Planning For Contract Termination

NelsonHall's Tony Hall on how to ensure a smooth transition and a happy

ending

By: Tony Hall

Director
NelsonHall
(Issue Details: Volume 9, Issue 5, June 2007).

Although business process outsourcing (BPO) is still in the early adoption stages
for the majority of companies, the increasing volume of BPO activity over the last
approximately 15 years has resulted in significant learning experiences by the
companies implementing BPO, the vendors providing BPO services and the
companies that deliver other products and services associated with BPO. As a
result, the experiences and knowledge of the greater business community has
evolved leading practices across several aspects of the BPO lifecycle. This article
provides information on those leading practices that specifically address the topic
of BPO contract termination, both planned and unplanned.

Termination Planning

“There is no silver bullet that takes care of everything” – senior law practitioner

There is no doubt that all BPO contracts will eventually terminate. However, while
the BPO vendor’s relationship with the business may cease, the service
requirements of the business will generally continue. Proper termination planning
and contracting is critical to ensuring a successful process transition (back) to the
business (client) or new BPO vendor.

Factors Influencing Termination

The cause and circumstances surrounding contract termination, beyond simple

contract expiration, can vary significantly based upon circumstances. Examples of
factors influencing contract termination include:

o change in executive leadership

o CEO, CFO, chief HR executive
o change in business strategy
o mergers, acquisition and divestiture
o expansion from regional to global environment
o new business model
o initial cost savings contracts lose luster
o failure of performance
o BPO vendor capability insufficient
o poorly scoped and priced offering
o inadequate change management processes
o BPO contract unable to support changing business needs
o desire to re-bid and/or change pricing structure
o changing market and economic forces
o pure cost savings contracts lose value
o desire to bundle/unbundle BPO vendor(s)
o nonpayment of services
o untenable business circumstances
o aggressive negotiation tactics
o loss of credibility and trust
o either or both BPO vendor and client unable to work together
o significant or consistent staff turnover undermines client/vendor relationships
o a team oriented win/win relationship is never established

Early Planning for Contract Termination

“Over the last 20 years we have learned that termination is not especially difficult
and is not a golden handcuff” – senior law practitioner

The need to address contract termination in detail early in the negotiation process
is critical to ensuring the lowest-risk, highest-benefit contract is created. While
parties to a new BPO contract and business relationship are interested in creating
the terms and circumstances which contribute to their mutual success, it is critical
that the discussions include detailed planning for all types of contract termination
events as well. It is a serious mistake for clients to shy away from addressing
contract termination issues at the beginning of the contracting process either for
lack of experience or out of concern for setting a negative tone or damaging their
relationship.

In fact, clients should insist on a thorough and comprehensive contract

termination plan during the initial contracting process. This will enable them to
identify and utilize the most comprehensive and flexible approach possible to
ensure the framework and terms for managing complex and challenging contract
termination situations are established well before issues arise.

In addition to the benefits associated with well-thought-out termination plans and

processes for change management and the protection of business interests early
in the BPO relationship, the worst possible time to address the high pressure,
complex, sensitive and emotional issues associated with unplanned BPO contract
termination is during the termination process. While minor improvements and
negotiations may be appropriate during this time, the multitude of detailed and
complex termination related issues should be defined well in advance.

BPO Contract Termination Framework

A. Categories of Termination

“Every contract terminates” – senior law practitioner

While circumstances listed above as well as others can result in contract

termination, there are really three categories of contract termination as defined
below:
1. expiration or non-renewal
2. termination for convenience including early and partial termination
3. termination for cause

Expiration or non-renewal

The contract is allowed to expire (expiration terms are invoked). While obviously
self-explanatory, this type of contract termination is somewhat rare; generally
other factors will influence action in the form of termination for convenience or
termination for cause.

Termination for convenience including early and partial termination

Termination for convenience is the broadest or “softest” category and can be

invoked for several reasons including the following examples:

o changes in business strategy including mergers, acquisitions and divestitures

o changes in executive leadership
o the desire to rebid BPO services to obtain more favorable pricing
o desire to rebid BPO services to change the BPO environment itself such as
moving from labor arbitrage or “lift and shift” to business transformation

Termination for convenience should never be an option for the BPO vendor.

Termination for cause

Termination for cause is the most concrete reason for termination and generally
involves two conditions:

o failure to perform on the part of the vendor

o failure to pay on the part of the client

B. Common Requirements in BPO Contract Termination

“Whether it is BPO, ITO, Transformation or F&A, HR, CMS for the most part the
rights to terminate and the assistance the BPO provider must provide are
generally similar” – senior law practitioner

Regardless of the circumstances surrounding termination, all terminations involve

certain common requirements. Correctly addressing these common requirements
is critical to successfully terminating the BPO contract regardless of circumstance.

Common requirements include the following:

1. process production elements

2. service continuation
3. transition support

1. Process production elements

“It is a major issue to address the ‘hundreds’ of contracts that support
transformation and unwinding the third party contracts are challenging and a big
effort” – senior law practitioner

During the transition phase of the BPO lifecycle, the elements needed to produce
the business process become the responsibility of the BPO vendor. Upon
termination, they must be transferred from the service provider back to the client
or to the new BPO vendor.

These process production elements typically include:

o personnel - including all the individuals and associated skills required to

perform the process
o equipment - including facilities, infrastructure, hardware, peripheral devices,
etc
o intellectual property - including software licenses
o third party contracts and services - at the same cost and productivity levels
included in the contract
o data - including other confidential information
o process documentation - including manuals, instructions and other procedures

2. Service continuation

“The key is that the customer must have business continuity” – senior law
practitioner

Generally, the client will require the continued provision of services from the BPO
vendor for some period of time following termination. This includes the need to
provide service continuation during the time frame the process is being
transitioned back to the client or to a new service provider.

Common requirements for continued services include:

o all services continued - or specific services selected by the client - and in the
same manner as the service delivery model being used prior to termination
unless authorized by the client
o notice provision - including specific notification processes identifying contact
personnel by name
o timing elements - identifying pre- and post-termination assistance time
periods (planning with BPO vendor assistance can begin up to six months
before termination date; this six month period is in addition to the transition
time period described below)
o service levels - including SLA and other performance credits - should not be
affected by any service delivery model changes as indicated above

3. Transition support

The objective of transition support is similar to the original transition activities

associated with BPO contract initiation:
o continuation of business services without interruption
o transfer of all resources required for the client (or its designee) to assume
control and responsibility for the services from the BPO vendor
o timely and orderly transfer of services to the client or the client’s designee

Common requirements for transition support include:

o clear definition of BPO vendor’s role in transition planning and execution

o given changes to the client environment the specific components of this role
may be significantly different than the initial transition
o a cooperative environment regardless of the reasons for termination
o relationship management is key to a successful transition

Leading Practices

“The best practice in an outsourcing contract takes you to every phase of the
contract” – senior law practitioner

The components listed below summarize the framework defined earlier in this
brief and provide a method for identifying leading practices for BPO contract
termination:

Termination Framework
Categories of termination

1. expiration or non-renewal
2. termination for convenience including early and partial termination
3. termination for cause

Common termination requirements

1. process production elements

2. service continuation
3. transition support

Following are a series of leading practices for BPO contract termination which is
based on the cumulative experiences of the BPO client, vendor and the legal
communities. Each of these components can be applied to all three of the
termination categories listed above.

While the points expressed below may be appropriate for your utilization, each
BPO client situation and needs differ substantially and the utilization of any
specific item below must be considered in light of their unique needs.

Categories of Termination

In all cases the contract provisions surrounding the three categories of

termination should include the following:
o The contract must discuss termination in detail and include specific
termination provisions by termination category
o Termination assistance provisions must address all of the common termination
requirements (more detail below)
o The period of termination assistance is typically 12 to 18 months
o Performance standards for termination assistance must be specified
o Any charges associated with termination assistance must be specified

Common Termination Requirements

1. Process production elements

“Most of the BPO providers want to provide both the technology and process, not
use your system - understanding all of the infrastructure pieces is terribly
important” – senior law practitioner

Personnel

o The client or client’s designee may hire any BPO vendor personnel dedicated
to performing the BPO services as of the date of termination notification
o The BPO vendor waives its rights under any contracts with such personnel
restricting their ability to be recruited or hired by the client
o The client or its designee shall have reasonable access to personnel for
interviews and recruitment
o The BPO vendor waives its rights under any contracts with such personnel
restricting their ability to be recruited or hired by the client
o The client or it’s designee shall have reasonable access to personnel for
interviews and recruitment

NOTE: in cases where the above terms cannot be secured, positioning the next
level of negotiation should include the following:

o If hiring is not possible, an option to retain any of the staff currently assigned
to the project, that you select on the contract for up to three years at a rate
reduced from list price rates
o Another approach is to seek a flat maximum percentage of staff assigned to
the client as of notification termination, for example, have the right to hire up
to 30% of the staff
o These terms are most commonly used with large labor arbitrage contracts
where the BPO vendor utilizes high volume of staff in a competitive labor
market, for example with firms in India

Equipment

At the client’s request, the BPO vendor is obligated to:

o obtain consents and assign to client or its designee leases for equipment used
for providing the services
o sell to the client or its designee equipment owned by the BPO vendor and
used for providing the services
o assign any maintenance agreements for such equipment
o provide all documentation relevant to such equipment

Intellectual property

o continued current grants by the BPO vendor of licenses or other interests in

pre-existing and newly-created intellectual property required for the BPO
services
o BPO vendor is obligated to provide sublicenses to service recipients as
required

Third-party contracts and services

o The BPO vendor will obtain for the client or its designee, on reasonable terms
and conditions, rights to any third party services required for provision of the
services

NOTE: In large BPO deals and especially with transformation contracts vs. labor
arbitrage contracts it can be very difficult to “unwind” the third party contracts;
there can be an enormous quantity of contracts unknown to the client. Although
BPO vendors will naturally seek to eliminate third parties during the course of
BPO contracts in order to extend their services and increase profitability, there
can be a significant challenge with large enterprises. If possible, assigning a high
quality person to a contract management position at the outset of the BPO
contract will significantly reduce the risks associated with reliance on third party
equipment. The key is high quality; traditionally a lower level employee is
assigned and unable to accomplish the complex tasks associated with this effort.

Data (including confidential information)

“The vendor has no rights to withhold access to data under any circumstances
and the customer must know where it is and where it is going and know that they
can get access to the data in a form they can use” – senior law practitioner

o client retains ownership of all its data and confidential information

o BPO vendor is obligated to protect client data and confidential information and
to return it promptly upon request or upon termination/expiration
o all copies of this information should be destroyed as well

Process documentation including manuals, instructions and other procedures

o BPO vendor is obligated to prepare, maintain and update information

sufficient to enable the client to understand requirements for service delivery
o client owns the service manuals and the BPO vendor must relinquish them

2. Service continuation
o BPO vendor is obligated to continue to provide services during the termination
assistance period
o scope of services may be reduced by client notice to the BPO vendor
o quality and level of performance during the termination assistance period may
not decline
o service levels continue to apply
o charges remain unchanged

3. Transition support

o BPO vendor is responsible for drafting or assisting in the preparation of the

transition plan
o BPO vendor is required to give the client or client’s designee reasonable
access to facilities, personnel and other resources
o BPO vendor is required to maintain confidentiality and is prohibited from
removing equipment or data
o BPO vendor is required to support client’s bid process

NOTE: in order to ensure the greatest possible flexibility, the client must establish
their rights with respect to utilizing BPO vendor data as part of any bid process
for a new vendor.

o certain BPO vendor confidential information will be required in the RFP or

appropriate specification document to ensure prospective BPO vendors can
accurately assess and bid their BPO services
o it is better to go with a broad definition of information required with general
examples than try to identify specific confidential vendor data needed for the
bidding process
o generally, the price will not be released by the BPO vendor to their
competition and is generally not needed in the specifications

BPO vendor is required to provide specific operational assistance in the transition

process including the following:

o knowledge transfer
o delivery of documentation and procedures
o delivery of data
o cooperation with recruiting and hiring of personnel
o planning activities associated with the transition process include
o joint review of contract termination assistance requirements
o assessment of current client state, needs and gap analysis
o preparation of a termination assistance plan with BPO vendor’s assistance
o documentation of responsibilities and deadlines in as much detail as possible

Recommendations

An organization seeking to create BPO contract termination components that

minimize risk and provide the most flexibility to address unknown future
conditions should seek the most experienced counsel and assistance available
given time and budget constraints.

The leading practices articulated within this report are the result of several years
of experience; however the constantly changing regulatory, technology, economic
and business environments require constant updating in order to ensure new
issues are properly addressed.

While some firms have successfully negotiated and implemented BPO contract
termination on their own, the level of knowledge and experience in the
marketplace at this time is more generally resident in professional firms such as
legal and consulting practices than within any specific company or the market at
large. As the utilization of BPO increases, and there is every indication that it will,
the availability of experienced and knowledgeable resources in the market for
potential recruitment to internal positions will undoubtedly increase. However, as
of this moment that is not the case, and companies seeking to recruit
experienced BPO staff are generally finding their efforts challenging at best.

Given the importance of contracts in the BPO lifecycle, the specific requirements
associated with business continuity during any BPO related transition are complex
and require joint efforts on the part of the client and BPO vendor to be successful.
Without properly negotiated contract termination components, clients are at
significant risk for business disruption. As evidenced by this report, a high degree
of value should be placed upon ensuring BPO contracts are constructed well in
advance of any termination event, utilizing current and leading practices to
minimize risk and ensure a successful transition.

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About the Author

J. Anthony (Tony) West

Director
NelsonHall
tony.west@nelson-hall.com

Tony West has extensive BPO and IT shared services consulting and management
experience. Most recently he was program manager for Corporate Executive
Board’s Shared Services Roundtable where he led the creation of a BPO research
track, led SSR market expansion to Europe and significantly contributed to the
growth of the Roundtable from 68 member companies to over 300. Prior to this,
Mr. West provided independent consulting services to General Electric Energy
Systems Headquarters group where he performed several projects associated
with their business intelligence center of excellence and IT shared services
organization which directly supported over 9,000 GE Energy Systems managers.

NelsonHall provides buy-side and sell-side organizations with research and

analyses in front office, mid-office and back office BPO. The company’s
subscription-based model provides subscribers access to a content-rich BPO
contracts database. The firm covers a wide range of industries including financial
services, government and utilities sectors, and tracks worldwide and regional BPO
activity. www.nelson-hall.com

Copyright © 2008 SSON. All Rights Reserved.

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