Bierce & Kenerson, P.C.

Legal Guides: Outsourcing

LEGAL GUIDE TO OUTSOURCING

The "Virtual" Global Organization

Infrastructure Alignment

Today's complex corporate infrastructures are becoming more globally uniform and costly to manage. New service infrastructures and management techniques are replacing business processes dependent on internally managed corporate-owned assets. These new service paradigms, "Business Process Management," cut across the entire business enterprise. They impact diverse operations ranging from product design, manufacture, repair, marketing, distribution and "customer care," to the management of personnel, supplies (such as electrical power co-generation facilities, telecommunications and information technology), logistics and finance.

Business process alignment enables the enterprise to leverage on core competencies and subcontract even the most vital of supply needs. On a macroeconomic level, such alignment can transform the enterprise into a new, more competitive "virtual" global service provider.

An outsourcing relationship has the potential for unlocking capital investment for new strategic initiatives, synergy, global reach, cost savings, productivity enhancement, greater profitability and flexibility, quicker response times, speed to market and predictability in service levels and financial commitments.

Careful planning, implementation and ongoing management are the keys to achieving this potential.

Planning

Project Management

Make a case for business process design with end-to-end structuring for analysis of each business process component; activity-based costing, tax analysis
Define goals, rationale and alternatives
Identify teams and roles
Develop a project plan
Define the scope of contracted services and retained core competencies

Performance and Productivity Benchmarks

Existing levels and flowchart of steps
"Best practices"
Competitively acceptable thresholds
Audit parameters and audit tools

Decisionmaking Plan

Pre-select qualified bidders
Identify, group and weight criteria
Identify legal and fiscal constraints
Build a financial "base case"

Human Resources Management

In-house bidding procedure
Evaluate compensation, benefits, incentives, training, career paths

Risk Management Strategies

Geopolitical risk management
Regulatory environment
Identification, infringement, liability to third parties
Disaster recovery planning
Reversibility planning

Variations on Classic Outsourcing

Gain-sharing incentives
Joint ventures with external service provider
Open-book accounting

Selection Process

Requests: Information, Quotations, Proposals

Focus: transparency, competition, service levels
Project scheduling and management
Scope: required and optional services
Asset Management: inventory and plans for current and future resources (human, physical, realty, intellectual property, contract rights and duties)
Service Levels: current and projected
Formats for vendor responses
Vendor background and qualifications
Attachments: sample terms, reports

Due Diligence

Vendor references
Meetings to clarify vendor responses
Customer operating issues

Decision Making Process

Tangible measurements based on reasons for outsourcing: improve business focus, access of other resources not available internally, share risks, liberate capital investment, accelerate re-engineering benefits, gain a committed "partner," reduce costs, globalize
Transparency of evaluation process
Consultations with all stakeholders
Legislative approval and appropriations
Pre-bid vendor conferences, evaluation of bids, possible selection process
Approvals

Planning for Implementation

Third pary consents
Human resources planning
Asset retention and refreshing

Control without Ownership

Letter of Intent

Define scope and parameters
Interim commitments and contingencies

Contract Negotiations

Objectives
Scope of services
Term, termination and transitions
Vendor personnel: key personnel, transferred employees, qualifications, retention and replacement of vendor personnel, new benefits, employment and confidentiality contracts
Third party contracts: services, licenses, leases, finances, etc.
Proprietary rights and confidentiality
Performance standards and incentives
Force majeure
Project and contract administration
Pricing, taxation, finance and audit
Representations and warranties
Insurance, indemnities, liability penalties, incentives
Process Improvement
Dispute resolution

Maintaining Control

Transition management
Permanent management: support staff for strategy, policymaking, supervision of vendor performance
Governance
Steering committees
Continuous process improvement: benchmarking and SLA revisions
Enforcement
Evolution: renegotiation, replacement
Integration: managing multiple outsourced services; coordination of in-house with external services
SOX
Privacy
Compliance