Large-scale outsourcing and technology transactions are inherently complex. So is the process of securing commitments in the underlying contract. By helping to manage this complexity, contracting tools can allow deal teams to build better contracts faster, within budget, and at less cost.
This article describes tools that we have found to be particularly valuable when helping customers enter into large-scale outsourcing contracts or technology transactions. These and similar tools can make customers more effective and efficient in any sourcing process.
The tools described have been particularly useful in cases where there are multiple bidders, the negotiations have been difficult, long running, or sometimes fragmented due to the complexity of the documents. For example, the use of a spreadsheet based issues tracker was helpful in facilities management outsourcing project for a multinational consumer goods company in order to be able to make a decision between multiple bidders.
While we have highlighted the use of these tools in the past, it is useful to go over them now. Legal teams face increasing pressure to deliver more results with less resources. Utilizing most or all of these tools can reduce the required trading of documents and cycle time required to get to a negotiated outcome. Business teams expect rather than just request the use of these tools, and as lawyers we should be current on the application of these tools to manage the deal process effectively.
Identifying Deal Terms
Reaching early internal alignment on the business objectives helps the customer’s deal team to focus its energy on the most valuable parts of the deal and ask for the right deal terms in its initial draft. The challenge in achieving alignment is that outsourcing and technology transactions often involve a large number of issues and stakeholders. We have found three tools particularly effective.
The first tool for identifying deal terms is a preliminary questionnaire to be completed by the members of the deal team. This questionnaire contains a detailed set of questions that are designed to reveal important deal terms, including both factual detail and the customer’s primary objectives. Using a questionnaire to gather this information allows recipients to take the time required to investigate the answers. This can provide more complete and accurate information. Also, later in the deal, the deal team will be able to go back to the responses to know who said what in case of any confusion.
In sending out a questionnaire, there is a risk that the people who fill it out may not understand or answer the questions fully. As we are seeking to be faster without cutting quality, one of the key goals is to make sure the correct information is obtained. There are several ways to mitigate this risk. One is to be judicious about selecting people to fill out the questionnaire. Another is to tailor the questionnaire to the recipients and to ask about the underlying business interests instead of particular terms. A third is to include explanatory commentary.
The challenge in achieving alignment is that outsourcing often involves a large number of issues and stakeholders, each with their own opinion as to what should be considered a “key deal term”. We have noticed that information security, data protection and Environmental, Social and Governance (ESG)/Corporate Social Responsibility (CSR) requirements are increasingly considered key deal terms by clients. And as a deal lawyer in charge of a particular transaction it is important to identify the correct internal stakeholders for these highly specialised topics.
The second tool for identifying deal terms is an interview checklist. The benefit of an interview is that it allows both the questions and the answers to be refined and expanded during a detailed discussion. Ideas that might merely be implemented if included in a response to a questionnaire can be examined and tested. In some cases, an interview provides the information required to follow up with a detailed questionnaire.
The interview checklist is a tool to avoid missing points in the interview. An interview checklist allows the lawyer to quickly identify the points raised in similar interviews, and also allows a team of interviewers to ask consistent questions. We recommend developing a comprehensive list of questions that can then be selected and tailored for the particular deal. We prefer to create the interview checklist for a specific deal from an over-inclusive comprehensive checklist.
We have found the use of written terms sheets, to support efficient contracting, as it allows the parties to reach an agreement on the key terms of the deal prior to creating and/or negotiating the actual contractual documents. Specifically, agreeing key terms before negotiations commence allows us to focus on the core high-level issues which are a priority, and identify any necessary compromises on critical items at the outset. This can shorten the time to completion and reduce transaction costs. Also, these compromises reached on the term sheets can be reflected in the initial set of documents.
Issues which are suitable to be dealt with in a term sheet include:
- Scope of services
- Term and termination
- Fees and payment terms
- Liability regime
- Warranties and indemnification
- Intellectual property
- Governing law
Creating Initial Documents
Large-scale outsourcing and technology contracts tend to include dozens of documents. Some of these documents contain specific legal terms and conditions while others have lists, diagrams or other data. Breaking a contract into many separate documents is efficient because it allows individual review teams to work on the separate documents in parallel. Also, different documents are best described with different software products (e.g., pricing in a spreadsheet application and terms in a word processing application). At signing, however, all of these documents need to fit together. We have found three tools particularly helpful in making the end-to-end process of creating a clear, consistent and comprehensive contract faster and less costly.
Breaking a contract into many separate documents is efficient because it allows individual review teams to work on the separate documents in parallel.
More recently, we have used online “wizards” or surveys to both gather information from the client as to their expectations and priorities and to fill out the information dynamically into the form as it is received. A Mayer Brown lawyer walks through the survey with the client, and the survey has been programmed to use logic so that any non-relevant questions are skipped. The output of the survey is then a completed version of the form of agreement, including without the sections pertaining the questions that were skipped. Currently, a wizard is in place for master services agreements in technology transactions; however, in some cases, a customized survey may be more appropriate.
The most valuable accelerator is a well-designed, carefully reviewed suite of contract templates aligned with the initial questionnaire and interview checklist. Contract templates serve as a repository for best practices and help to build quality into the documents at the start (avoiding the need for corrections at the end). Such templates take positions that are market reasonable, leading to less negotiation of terms. A good contract template quickly guides the team to decision points and is easy to adapt to the deal. A collection of templates for the contract schedules speeds the gathering information required in a final contract, avoiding rework and delay close to signing. Strong initial drafts also help clients capture value in negotiations by winning the points that do not get negotiated because they are overlooked or seem too small to raise.
Strong initial drafts also help our clients capture value in negotiations by winning the points that do not get negotiated because they are overlooked or seem too small to raise.
Of course, templates can only take the deal team so far. They do not include the deal-specific facts. There is a risk that people will have difficulty knowing what to modify, or that they will assume that the templates represent the right answers instead of a starting point for review. Thus, the deal team also needs background, context and guidance on how to bring the templates in line with the facts of an individual deal.
Guide for Document Preparation
A “guide for document preparation” is a tool to help the deal team through the document preparation process. The guide typically covers what data are needed for the contract, the organizational structure of the data and how to present the data in a contract document that is clear, complete and consistent with the remainder of the contract terms. Such a guide can prove invaluable in assisting the teams to quickly bring the pieces of the deal together, particularly when there are multiple deal teams working in parallel. The guide can take many forms, including a written document, an illustrative flowchart, or presentation. The guides can be customized for different audiences of client teams (for example, procurement, finance or legal teams) that highlight different parts of the contract relevant for such team.
Negotiating the Contract
Once the contract documents have been distributed and the bidders have responded, the deal team will need to know, on an ongoing basis, about the progress on the deal, time to completion and outstanding issues. The following tools enable the deal team to answer these and other important questions and to respond effectively to management inquiries.
The contract negotiation is a project. We find that deal teams are more successful if they start with a thorough project plan that takes into consideration any dependencies on non-contract activities (e.g., due diligence, technical reviews, risk reviews, site visits, etc.). The form of the project plan can be as simple or as detailed as the customer feels necessary, depending on the circumstances. There is particular benefit in allowing people to schedule their time to turn documents, gather facts, obtain approvals and participate in negotiation sessions.
The core of project management is deciding who will do what next and then following up to see what has been done. In large-scale outsourcing and technology transactions, teams are generally responsible for specific documents. As a result, the use of a “document tracker” is an absolutely essential component of good project management, as it shows who is responsible for the next step(s) on each document and includes a list of tasks and notes for each document.
A good document tracker will provide each team with a centralized, regularly updated overview of progress on a document-by-document basis and will help each team member know what to do next. When approaching finalization of a deal, the document tracker can be the single source of truth for the remaining items for each document, and can be utilized by teams to guide regular updates meetings to progress the documents. Finally, follow-up on the document tracker to ensure that each document is progressing towards finalization is critical to getting to deal completion.
The core of project management is deciding who will do what next and then following up to see what has been done.
Although the document tracker will tell you the status of each document, it will not tell you which issues remain. As a result, we often use an “issues tracker,” which is an organized description of open issues. The best issues trackers express each issue neutrally enough so that the tracker can be shared collaboratively between the customer and supplier teams and can thus be used as a focal point for discussions.
Caution and discretion should be used when framing concepts in an issues tracker because a poorly framed issue might result in making a decision on the wrong question or the wrong facts. Ideally, the issues tracker will focus attention on the most important issues and will speed resolution of escalated issues.
We have found these trackers to be most efficient when used narrowly in order to track key issues, rather than for every clause of an agreement. Where the key issues are satisfied, it may even be acceptable for a customer to agree to the standard terms of the supplier, or for a supplier to agree to the standard terms of a customer, avoiding protracted negotiations of less important clauses.
We have had success with implementing an objective and bespoke scoring system for the ranking and communication of issues, or proposed changes, with clients. This has supported the decision between multiple similar providers in a bidding process.
For example, we have used a scoring spreadsheet to compare the initial bids of three information security providers. Suppliers were ranked from 1 to 5 in 10 areas including:
- Overall ease of contracting
- Commitments made to comply with legal obligations
- Liability regime
- Representations and warranties
Each of these categories was then weighted as a percentage in order to generate an overall score for comparison.
That being said, even though the scoring system has been a useful tool for discussions with clients and overall project planning, it is not recommended that a scoring system is the only methodology used to decide the preferred supplier.
The issues tracker can tell you what issues are open, but it only addresses risks that are being allocated to each party in the contract. A “risk register,” on the other hand, is an internal tool of the customer’s that helps the core deal team assess how the deal team is mitigating risk and thus increasing value.
For each risk that the customer’s team identifies, there are generally four options available: (i) change the deal to eliminate the risk (for example, by removing a risky service from the scope); (ii) place the risk on the supplier through risk allocation clauses; (iii) retain the risk to be managed through governance; or (iv) place a value on the risk and factor it into the deal’s financial model. Any risk that is mitigated is reflected in the risk register to show how it was addressed and to detail the positive impact of its mitigation on the overall risk profile of the deal. This tool is of increasing interest as companies focus on risk in outsourcing in addition to the potential rewards when looking at value.
The risk register is an important post-contract signing tool as well. Often clients request a risk memo, which summarizes the risk register and guides a client’s teams in governance. The risks to highlight have already been logged in the risk register, but a risk memo lays out the remaining risks in a succinct and understandable way for the business teams.
The final category of tools for negotiation is collaboration tools. Almost all businesses are now able to effectively use electronic data rooms for sharing documents, advanced file management systems and video meeting tools with screen sharing for the discussion of working documents. Clients expect that lawyers are able to utilize the collaboration tools effectively during negotiations.
Especially now, as a result of the COVID crisis, businesses have realised the importance of having good video meeting tools available and being able to use them effectively. We have noticed that in person negotiations have been on the decline for a few years now. So, we have seen a trend that businesses increasingly seek to complete outsourcing deals from start to finish virtually, without any in-person interaction. Any improvements or new developments in collaboration tools which facilitates this virtual and effective contracting process should thus be followed up closely and implemented in your practice.
That being said, we have found that effective use of these tools requires regular training and agile use of new technologies. Experience shows us, too, that different tools work well with different corporate cultures.
Deciding Whether to Sign
In deciding whether to sign a sourcing contract, the customer must consider whether the value of the contract is greater than the value of alternatives that the contract precludes. Financial modelling indicates value, but risk must also be considered. For the customer, the choice might be between two bidders, between a bidder and internal processing, or both.
The best tool here depends on the customer’s decision-making process. For example, a customer approaching a difficult down-select in a competitive outsourcing process might use a side-by-side chart of key issues organized by bidder. A comparison chart could be built based on the issues tracker and risk register described above. This approach works particularly well when there are only a few issues separating the bidders.
Effective governance is critical to the success of a contractual relationship, and effective transition from the deal team is essential to the success of the governance team.
If there are a large number of issues separating the bidders’ proposals, the customer might use a scoring matrix that combines a simple 1-2-3 score with a customer-reviewed weighting for each issue to produce a composite score. This tool can sometimes provide surprising results. In some cases, the final score will show there are no significant differences among bidders, even though the responses look very different on their face. In other instances, the tool can show there is a material difference. In any event, the scoring matrix tool can synthesize a large number of differences.
A customer choosing between internal processing and outsourcing might use similar tools. This can also produce surprises. A deal team that has focused on the risks in an outsourcing contract may be surprised to find that many of the same risks are present—and perhaps to a greater degree—with internal processing.
Another useful tool is a scorecard that evaluates risk in a more nuanced way than the 1-2-3 scoring matrix. For example, a scorecard might describe the outcome of negotiations on the incentives, commitments and options in the contract and place a value on each. A scorecard is particularly useful when working with a series of similar deals because it allows comparisons across time and across deals. Ideally, the scorecard will produce an adjustment to the financial model.
Facilitating an Effective Transition
The final leg of the contracting process is the transition to the governance team. Effective governance is critical to the success of a contractual relationship, and effective transition from the deal team is essential to the success of the governance team. We believe the best practice is to have some overlap between the deal and governance teams, but our experience and research shows that this overlap is generally limited.
We have identified three tools as particularly useful in transferring knowledge about the contract from the deal team to the governance team. The first is a milestone list that includes all date-dependent activities and deliverables shown in any part of the contract. The second is a detailed or a high-level contract summary identifying key areas of the contract on which the governance team should focus in its day-to-day management of the relationship. Again, these can take different forms including a document that describes the different areas of the contract, a flowchart to illustrate dependent steps, a project plan laying out expectations during different phases of the contract term, and a presentation describing the different parts of the agreement. The third is governance training that allows for interactions between the teams to ensure that the governance team can ask questions when information or contract provisions are unclear.
Tools are aids to successful contracting, not substitutes for experience and judgment, and they must be used with care to avoid creating misimpressions.
The specific contracting situation drives not only overall strategy, but also choice of tools. Tools are aids to successful contracting, not substitutes for experience and judgment, and they must be used with care to avoid creating misimpressions. However, we have found that tools can assist deal teams to maximize value and avoid pitfalls by helping to manage the inherent complexity of outsourcing or technology transactions and by increasing the speed, efficiency and effectiveness of the contracting process. We have also seen that the use of the tools become a required element of any contracting process.