Tuesday, August 24, 2010


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.

Tuesday, August 3, 2010

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.