Planning a Graceful Exit — Checklist for a Breakup
This article is the first in a four-part series that seeks to provide organizations with useful checklists to key components of outsourcing arrangements. One key component that does not often receive the attention it deserves is the exit strategy. More often than not, the pressures of realizing immediate cost savings in outsourcing deals drive organizations to agree to termination or repatriation assistance terms and conditions that may end up eroding any savings realized upfront. Not only can termination and repatriation terms and conditions guard against such erosion, they can also provide significant leverage when negotiating outsourcing renewals, as well as mitigate the risk of disputes over each party’s rights during repatriation.
When negotiating a new outsourcing agreement or renewing of an old agreement, organizations should devise an exit strategy that takes into consideration the following issues:
- Based on the type of outsourcing, will repatriating the services at the end of the relationship require significant effort by the service provider? If so, consider negotiating the fees that will be applicable for termination or repatriation assistance services provided by the service provider. Also consider whether any portion of such fees should be paid only upon successful completion of such services.
- At the end of the relationship, will you have access to the information your organization will need to either: (a) perform the services yourself; or (b) approach another service provider for the services? If not, consider negotiating obligations of the service provider to deliver the information you will need in order to do so, such as the delivery of key systems documents, operational manuals, process flows, or architectural diagrams.
- At the end of the relationship, will you need rights to acquire any licences or assets that the service provider has used or is using to provide the outsourced services? If so, consider negotiating provisions that provide for: (a) visibility into the assets and licences used by the service provider to perform the services; and (b) the right to acquire such assets and licences at pre-determined values. For example, you may be able to negotiate terms and conditions that provide for: (a) the return of assets initially transferred to the service provider; (b) the right to purchase assets at cost; (c) the right to purchase assets at specified margins; or (d) the service provider’s assistance in procuring assets from relevant suppliers.
- What is the likelihood that one or more key employees of the service provider will become indispensable to the operations of the outsourced portion of your business? If the likelihood is high, consider negotiating the right to make employment offers to such individuals.
- When will you need to invoke your rights to termination or repatriation assistance services from the service provider? Consider how far in advance you will need the supplier’s assistance before the contract is set to expire. Consider also whether three to five years down the road, when you no longer have in-house expertise, you will need the service provider’s assistance to articulate the services that you are receiving in a request-for-proposal or request-for-information document in order to compare apples to apples. You may need such assistance months in advance of any renewal or new agreement discussions.
Although it is difficult to think about what will happen at the end of the relationship, it is important to negotiate favourable back-end terms and conditions while you still have leverage.