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Upgrade Your Tech Outsourcing Contract Practices

10 October 2014
Corporate Counsel

Technology is changing the way business is done so rapidly, it can sometimes be hard for a single company to keep up without a little help from outsourcing. A recent webinar from Mayer Brown, “Current Critical Issues When Outsourcing,” provided advice on how companies can have better and more legally secure relationships with those partners they pass essential tech functions (and essential data) along to.

Paul Roy, a partner in Mayer Brown’s business and technology sourcing practice, told the attendees that with a proliferation of outside service providers and new ways of delivering technology services, the landscape for outsourcing tech functions is changing fast. Companies are using more service providers for a greater number of specialized services.

“There’s been an increase in the volume of deals and a reduction in the size of deals,” Roy said. “These changes have created new challenges and some new critical issues in outsourcing deals.” He added, “In short, yesterday’s agreements will not work with many of today's and tomorrow’s outsourcing deals.”

One challenge of the new outsourcing landscape is that with more services being contracted out to more providers, different kinds of providers need to learn to work together for the good of their client. “As customers have an increasing number of service providers, they increasingly need to ensure close working relationships,” said Brad Peterson, also a partner at Mayer Brown and a member of the firm’s business and technology sourcing practice. “Providers increasingly depend on each other for critical service components.”

A potential solution for companies, he suggested, is to think of the goal of outsourcing contracts as less about enforcing individual agreements and more about building and maintaining a “contractual infrastructure.”

Creating an environment in which there are solid rules to govern and protect supplier relationships and where healthy collaboration between providers is encouraged can be challenging. “Each provider will have concerns that other providers might be predators, might take away business or take away intellectual property, or otherwise fail to collaborate within the ecosystem,” Peterson noted.

To avoid these problems, the lawyers explained, it’s helpful to have consistent contract terms that allow more efficient and effective governance and interaction between providers. This makes for a level playing field and, on a more practical level, helps streamline paperwork, as many providers will be able to use the same or very comparable contractual documents. From a governance perspective, companies are creating better “provider ecosystems” by having more joint meetings that involve multiple service providers and, in some cases, even charging one provider with the task of integrating other providers’ work.

Another big trend in outsourcing, likely attributable at least in part to technological advancements, is the short-term nature of many outsourcing deals. Even if a deal is inked only for a three-year contract, Roy pointed out, the customer should not be fooled. There is still a need for a monthlong lead time to plan and implement the contract, and often this necessitates that the client take advantage of possible extensions written into the agreement. Thus, a three-year deal can morph easily into a four- or five-year deal, or even more.

“That means that even if you have what is nominally a short-term deal, you really should be considering building in the protection of a longer-term deal that anticipates the changes in the marketplace, the changes in the technology and changes in your business,” said Roy. He advised that companies entering into these agreements think about using provisions that address such factors as the currency of technology or the competitiveness of pricing out services over time.

Then, there’s the question of what happens to the data that is passed between company and service provider and the additional data generated by the provider in the course of the service. According to the webinar, many outsourcing contracts still allow service providers “secondary uses” of this confidential data, sometimes in an aggregate or anonymous format. “With the emergence of Big Data technologies, companies have come to realize two things: first, that the secondary use of data or the insights that it can produce through predictive analytics is very valuable,” said Roy. The second, he added, is that data can’t always be kept anonymous because data analytics has become very advanced, and the service provider can reidentify data by comparing it with information on other databases.

During the contracting process, then, companies can get real value from their data and capitalize on their outsourcing partners’ abilities to analyze that data and provide insights that could help the business. “What that means is customers really should consider being more explicit in addressing data rights, data analytics capability and the value of those things early in the sourcing process, and really consider that as one of the criteria for value factors in their selection of providers,” said Roy.

Reprinted with permission from the 10 October 2014 edition of Corporate Counsel © 2014 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.

Related Information

  • Related People
    Brad L. Peterson
    T +1 312 701 8568
    Paul J. N. Roy
    T +1 312 701 7370

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