IT Outsourcing and software contracting entering new decade

Benchmarking and exit clauses: how to knock down the exit barriers

Helsinki, 10 June 2010

RA Ulrich Bäumer, LL.M.

Agenda

I. Benchmarking

II. Exit clauses

III. Lessons learned

…but first

How do we know ?

Advice of IT companies in Europe* – Legal and Tax Services

Int. IT company

• outsourcing• tax• structuring the distribution in the EU• data protection

Indian IT company

• M&A• IT contracts• employment law• competition law• data protection

Indian IT company

• IT procurement• IT contracts• HR / employment• corporate law• strategic advice• antitrust

Indian IT company

• IT contracts• HR• data protection• M&A

Indian IT company

• M&A• corporate law• IT contracts• HR / employment• data protection• transactional work

Int. IT company •Commercial contracts• data protection• HR

Indian IT company

• tax law• HR / employment• corporate law• strategic advice• transactional work

Int. IT company

• M & A• HR• outsourcing

*Some examples of our recent projects

Recent Quotes

Information TechnologyParticular strengths: Strong outsourcing expertise

JUVE, November 2009

Another extraordinary success is based on the Indian Group led by IT partner Ulrich Bäumer

JUVE, November 2009

Quo Vadis outsourcing IT service providers in Europe?

• trend No. 1:

• The IT outsourcing service providers have discovered Europe as an attractive market

• The reasons are the strong Europe and a saturated US market:

• US market for outsourcing in 2006: 148 transactions (2005: 163)

• EU market for outsourcing in 2006: 157 transactions (2005: 142)

(Source: Technology Partners International, TPI Index)

Quo Vadis outsourcing IT service providers in Europe?

• trend No. 2:

• Outsourcing IT service provider climb the value chain:

• 2000: Y2K problems

• 2004: larger outsourcing projects (IT-, Application Management-, Infrastructure-, Business Process Outsourcing)

• 2006: takeover of smaller companies in Europe / Business Consulting

• 2008: Collaboration / takeover of business units

• 2009: takeover of larger companies in Europe (e.g. Axon)

I.

Benchmarking

I. Benchmarking

• "Benchmarking is the search for industry best practices that lead to superior performance" (Robert Camp, founder of the Benchmarking approach)

• "A process of identifying and learning from the best practices in other organisations" (Performance Improvement Group, "Benchmarking Code of Conduct")

• "Process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost" (Wikipedia)

I. Benchmarking

• Principles of Benchmarking:

Identifying and learning from other companies

Identifying the Best Practice

Benchmarking as management tool

Benchmarking as essential part of dynamic process of continuous improvement and performance breakthroughs

• Benchmarking is appropriate if:

Outsourcing volume is of a bigger scale (> 1 Mio. €)

Outsourcing project covers various and complex services

Term of project is lasting over several years

Both parties intend to continue the cooperation

I. Benchmarking

Supplier's Interest

• Preference:

• Shorter contract term

• Reasons:

• Flexibility/Adjustment to changing situations

• Prices, services and place of Performance are re-negotiable

• Preference:

• Longer contract term

• Reasons:

• Risk management

• Better return on ramp-up costs, such as personal, time, material and costs through long-term co-operations

• higher customer loyalty

Customer's Interest

I. Benchmarking

• Types of Benchmarking:

Internal Benchmarking

• Benchmarking within one company and its affiliates or within one industry over time in light of established goals

Competitive Benchmarking

• Benchmarking of practices and processes of competitors from one business sector or areas of activity

Functional Benchmarking

• Benchmarking of similar practices of processes in companies from different business sectors or areas of activity with regard to a certain services/functions

Generic Benchmarking

• Broad benchmarking of generic practices and processes of companies from different business sectors

I. Benchmarking

• Essential elements of a contractual clause:

What is the time and periodicity of the benchmarking?

What is the scope/subject of the benchmarking? Who is the comparative group?

What agent/company will conduct the benchmarking?

Who will choose and pay the benchmarking agent?

How is the benchmarking process structured?

What is the calculation of price average?

How are the parties be bound by the benchmarking results? How will they execute the benchmarking results?

I. Benchmarking

Template of a Benchmarking clause from our last outsourcing contract:

a. Benchmarking Test

• Scope of Benchmarking, cost bearance

b. Result of benchmarking

• Price adjustment proceedings (one-sided)

b. Supplier's right to examine/escalation proceedings

c. Qualifications and requirements for benchmarking agent

d. Use of comparison data

• In case of existing NDA: Supplier's consent to disclose information to Benchmarking agent.

II. Exit clauses

Exit

Termination of Supplier's Services

Back-/Insourcing to Customer

Transition to 2nd Generation Supplier

Detrimental

• Risk for Customer's business

• Loss of outsourcing benefits (Know-how, data, processes)

Risk: § 613a BGB ("TUPE")

Transfer of Operations

Transfer of Employees

II. Exit clauses

• Risks of Lacking Exit-Management

Loss of

• Services provided by Supplier

• Know-how developed by Supplier

• Licenses granted by Supplier on Supplier's pre-existing or on third party's IP-rights

• Equipment delivered by Supplier

II. Exit clauses

Risk of § 613a BGB

• Transfer of Operations: Change of the owner of operations

Transferred operations remain single economic unit

• Critera:

Takeover of resources (e.g. hard/software, licenses)

Takeover of client base and of key personnel

Similarity of services provided prior and after transfer

Rather short interruption period of service provision

Same tower structure or same organisation across towers

• Consequences:

Transfer of Employees: Customer/2nd Generation Supplier become new employer = Liability for all employee's claims, even occurring before transfer

II. Exit clauses

Essential Elements of Exit Management

I. Transition Plan:

• Parties' responsibilities and tasks

• Milestones/delay

• Non-Compliance with Transition Plan

II. Exit clauses

II. Personnel

• Binding key personnel: old Supplier shall not withdraw key personnel before end of transition

• Disclosure of information on qualification of key personnel by old Supplier to Customer/2nd Generation Supplier

e.g. Bitkom "Code of Conduct: Transfer of Employees with 2nd Generation Outsourcing"

• Structure of transition to be out of scope of § 613a BGB, alternately: specifying costs and obligations under § 613a BGB (e.g. company pension scheme)

II. Exit clauses

III. Information and Disclosure

• Transition of know-how

• Data migration, delivery of required documentation/information

• Training of Customer's/2nd Generation Supplier's personnel

III. Assistance

• Old Supplier's obligation to temporarily continue service provision

• Customer's/2nd Generation Supplier's right to request for additional services

• Old Supplier's obligation to provide follow-up support services

II. Exit clauses

V. Equipment

• Asset-Management

• Transfer of licenses

• Transfer of existing third party service contracts

VI. Dispute Resolution

III.

Lessons learned

III. Lessons learned

• Make sure

• the outsourcing service provider understands what you will do and what you expect of him (e.g. TUPE – who will make the redundancies)

• you explain to the outsourcing service provider who will bear the financial risks (of a benchmark, of a TUPE risk)

• you have the right team on the project (e.g. business, finance, tax, legal, pension experts, local HR team, etc)

• you have a workable timeline (for benchmark and exit, but also for possible merger and HR notifications) and a workable conflict resolution mechanism

III. Lessons learned

• you can practically enforce your rights against the outsourcing service provider

• you have the right conditions precedent and subsequent (for a smooth exit scenario)

• you involve management and all stakeholders (including, where applicable, works councils) at the right time

• you use the right legal entities in the right geographies

• you are prepared to take some risk and some costs

• you address the compliance issues

• you are prepared to deal with all cultural issues in an exit scenario

Questions?

Contacts

Ulrich Baeumer, LL.M. / Attorney-at-Law (NY)

Osborne Clarke, Cologne (Germany)

Partner/ IT

t +49 (221) 5108 4164

m +49 160 969 36 939

e ulrich.baeumer@osborneclarke.com