entered into by the Province of British Columbia as part of its Alternative Service Delivery program (available at http://www.health.gov.bc.ca/ehealth/pdf/MSA_and_Schedules.pdf), the Province and the service provider acknowledged that the primary objectives and guiding principles of their contractual relationship included:

“to develop a long term and mutually beneficial business relationship
characterized by, among other things, mutual trust, respect and understanding of
each Party’s interests, mutual cooperation, good faith and flexibility to allow
for the addition or removal of services within the scope of the Services
described in (and in accordance with) this Agreement”.

The second area of focus should be to ensure that the Objectives clause actually reflects the customer reality. Very often, what we see in outsourcing agreements is not an “Objectives” clause but an “Ideals” provision – the description of the ideal outsourcing relationship. It is well and good to refer to leading edge technologies, high levels of innovation, extraordinary levels of service and other similar or equivalent distinguishing marks of top quartile outsourcing relationships – if that is what the customer wants, the ideals correspond to the objectives embodied in the RFP and the successful bidder was selected on that basis. Often though, the customer’s actual objectives are very different. The customer may be focussed on replacing outdated technology with something that won’t break, dramatically reducing costs, avoiding risk or potential disasters or simply staying out of the papers. That’s what should be reflected in the Objectives clause for those relationships.

Finally, if the Objectives clause is actually intended to set out the objectives, intentions and guiding principles of the parties, then it should also take account of the objectives of the service provider. There may be one or two service providers the objectives of whose business were solely focussed on leading edge technologies, high levels of innovation and extraordinary levels of service, but I am not sure they are still in business. Most service providers today are trying to use their expertise, insight and infrastructure to provide services efficiently to customers, to grow their business and to make a profit, i.e. the service provider’s objectives are:

• To perform the services efficiently and effectively;

• To avoid operational management of the services by the customer;

• To leverage the services to expand the service provider’s business, both in the specific area of the contract and in other sectors; and

• To increase its revenues and profit (in less service provider-centric terms, to establish a fair economic business arrangement for both parties)

Getting an alignment between the Objectives clause and the real objectives of the parties is more that an academic issue. It matters because the Objectives clause can be used throughout the term of the agreement and in a variety of ways. The clause may be used, as the introduction to this posting suggests, as a guide to interpreting specific provisions of the contract. If that happens, and the Objectives clause does not reflect the true intentions of both parties, then the result is unlikely to be fair to them. As well, objectives clauses are frequently used as part of the annual evaluation of the service provider’s performance. The objectives themselves may also show up in customer satisfaction surveys when the customer’s employees are asked to assess the service provider’s performance against the ostensible objectives for the agreement. If the objectives are not right, then it is also likely that the evaluations will be skewed. And, finally, the objectives clauses need to reflect the reality of the outsourcing transaction because, hopefully, the parties will read the clauses and try to establish a relationship that will achieve the objectives that have been agreed to by them.

If the outsourcing agreement is truly a partnership, and the Objectives clause reflects this partnership in a balanced way, then it should deal with the parties’ relationship, reflect the customer’s actual objectives in entering into the outsourcing and include the objectives of the service provider.

Are you really going to wear that?

No matter how it is structured, outsourcing is disruptive because it is a change.

Businesses are run by human beings, and most human beings are resistant to change, even if the change is for the better.

One of the interesting phenomena I noticed while working at a large technology services company - and with other service providers since then - was that RFP’s for services frequently contained verbiage about how the enterprise wanted to “transform”, “get to the next level”, “obtain leading edge technology” etc.

However, when provided with a proposal that did this, more often than not an enterprise balked, and would choose a proposal that in the end was significantly less innovative, but was more comfortable if it slightly nudged the status quo.

The successful service provider understands this and frames its proposal so that it balances the RFP’s rhetoric with the reality that change cannot be too drastic or they will not win the deal.

The party issuing the RFP needs to understand the level and pace of change it can actually accommodate, and tailor its assessments of proposals accordingly.

Customer Service Levels – An Idea Whose Time has come

Service Levels are an important part of any outsourcing relationship. However they are usually only thought about in the context of the service provider. In this blog posting, first published on slaw at http://www.slaw.ca/2010/05/20/customer-service-levels-%e2%80%93-an-idea-whose-time-has-come/ , I argue that the time has come to consider “customer service levels”. This is not my idea. I first heard of the idea from Harriet Velazquez of Velazquez Consulting Inc. who also refers to customer service levels as “two way service levels”.

These days, service levels are an integral part of outsourcing relationships. Reflecting the principle that “What gets measured, gets managed.” , the parties to an outsourcing relationship will establish specific metrics to be achieved by the supplier in performing services under the agreement, e.g. 99.99% server uptime in an infrastructure outsourcing or a call abandonment rate of less than 6% for help desk services. The service levels will be linked to penalties for failure to perform and termination rights in the event of consistent under-achievement. Suppliers may not love the idea of committing to service levels, but they recognize the benefits that come, to both parties, from having objective measure of performance and exact information on a regular basis about the level of performance actually provided. The result is that the customer and supplier no longer argue about whether the service levels ought to part of an outsourcing relationship. Instead they focus on “getting it right”: (i) selecting service levels that measure what is important in the relationship for the customer (outcomes, not interim measures of performance); (ii) defining appropriate targets and measurement methodologies; (iii) stating precisely how penalties will be calculated (100/225?); (iv) documenting the availability, if any, of earnbacks; and (v) specifying any concomitant rights of termination available to the customer.

The parties do not usually spend a lot of time talking about establishing service levels for the customer. The response to any suggestions that customer service levels be included is normally either that: (i) the customer’s only material responsibilities are to pay the supplier’s invoices; or (ii) the customer’s obligations cannot be quantified and objectively measured in the same manner as the obligations of the supplier can. This is regrettable, because there is a role for customer service levels in outsourcing relationships, especially in areas where the customer’s performance can have a significant impact on the supplier’s ability to fulfill its commitments under the contract.

Let’s consider a couple of examples of how customer service levels might be used in an outsourcing transaction. First, consider a transformational outsourcing arrangement with a government based on the implementation of a new technology solution across all government departments. In these circumstances, during the term of the agreement, the supplier may need to coordinate multiple site visits to hundreds or thousands of government offices to survey the premises, remove existing equipment, install the new solution, provide training and perform maintenance. To avoid disputes during the term about whether the technology was rolled out and maintained in a timely fashion or why the supplier did not obtain the timely and sufficient access to government premises originally contemplated, the customer and the supplier might establish a customer service level at the time they enter into the agreement. The service level would measure the service provider’s ability to gain access to government offices in accordance with the contract schedule with specific targets to be achieved, e.g. each month, the supplier will gain timely access to 95% of the premises according to a schedule for the month agreed to with the customer sixty days in advance. If performance against this service level were reported on a monthly basis, access issues could be identified early on in the relationship, providing the customer and the supplier with the opportunity to take remedial action at an early stage.

The second example is based on the fact that, in most outsourcing relationships, there are numerous areas where the supplier requires input, advice or direction from the customer. Under system development agreements, for example, there will be many items such as functional or technical specifications, document formats and test results produced by the supplier that require a response from the customer and in respect of which the supplier cannot proceed until that response is received. In these circumstances, the parties should think about establishing a customer service level that measures the responses received from the customer within specified review periods. The customer service level could be calculated, on a monthly basis, as the total days provided for review according to the contract divided by the total review days (with anything less than 100% indicating the customer is not responding within the required periods). Establishing such a service level will not solve any “deemed approval” issues but it will ensure that, when the parties come to discuss delay issues at governance during contract performance, they will have both well-defined expectations and concrete evidence of performance on which to base their discussions.

These examples illustrate that customer service levels can be used in an outsourcing relationship as a management tool for areas where the supplier’s ability to fulfill its obligations depends upon customer performance. The process of defining the service level will compel the parties to identify these interdependencies and to agree on what level of customer performance is acceptable. The implementation of the customer service level will focus the customer on fulfilling its obligations (remember the adage above about “what gets measured, gets managed”) and provide objective information during the course of the relationship about the level of performance actually achieved.

For this idea to work however, the parties will need to think about the same issues in respect of customer service levels as arise with respect to supplier service levels. This includes defining service levels that measure what is important in the relationship to the supplier’s ability to perform, selecting appropriate targets and ensuring the customer has the ability to measure its performance. It should also include a penalty mechanism that establishes consequences for the customer’s failure to perform. This may be a monetary amount, e.g. a quantification of the additional costs incurred by the supplier as a result of the customer’s substandard performance, but it need not be. The parties might agree, for example, that the customer’s failure to achieve a service level creates an earn back that can be used by supplier to excuse its failure to achieve a supplier service level or, alternatively, that, each time the customer fails to perform, the due date for payment of invoices is reduced by five days. The objective of the penalty mechanism is to establish consequences to substandard performance and it is open to the parties to agree as to what those consequences are.

The idea of customer service levels is not just “tit-for-tat”. Rather, they are and should be seen as a governance tool that can be used to improve the overall health of an outsourcing relationship. With that idea in mind, it is time to focus on defining the appropriate customer service levels, not reject the idea out of hand on the basis that however far partnership goes, it does not go that far.

Renewing your Outsourcing Agreement - Ensuring the Benefits are Shared

Jim Black, Vice-President IT Operations at MDS Inc., posted a discussion question on the Outsourcing Relationship Management Group of LinkedIn. Jim asked how one ensures the benefits of sole sourcing are realized by both customers and service providers. (Here is a link to the discussion: http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&discussionID=20146940&gid=2437594&trk=EML_anet_qa_ttle-dnhOon0JumNFomgJt7dBpSBA.)

Jim asked the question generally, so that it related to both new outsourcing deals and the renewal of an existing outsourcing relationship. I thought about the question more narrowly however, in the context of the renewal of an existing outsourcing relationship: how do customers who are thinking about renewing their outsourcing relationship with their current service provider ensure that the benefits of the renewal are enjoyed by both parties, not just the service provider. I replied to Jim on this question and wanted to share my thoughts here.

There are three general areas to think about.

First, customers need to determine what their objectives are for the renegotiation. In the same manner as customers will define their objectives in entering into an outsourcing arrangement, they should try to define what they hope to achieve from the renegotiation. Certainly there will be a cost component to the objectives but it will probably include more than that. It may include “fixing” some irritants or problem areas in the outsourcing relationship, implementing new technology, improving service levels and so on. Also in this category of thinking about objectives, it is worthwhile to try to determine what objectives the current service provider will have for the renegotiation. Knowing this may allow the customer to define aspects of the process or make compromises in areas that are important to the service provider but of little cost to the customer.

The second aspect of a renegotiation is to obtain some market data with respect to price, service levels, terms and conditions, etc. This information can be obtained from speaking with other companies, consulting with benchmarking organizations such as Gartner or exercising benchmarking, audit or other rights that exist under the current outsourcing agreement. Your legal counsel may have information about market terms and conditions. If you are using a third party intermediary such as TPI or Everest, in all likelihood they will also have market data that they are able to bring to bear. While there are a variety of sources, the important point is to obtain some sort of information. You will need the leverage.

The third aspect is to define an effective process for obtaining a realistic proposal from the existing service provider. What I have seen done in other circumstances is for the customer to establish a separate process with the existing service provider under which:

(i) the customer establishes some objectives that any renewal proposal must satisfy and communicates these objectives to the existing service provider;

(ii) the existing service provider is invited to make a sole source proposal – in effect a BAFO – around the renewal – the proposal must be responsive to the customer’s requirements, identify the benefits to the customer of accepting the proposal rather than issuing an RFP, providence evidence that the proposal is market, etc.;

(iii) the proposal of the existing service provider must be submitted on the basis that, if it is acceptable, the customer will attempt to negotiate a contract extension with the existing service provider. If the proposal is unacceptable or if the customer and the existing service provider are not able to reach agreement on the contract extension, then the customer will initiate an RFP process. The existing service provider will not be entitled to participate in the RFP process.

The customer needs to ensure that it starts this process significantly in advance of the expiration of the existing outsourcing agreement because this process can take some time. The customer does not want to be squeezed if there is not sufficient time. Therefore, if there is not enough time, the customer may be best to negotiate a short extension to the existing outsourcing agreement on the same terms and conditions so it has time to follow this process.

Outsourcing - Consultants’ Mandates

As promised (threatened) I am going to give my two cents worth on understanding and controlling your process consultant’s mandate. I am sure that if you do engage one of them to help with an outsourcing they will be only too happy to provide their opinion on what your lawyer’s mandate should be!

I think that you are best served if the process consultant you hire – be they an individual with industry experience or a team from a larger specialized firm – has actual experience in delivering outsourced services – i.e. at least one or two members of the team has worked for a period of time at a service provider actually delivering services. Such persons will have insight into what outsourcers can actually deliver, they can better evaluate what parts of a response/proposal are “fluffy” and require clarification, and they will have an industry feel for the situation. I am not saying that people that don’t have this experience cannot add significant value, but I think you get a very practical perspective and advantage if your advisor has actually been there done that.

That being said, it is still your business and your business plans that have to be fulfilled. Consultants work based on models. They analyze your situation and they then give advice based on models that they have studied and or created. Modeling can be good in that it provides framework and comparisons. Modeling and standardization are bad in that their focus is to force square pegs through round holes.

You need to review very carefully what your consultants advise, ask many questions as to how their proposed structure is going to accommodate the “must have” idiosyncrasies of your business that may not be apparent to third parties, and then get the proposed solution updated.

In other short, your consultants are advisors. You have to live with the results, so don’t abdicate decision making to them.

Third Time Lucky?

Hot off the press, and the darling of Canadian IT/IP legal bloggers and general media, is the dissection of the latest attempt to update Canada's copyright legislation - Bill C-32 Copyright Modernization Act.

General consensus is that it fixed some of the bigger problems with the last two failed attempts to bring Canadian copyright legislation into compliance with its international legal commitments. However there are still a number of sore spots that irk copyright specialists and the proponents of looser copyright laws, particularly surrounding digital rights management. Richard and I will talk to specifics in future posts.

In the meantime, another more pressing question: will the Government get it passed this time, or will we face another election before final reading?....