Contracting and Legal Issues: Navigating the Negotiation Process. That’s the topic of a presentation by Janet Parkhurst, Esq. at the ALM Outsourcing Conference 215pm session.
[This blog post comes to you live from the ALM-sponsored Legal Industry Outsourcing Forum (May 23, 2007, NYC). Notes and comments are real time with minimal editing and posted as a session ends. I am taking notes in Microsoft OneNote, so use the outlining format.]
1. Negotiation process
a. “Boots to the ground and nose to the grindstone”
b. Make sure you have people on the ground in offshore locations
c. Whoever is negotiating the deal needs to do it full time
d. Be prepared for cultural gaps – both between service providers and customers and between onshore and offshore entities
e. It’s always close of business somewhere. Time differences can be advantage in service delivery, but when negotiating, the time zones are hard to manage. Who has to be up in the middle of the night?
2. Deal structure
a. Competitive bidding or soles source. Usually deals start as competitive and then down select to one provider late in negotiation process.
b. Options include Master Service Agreement (MSA) with Statements of Work (SOW), line of credit or facility approach (make service available)
c. If you outsource multiple types of services, you may want to select multiple vendors, for expertise and for risk mitigation
d. Timing is a key consideration. Complexity and short time frame are inconsistent. Avoid creating false deadlines, which can lead to signing in haste
3. Key contract terms
a. Intro: Agreements (any, including LPO) typically are 50 to 80 pages. Deals are complex. Following are terms of greatest concern
b. Scope of service
i. Know what you do today (your current process)
ii. If you outsource document production, you need to know how you do it now, internally.
iii. Involve subject matter experts (SME) in the service being negotiated
iv. You must include details in SOW. This helps avoid disputes over what service provider must do.
v. “Sweep provision” reflects services not specifically mentioned but necessary to deliver the services specifically mentioned
c. Performance management
i. Post signing, this is the most critical. Manage expectations on both sides
ii. Service levels
1) Define and align customer expectations. Since LPO is immature, defining service levels is still hard (at least relative to IT). One approach is customer satisfaction levels (by survey) but this may be too subjective. It is better to have more objective measures of success.
2) Define supplier expectations. (Relates to Service Level Agreement, SLA)
3) Create remedies
4) SLA determines and defines success. Don’t expect platinum service if you are only paying for silver. This is sometimes a bitter pill for customers to swallow.
5) SLA and price relate
6) Remain flexible. SLAs may need to improve over time.
d. Benchmarking
1) Relates to SLA – a provision that lets customer keep up with competing customer organizations and with pricing of other providers. Keep agreement aligned with market. LPO market is immature so benchmarking now is hard. Not clear if there are good benchmarks available.
e. Governance
1) Oversight is required, not optional. Lawyers must be involved in managing LPO relations, especially where substantive legal w
ork is involved.
2) Spell out which issues will be decide through a formal governance process. But consider what you as customer really want to be involved in. Be realistic about the level of scrutiny and approval you really want.
3) Avoid clauses that reference future “mutual agreement.” Know what happens if you fail to mutually agree
f. Insourcing and Re-sourcing
1) The right to pull work back in internally or to use a different provider helps manage the performance. Make this right granular (
meaning it does not trigger termination) so you can pick and choose what you change. For this right, expect the provider to ask for price adjustments.
2) Make sure that exclusivity, pricing, and extraordinary event provisions tie in properly
3) Distinguish this right from rights to down- or up-size based on change in business.
g. Staffing considerations
1) More important in LPO than other outsourcing agreements because of ethical considerations. Law firms must have controls to avoid aiding the unauthorized practice of law (UPL), to protect confidences, and to avoid conflicts.
2) Terms that can help with this include employee background and reference checks
3) Training and appropriate certifications should be contractually required
4) Make conflicts and ongoing obligation, down to individuals at outsourcer. Maintain right to re-check conflicts regularly.
5) Consider service levels re turnover, which is especially important where measuring outputs may be hard.
h. Data protection and confidentiality
1) Rules vary by industry and geography. Contract should comply with rules of the most restrictive jurisdiction
2) Contract should allow amendment to reflect changes in rules. Specify who bears costs.
3) Be prepared for a breach – have terms that specify who is in charge of and how to mitigate the damage
i. Proprietary rights
1) Specify who owns any IP created. Especially an issue in IT, but also applies to lawyer work product. Consider local and domestic law. Indian law, for example, requires that employees assign rights. Be sure contract requires provider to obtain these.
2) Licenses to technology used by supplier
j. Pricing
1) This is a more a business than legal issue
2) Allow for increases or decreases in amount of services used
3) Who bears cost if extra hours are required – contract may specify premiums for off-hour work
4) Which locale’s COLA (cost of living adjustment) applies
5) Explicitly address currency exchange rate risks
6) Be aware of tax holidays that may expire or new taxes – who pays?
k. Force majeure
1) Read the events and know the geography. Find out which force majeure events have occurred in the past.
2) Include provisions for prompt resumption and/or substitute service
3) Business continuity is ideal – but can you afford it?
l. Term and termination
1) Length of term affects other provisions. For example, shorter term may mean fewer benchmarks.
2) In practice, agreements rarely terminate; more often they are renewed. Termination for problems is rare
3) Termination fees are about leverage in the event of problems. You may not get them, but they help in negotiations
4) Understand the implications of termination – how easy is it to get out, what is the wind-down process, what are the costs (stated and internal costs not part of contract) and who bears them
m. 50 Ways to Leave Your Vendor
1) Cause, convenience
2) Termination assistance (specify length of time and scope), even if for convenience
3) Cooperation with successor
4) Employee re-hire rights
n. Dispute resolution
1) It is fairly common to invoke dispute resolution process, largely because relationships ARE long term
2) Consider choice of law and venue (or arbitration)
o. Limitation on liability
1) Providers attempt to disclaim liabilities and there are typically caps on liability
2) Customer may want caps and exceptions (e.g., for confidentiality breach or gross negligence)
3) Make sure performance credits are not viewed as liquidated damages. They are meant as disincentive for bad performance
4) Third party beneficiaries – understand potential rights of or benefits to clients
4. Avoiding pitfalls
a. Manage the agreement
b. Avoid honeymoon – watch from outset
c. Plan for the unexpected such as regulatory changes, scope adjustments.
d. Align expectations of both sides, including end users of customers
e. Know how to bring work back in house.