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Get out of that one!

Wednesday April 13th, 2011

By Terry Street, Principal Consultant and Procurement and Outsourcing Product Manager, Socitm Consulting

Imagine that about six years ago your organisation awarded a contract for outsourced services; not just support for your business, but a totally managed service, run off-site using a pool of staff who operate across many clients, in a shared facility using shared equipment. The contract ends in a year’s time. You have the job of deciding what to do.

The original agreement was for five years with an option to extend for up to two more, which was taken last year. You are pretty sure that the deal is no longer cost-effective: there are frequent complaints that service has declined while costs have risen, over six years the price-indexation has increased the base charge by about 25 per cent, and more and more requests for changes turn into additional charges. The ‘obvious’ solution is to terminate and bring the service back in-house, transfer the staff back, buy back the assets for £1, transfer all the information and sit back and watch the savings pile up.

So the next step is to check the exit clause in the agreement… Oh dear! Nobody was thinking about the contract termination when it was awarded, and the exit provisions are basic to say the least. The supplier will provide an exit manager for six months at the prevailing senior consultant day rate of £650. That means a potential bill of over £70,000 and no legally binding agreement to actually do or transfer anything.

Just as engaged couples tend not to focus on how they’ll handle a possible divorce, so the contracting parties in an outsourcing project often skim over exit strategy during the procurement process. It’s hard to predict how things will work operationally in practice, how the external environment may change and how the contractor will react to termination (not well is the most likely reaction).

Nevertheless, it is essential that the organisation doing the outsourcing ensures that a realistic and fully costed exit strategy is developed as part of the procurement process and that the final agreement and schedule set this out in a detailed and case-specific way.

According to the OGC model agreement, the guiding principle of the exit management clause should be that termination should cause minimum disruption to the outsourcing organisation and, where service provision is transferred, that transfer should be seamless. The key issues are which assets (including business information) are to be transferred, how they are to be valued, and how associated risks are to be managed – and the price to be paid for any transitional services or assistance provided by the contractor.

Of course, a key consideration is the circumstances in which termination takes place. Is it just the planned end of the contract term, or has there been a breach or breakdown in the relationship between the parties? The exit agreement cannot assume goodwill or that timing or any other aspect of termination will be non-controversial. Putting it bluntly, it’s a very good idea to review your exit provisions before the time comes when you have to rely on them.

Indeed, the OGC model suggests the exit plan be revisited annually and adjusted to ensure it remains relevant as the situation changes, so maybe now is a good time to have a review.

If you’d like to discuss any aspect of this, contact me on 0845 450 2317 or at terry.street@socitmconsulting.co.uk

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