Archive for the ‘Outsourcing’ Category

Force Majeure Provisions in Outsourcing Contracts

Tuesday, January 20th, 2009

Last week, I provided a general overview of some of the compelling reasons for outsourcing at E-Solutions Integrator.  Outsourcing contracts need to be carefully negotiated as problems can have a huge impact on the company that outsources.

Lawyers tend to use the same  boilerplate provisions despite the type of contract.  That can be a killer in an outsourcing transaction.  For example, one provision that should be carefully reviewed is the force majeure provision.

Force majeure literally means “greater force.”  Force majeure excuses a party from liability or from performing its obligation if some unforeseen event or circumstance beyond that party’s control prevents it from performing as required under the contract.  Thus, force majeure clauses commonly cover Acts of God, such as natural disasters, war, strikes or labor unrest, riots, and the failure of third parties (e.g., subcontractors, suppliers) to perform their obligations to the contracting party.

When negotiating an agreement to outsource on behalf of a client, one should read and limit the list of categories under which force majeure may be claimed.  Sometimes, the vendor’s contract provides includes an unnecessarily broad list.  Additionally, one should limit the duration of any enforced delay.  Consider how long a force majeure event lasts.  Forever?  If so, no one will provide the service.

A force majeure event for one of the vendor’s other customers should not be a force majeure event for your client.  Further, one should make a distinction between a supplier and a subcontractor, the latter typically being more easily and quickly replaced.  Depending on the type of contract, one should consider whether the failure of a supplier should be a force majeure event.

Force majeure events should not include power or equipment failures.  The vendor should have immediate backups when these events occur.  Similarly, software defects should not be force majeure events.

When a force majeure event occurs, it should not relieve the vendor from implementing its disaster recovery plan.  In fact, it must do so when such an event occurs.  The client should have its own business continuation plan as well.  The client should have insurance If the risk can’t be minimized in a particular area.

The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities and The Outsourcing Handbook: How to Implement a Successful Outsourcing Process are good places to start when considering an outsourcing arrangement.

An Overview of Outsourcing

Saturday, December 13th, 2008

When I was with Day, Berry & Howard, I negotiated large, complex outsourcing contracts for a number of Fortune 500 companies.  For example, in one instance, it was more efficient for a pharmaceutical company to outsource its help desk to an expert provider of such services rather than to manage and maintain the resources necessary to operate the help desk function in-house.  In another instance, a bank outsourced its data processing function to an expert provider of data processing services for lenders.

This expertise I gained came in handy at E-Solutions Integrator, Inc. (e-SI). because it helped us to grow much more rapidly on limited resources. In the early days of e-SI, when we landed a project, we needed to quickly add software developers.  However, we didn’t want to hire full-time employees for a variety of reasons.  This was because the Internet – and our business – was growing so rapidly that it was hard to predict our needs and we didn’t want to take on employees we might not need in a couple of months when a project ended.  So we used the leverage of contractors and ultimately, we engaged hundreds of individuals  – in addition to our own core employees.

Outsourcing worked for us.  We hired contract organizations that provided employees in India.  This provided the flexibility we needed and increased our margins, as software developers in India cost significantly less than in North America.  Yet, we did have concerns and were careful to manage them.  These concerns included quality control, security issues and time constraints from having our resources on the other wide of the planet.

Broadly defined, outsourcing is subcontracting a process to a third party.  That process could involve a product or a service or part of either.  It could also involve a specific business function or a non-core competency of the organization.  We outsourced overseas, which technically, is called “offshoring.”

The Outsourcing Center is an Internet portal for information on methods to outsource information technology.  The Outsourcing Institute is a professional organization dedicated to outsourcing.  For individuals in the U.S. the Contract Employees Handbook is focused on helping contract employees manage their careers.

As it was, at e-SI, we grew and survived the Internet downturn because of the flexibility of being able to outsource.  Ultimately, though, we opened our own offices in India as our business prospered and our projects and customer list expanded.