By Gordon & Glickson LLC

Article II 

Because managing the legal aspects of the outsourcing of information technology services has been a core component of our practice for over 20 years, we have developed a methodology for negotiating information technology outsourcing agreements that has proved extremely successful for a wide range of clients. Many consider this methodology to constitute a “best practice” in establishing an efficient negotiation process, either in a single vendor or multiple vendor competition setting, while simultaneously limiting the risks to which a customer is exposed in the outsourcing agreement.

THE METHODOLOGY

The key to avoiding lengthy negotiations is to create a structured timeline and procedure for conducting negotiations, that may not be deviated from by either party. Following the guidelines set forth below will help you shorten the length of negotiations, enhance your leverage, and negotiate better business terms for the outsourcing transaction.

•  Prepare a detailed and well thought out RFPs describing your technical requirements;

•  Prepare a complete and comprehensive outsourcing agreement, including exhibits, to distribute to vendors prior to negotiations;

•  Require all vendors to respond to the outsourcing agreement in a structured issue paper format to reflect the actual language changes to the outsourcing agreement requested by the vendor;

•  Limit the time for negotiations by number of days, and hours per day; and

•  Stick to the established procedures.

REQUEST FOR PROPOSALS

If the best outcome is to be achieved, your legal counsel must be involved in the process from the beginning, even with the RFP and exhibits, because the description of services should be in wording that can be used verbatim as the Statement of Work exhibit to the outsourcing agreement. Outsourcing negotiations are often protracted because confusion arises around the types and levels of services that the customer expects the vendor to provide. That is why “Baselining,” a subject addressed in Article I of this series, is so important.

You may not be able to accurately scope all of the functions or processes that you wish to have the vendor provide if you have not performed those functions or processes before, or had another vendor perform them. In these cases you may wish to ask the vendor to include a Statement of Work for those services in its response to the RFP. If you have problems with the vendors' proposed solution for the new services, you will have the opportunity, within the negotiation process, to discuss those problems and to require the vendor to submit a revised proposal for those services.

The outsourcing agreement should contain all of the documents that you will need to complete the outsourcing transaction, including the terms and conditions, the Statement of Work, and the format, if not the specific pricing provisions, of the Pricing Schedule. We also recommend that the outsourcing agreement start from a reasonable middle-of-the-road position to encourage shortened negotiations and a positive negotiation experience for all of the parties. It is difficult to negotiate an outsourcing transaction in a tight timeframe unless the document that you are starting from is one that both sides feel is relatively fair and evenhanded. It should be noted that preparing the outsourcing agreement prior to negotiations will enable you to clearly articulate and protect your position, and to prevent time-consuming exchanges with the vendor relating to the drafting of a Statement of Work or other exhibits.

Negotiation Procedures .

The negotiation procedures included in the RFP should describe the process you will use to select a vendor, and the negotiation schedule you will follow throughout the process. We recommend that you competitively bid and negotiate any outsourcing project that you choose to undertake, because it will provide you with the opportunity to get the best deal on the best possible terms, and it is a manageable task if you use the process we have described.

Issue Papers

The exact language changes that each vendor wishes to make to a particular paragraph or provision of the outsourcing agreement, and the reason for the requested change, should be set forth in each vendor's issue paper. Using this process will be beneficial in both a single‑vendor and a multiple‑vendor setting. In a single‑vendor situation, this makes each change to the contract much more visible, creating a disincentive to the vendor and its lawyer who won't, at least to some degree, want to appear picayune or difficult. It also discourages the vendor's lawyer from “tinkering” with the contract and thereby dragging out the negotiation process. In a competitive bid situation, the issue paper process will motivate each vendor to minimize its requested changes in order to remain competitive with the other vendors.

You should develop a schedule for the negotiations, including the total number of days of negotiation that each vendor will be allocated, the number of rounds of negotiations that will be conducted, the number of days in each round of negotiations, and the specific hours during those days when you will negotiate with the vendors. Each vendor should be treated equally, so it is important to strictly adhere to the negotiation schedule – start on time, end on time, and make no exceptions to that process. If you can, scheduling negotiations with the various vendors consecutively will allow you to use the same negotiation team for all vendors. (This will result in a significant saving in time and costs, as well as gains in knowledge‑management.)

The first round of negotiations should be an opportunity for you to discuss an attempt to reach agreement on the issue papers. It is unlikely that you will be able to resolve all items raised in the issue papers during the first round, but if you have extra time, you may wish to discuss other documents or information provided by the vendor as part of its response to the RFP (e.g., press for information). You may also choose to allow the vendor to submit additional issue papers prior to round two of the negotiations for discussion during the second round. In addition, you should discuss any exhibits to the outsourcing agreement that the vendor was asked to prepare, and negotiate the terms of those documents. By the end of the final round of negotiations you and each vendor should have concluded your discussions and agreed to take one of three positions on the changes proposed in each issue paper:

•  agreed (as the issue paper may have been modified during the course of negotiations);

•  incorporated into the outsourcing agreement without agreement (either in the original form or as modified by the vendor); or

•  withdrawn by the vendor.

Your negotiation guidelines should specify the default position you will take if you and the vendor fail to agree on taking one of the three positions listed above with respect to any issue paper. The most reasonable position would be to incorporate the vendor's last version of the issuer paper (as it may have been modified during negotiations) into the outsourcing agreement, without agreement.

Another technique that is often successful is to consider giving the vendor additional time following the completion of negotiations to submit its final proposal on those exhibits that are prepared solely by the vendor, such as the final pricing proposal.

After the final round of negotiations you should incorporate all of the issuer papers and exhibits into the outsourcing agreement to create a complete set of file documents, and the vendor should be given a certain number of days to review these documents and raise any issues relating to how you incorporated the agreed-upon changes. The negotiation procedures should also specify the process you will use to ensure that you and the vendor agree on the incorporated changes. The complete set of final documents as agreed to by the vendor will be considered the vendor's best and final offer for your evaluation in selecting the winning vendor, and should be executed by the vendor prior to submission to you.

Enforcing the foregoing guidelines strictly will prevent vendors from transforming the negotiations into a typical prolonged outsourcing negotiation and will allow you to control the process to the advantage of all. Many of our clients have concluded that, if the foregoing methodology is used, entering into an outsourcing arrangement is neither as risky nor as time‑consuming as anticipated.

VENDOR “ FORM ” CONTRACTS

No matter what function or process is being outsourced, it is almost certain that the “Form” agreement presented by the vendor will be relatively one-sided and, occasionally, overbearingly one-sided. It is worthy of note that it is both our experience, and the experience of others in the IT legal community, that these need not be difficult negotiations, provided the vendor understands that you are aware that its “Form” agreement is overreaching. The reason some vendors continue to lead with overreaching agreements is that there still are many customers who will sign them without comment or objection.

You should seek to negotiate all vendors' “Form” agreements. We believe that you will find that those negotiations need not be especially expensive, time consuming, nor difficult, but simply an opportunity to reach a balanced agreement between the parties.

Gordon & Glickson LLC, an internationally recognized law firm based in Chicago , has focused exclusively on providing legal and strategic consulting services to the technology marketplace for over twenty-five years. The firm provides corporate, commercial, litigation and finance counsel for its entrepreneurial technology clients, and serves worldwide as strategic and technology counsel for both private and public sector clients. For more information please contact Philip P. McGuigan at 312.321.7659 or at ppmcguigan@ggtech.com.