Outsourcing Law & Business Journal™ – February 2012

February 6, 2012 by

OUTSOURCING LAW & BUSINESS JOURNAL™ : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com.

Insights by Bierce & Kenerson, P.C. Editorwww.biercekenerson.com.

Vol. 12,  No. 2, February 2012
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Last chance to sign up for another Webinar in our series on:
The Future of Law and the Impact of Outsourcing, Part 2
(Part I was presented October 26, 2011)

Date: Thursday, February 9, 2012
Time: 11:00 AM EST – 12:20 PM EST

Join our experts in the “business of the law” for Part Two of our webinar series concerning The Future of Law.  Listen in as we discuss the disruptive and creative impacts of business process outsourcing (BPO), legal process management (LPM) and legal process outsourcing (LPO) on the traditional delivery and management of legal services and legal support services.

Speakers:

William B. Bierce, President of Bierce & Kenerson, P. C. (full disclosure, also the publisher of this website)
David T. Kinnear, COO of Cerebra LPO; Partner and Co-Founder of GSSOCX
Jason Mark Anderman, President and Co-Founder of WhichDraft

Cost: Free!

Click here for more information and registration.

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1.  Robo-Calls, Call Centers and Collection Agencies:  Supreme Court Approves Federal Court Lawsuits under Telephone Consumer Protection Act of 1991.

2.  Humor.

3.  Conferences.

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1.   Robo-Calls, Call Centers and Collection Agencies:  Supreme Court Approves Federal Court Lawsuits under Telephone Consumer Protection Act of 1991. On January 18, 2012, the U.S. Supreme Court ruled on a case of an outbound telephone call center that contacted one individual using robo-dialers and voice recordings.  The decision reminds companies using call centers for outbound contacts that a Do-Not-Call list should be respected or federal litigation could result, and that federal procedural rules could result in high litigation costs and settlement value.  For the complete article, click here.

2.   Humor.

Call Center, n. A recording studio for “training and quality control purposes.”

3.  Conferences.

February 28, 2012, Legal Process Outsourcing, HSBC Center, New York, New York. This roundtable will provide an in-depth overview of how to capitalize on LPO strategies and techniques. We have developed this program specifically to help corporate counsel carefully examine the benefits and challenges of outsourcing certain components of their internal clients’ legal work. Specific takeaways from this roundtable will be: developing workable solutions to cut costs, improving quality and timeliness of deliverables and best practices to manage ethical concerns. As an attendee, you also earn up to 4 CLE Credits. For a copy of the program agenda, click here.

March 7-9, 2012, 16th Annual North American Shared Services & Outsourcing Week, Orlando, Florida. In 2011 we brought you the ‘revolution’ of shared services – 2012 is all about delivering The Next Level of Value by Accelerating Global Growth & Delivering Business Insights to the Board. Over 100 thought leaders and companies including AOL, Volvo, Deloitte, DHL, Monster.com, Salsesforce.com, Hyatt, Molson Coors, Philips, BAE Systems, Intel, Perason, BP, P&G, UBS, Citigroup, WPP Group, Yahoo!, DHL and HP will present their inspiring talks and roundtables to drive global growth and root shared services firmly into the boardroom agenda. If you want to challenge your captive and outsourced operations to influence business outcomes, or endorse the IMPACT shared services can have on the success and progress of a business as a whole, then this event is a must attend for you. To register, visit their website.

March 15, 2012, Global Services Conference 2012, New York, New York. Global Services Conference 2012 will focus on how to build and sustain excellence in services.
This strategy is the key to enterprise services, enterprise transformation, and aligning that transformation to drive competitive advantage to companies. Companies are looking to access data and knowledge in a better way and to leverage the maturity of the services organization that has been in place to drive better business value. For more information, visit their website.

April 23 – 25, 2012, IBC presents The Legal, Regulatory & Compliance Outsourcing Conference, Grange Tower Bridge Hotel, London, United Kingdom. Hear from 20+ international experts on The Smarter Legal Model; trends in regulation, accreditation and certification, the business case for outsourcing; service delivery models; vendor selection; ethics and compliance; case studies; LSO contracts; data protection and security; technology enablers; managing the relationship; business optimisation and the future of outsourcing in law firms. 20% discount for Outsourcing-Law, use VIP code FKW82266OTLEM

April 23 – 25, 2012, 6th Corporate Counsel Exchange, Radisson Edwardian Heathrow Hotel, London, United Kingdom. The award winning Corporate Counsel Exchange is back in London!  Our 6th Corporate Counsel Exchange, in London, United Kingdom, will be co – located with the 3rd Corporate Compliance Exchange. View co – located agenda.  In April over 150 General Counsel and Chief Compliance Officers will gather to share strategic insights, discuss the latest developments in the legal and compliance sphere and meet with a range of leading law firms and solution providers offering innovative tools and services to help you increase the efficiencies of your department.  For more information visit www.corporatecounselexchange.co.uk, call: +442079689745 or alternatively email: exchangeinfo@iqpc.com.

April 23 – 25, 2012, Corporate Compliance Exchange,Radisson Edwardian Heathrow Hotel, London, United Kingdom. Corporate Compliance Exchange will once again unite Chief Compliance Officers in senior level networking forum in London, United Kingdom.  The 3rd Corporate Compliance Exchange is co – located with our 6th Corporate Counsel Exchange. Through a series of streamed sessions, joint networking panel discussions and roundtables, the award winning Exchange format offers Chief Compliance Officers and General Counsel a unique opportunity to keep current on the most pressing compliance issues and find out what strategies your peers have put in place to safeguard their organisations against compliance risks.For more information visit www.complianceexchange.co.uk, call: +442079689745 or alternatively email: exchangeinfo@iqpc.com.

May 14, 2012, 4th eDiscovery Oil & Gas Conference,  Houston, Texas. Mark your calendar for the 4th eDiscovery Oil & Gas Conference.  Building off of the success of our 2011 event, eDiscovery Oil & Gas will return to Houston on May 14-16 for you to improve your organization’s eDiscovery capabilities and comply with the requirements of the FRCP.  Learn from industry leading experts about effective e-Discovery strategies that they employ.  This conference will leverage best practices to show how to conduct thorough, cost-effective and defensible e-Discovery. For a copy of the program agenda click here.

May 16 – 18, 2012, SSON presents the 12th Annual Shared Services Finance & Accounting, Dallas, Texas. This event covers the entire spectrum of Finance & Accounting challenges in Shared Services from Process Design, Governance, Benchmarks, Metrics, and Audits through to Training and Change Management.  Each speaker will be diving straight into the specifics of their case studies offering timelines, metrics, results and lessons learned for you to take back to your own office.  For more information, visit their website.

May 21 – 23, 2012, SSON’s 11th HR Shared Services & Outsourcing  Summit, Chicago, Illinois. Creating the foundation for strategic human capital management through HR shared services, this event will will cover HR Shared Services challenges in Process Design, IT integration, Standardization, Benchmarks, Metrics, and Harmonization through to Training and Change Management.  Topics include Globalization, Inhouse-vs. Outsourcing, Growth Opportunities and more.   To register, visit their website.

June 24 – 26, 2012, SSON 6th Annual Shared Services Exchange, Pinehurst, North Carolina. For the 6th year in a row, the Shared Services Exchange will be the elite event for shared services executives who are looking to develop new strategy, solve challenges and source partners that will allow them to create efficiency and drive more value out of their shared services centers.  Efficiency is still on the minds of these executives as they search for solutions to create consistency across multiple business functions and develop hybrid strategies that utilize outsourcing and captive centers—all while sustaining centers as a core business strategy.  This event will continue IQPC Exchange’s ongoing tradition of offering cutting-edge, strategic networking and learning opportunities for senior level shared services executives.  For more information, click here.

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FEEDBACK: This newsletter addresses legal issues in sourcing IT, HR, finance and accounting, procurement, logistics, manufacturing, customer relationship management including outsourcing, shared services, BOT and strategic acquisitions for sourcing. Send us your suggestions for article topics, or report a broken link at wbierce@biercekenerson.com. The information provided herein does not necessarily constitute the opinion of Bierce & Kenerson, P.C. or any author or its clients. This newsletter is not legal advice and does not create an attorney-client relationship. Reproductions must include our copyright notice. For reprint permission, please contact: wbierce@biercekenerson.com. Edited by Bierce & Kenerson, P.C. Copyright (c) 2012, Outsourcing Law Global, LLC. All rights reserved. Editor-in-Chief: William Bierce of Bierce & Kenerson, P.C., located at 420 Lexington Avenue, Suite 2920, New York, NY 10170, 212-840-0080

Proctor & Gamble Highlights New Legal and Business Issues in Multi-Sourcing

October 16, 2009 by

Background

This case study examines some extraordinary circumstances involving competitive sourcing of services. It is not typical of the normal competitive sourcing, but it highlights some emerging business and legal issues in managed competitive sourcing of global services.

During the late 1990’s, Proctor & Gamble Co. (“P&G”), maker of soaps, toiletries and personal care consumer goods, created a “shared services” unit to provide a common suite of administrative and operational services to its lines of business. The shared services unit delivers such services as information technology, finance and accounting, logistics support and other administrative functions.

During the spring and summer of 2002, newspapers reported that P&G was in lengthy competitive negotiations with two outsourcing services providers to sell P&G’s shared services unit for $1 billion and hire the winning services provider for an 8 year, $8 billion outsourcing contract covering information technology, human resources and other major administrative functions.

In August 2002, it looked like Affiliated Computer Services, Inc. (“ACS”), of Dallas, Texas, was going to win the bidding, due to the reported withdrawal by Electronic Data Systems Corporation (“EDS”), of Plano, Texas. EDS had reportedly withdrawn from negotiations in June or early July because of pricing.

On September 17, 2002, ACS announced its withdrawal from negotiations with P&G. In an ACS press release, ACS’s President Jeff Rich noted, “While the size of this opportunity was historic and would have been accretive to earnings, we believe the financial, operational and cultural risks were too high.” In other words, the risks were disproportionate tot he profit potential.

At about the same time in mid-September 2002, EDS reported disappointing financial results, causing a one third drop in its share price in one day, due in part to increased costs because of “heavy investment in attempts to obtain new business.” Then, on September 24, 2002, EDS’s stock price plunged roughly another 30% after being downgraded by a Merrill Lynch stock analyst, who concluded that EDS’s free cash flow for the 2002 year could be wiped out by stock repurchase operations necessary to settle derivative instrument exposures. The EDS stock price decline was symbolic of a more general stock market decline on September 24, 2002, to the lowest point in four years (even lower than the post-9/11 trauma in 2001), based on the Dow Jones Industrial Average index.

EDS’s stock price plunge left P&G with a weakened sole bidder. With ACS having publicly withdrawn after EDS had publicly withdrawn, P&G might have been lucky to have any bidder. Or P&G might reevaluate and restructure its strategy.

This case study was completed on September 26, 2002, and is subject to clarification and further consideration.

Business Issues

This scenario underscores the dangers of hyper-aggressive competitive bidding that combines both outsourcing and a sale of significant assets by the customer to the vendor in a glutted market. In this case, the customer was apparently so aggressive on the pricing of its assets that one of two finalist bidders concluded that the deal was uneconomical. When the customer apparently continued to push the second bidder for the same deal as if the competitive bidding process had continued, the second bidder withdrew. This left the customer the prospect of having no bidders despite completion of an arduous, detailed and highly disciplined and managed competitive procurement process.

Further, the publicity surrounding the prospective outsourcing of the customer’s shared services unit, involving approximately 5,700 employees, raised questions about the viability of the outsourcing process and the impact of a possible failure upon the customer’s staff, its customers and its shareholders.

Accordingly, this case study evokes questions about circumstances affecting competitive procurement of long-term services.

Transfer of Customer’s Shared Services Center to the Vendor

Reportedly P&G had bundled its shared services unit — including multiple “back office” functions — into a cost-efficient self-standing business.

Factors in the Competitive Viability of the Transferred Shared Services Unit.

To our knowledge, the press did not comment on the degree to which the P&G shared services unit was ready to become a competitive unit of an outsourcing services provider. To be viable in the new role, the acquired unit would not only have to serve P&G as the customer, but also demonstrate the ability to generate cash flow that justified the price of the unit. The reported $1 billion asking price received no comments on whether the shared services unit had the corporate culture, the business plan, the competitive bidding experience, the inurement to the vicissitudes of competition, the personal accountability and internal leadership necessary to pay off the $1 billion price tag.

Valuation and Accounting Factors.

As with any acquisition of a going business, the questions of valuation, goodwill and other internal accounting practices of the P&G shared services unit have not been publicly defined. However, it is clear that the bidders examined them closely. ACS withdrew, in part, because it could not justify the return on investment. While ACS’s announcement of its withdrawal observed that the cash flow would be “accretive” to ACS’s income statement, it is perfectly conceivable that the successful bidder would have to write off goodwill under financial accounting principles. This might explain why EDS withdrew in August 2002 and ACS withdrew in September 2002.

Negative Market Environment.

Declining financial and stock markets in 2000 through 2002 resulted in the loss of significant shareholder value between the time for planning and execution of the proposed outsourcing. P&G established its Global Services group in 1998. Probably in late 2001, P&G decided to sell it in a massive outsourcing.

By the time for conclusion of contract negotiations in anticipated for August – September 2002, several adverse market conditions had occurred. The stock markets had fallen. And the information technology and telecommunications sectors swooned, with sharp declines in corporate purchasing of IT goods and services. Globally, throughout 2002 major IT outsourcers had terminated the employment of tens of thousands of IT workers. Consequently, the business prospects for a new IT services facility would be introduced into the market at a time of grossly excessive capacity for IT services both in the U.S. and worldwide.

The Impact of Corporate Governance and Accountability on Valuation.

President George W. Bush signed the Sarbanes Oxley Act of 2002 designed to root out misfeasance and malfeasance in the executive suites of publicly traded companies. In August 2002, senior executives of publicly traded U.S. companies had to sign and file certifications that the financial statements were not materially misleading. Enron, Tyco International and Adelphia Communications executives were indicted for looting. In late September 2002, the Securities and Exchange Commission indicted Tyco’s former CEO L. Dennis Koslowski, claiming that he should disgorge his personal bonus for having entered into an acquisition with a flagging company (Flag Telecom) at an inflated price, allegedly for the purpose of artificially inflating his personal compensation. Clearly, the regulatory environment counseled extreme caution on valuations of assets in an acquisition.

The “Stalking Horse” in the Bidding

A bidder that has no chance of winning is a “stalking horse”. This case study evokes the question whether ACS ever became a stalking horse, or whether P&G “over reached” on both finalist bidders.

Absolute Ability to Deliver the Full “Program.”

A bidder must determine whether it realistically has the resources to win in a convincing fashion. Otherwise, the competition is a gamble for the bidder. This self-assessment is essential in the “no-bid” decision as well as in the negotiations as the customer’s business rationale and expectations are revealed at the bargaining table.

Comparative Advantage.

If the bidder does not know the identity of its competitor, then it can only guess and rely upon its own self-assessment of capabilities. Once the names of the two finalist bidders became public, some commentators observed that ACS’s bid had not been as strong as EDS’s because ACS, while capable, would have had to “stretch” to satisfy P&G’s contractual expectations.

Rigged Bidding.

Typically, bidders that are not in the “top tier” should ask themselves whether the “rules of engagement” have been “rigged” in favor of a competitor. If this is true, then the competitive procurement process is a sham, and, as a legal matter, the stalking horse may have a legal claim for fraud.

Remedies for the Stalking Horse.

The rational bidder, when it realizes that is has become a stalking horse, should evaluate its possible remedies.

  • Litigation for Fraud.
    The ethical, savvy service provider is not likely to sue its prospective customer for fraud. Business reputation through avoidance of litigation is generally the customary business policy of outsourcing vendors. However, the benefits of a lawsuit might be achievable through other means (see below) or through non-public dispute resolution mechanisms. Bidders might be entitled to certain legal rights under pre-bidding agreements with the customer that define the rules of the procurement.
  • Unilateral Direct Boycott.
    If it feels that it has been “used” as a stalking horse, it can elect not to participate in future “rigged” bidding wars managed by the same specialized outsourcing advisors.
  • Complain to the Customer.
    A complaint might not necessarily result in compensation. It might, however, restructure the negotiations and re-admit the bidder into the realm of a “viable possibility” instead of a stalking horse. In government contracts, formal contests and appeals can result in substantial delays in the award of the contract. In private transactions, a more informal approach might be productive. The customer might have a self-interest in being responsive.
  • Request Compensation.
    The stalking horse bidder has lost not only its out-of-pocket expenses, but also its prospective profit from alternative application of the same resources to other prospective pursuits.
  • Sell a Service.
    Rather than just demand compensation for its out-of-pocket expenses, the stalking horse bidder might offer to sell some deliverable that resulted from the aborted competitive bidding procedure. This could include:

    • data discovered during the due diligence phase that could be useful to the implementation of the eventual outsourcing, or to its restructuring during the negotiation phase;
    • recommendations of an advisory or consultative nature from a service provider’s perspective (to facilitate negotiations with the remaining bidder(s)); or
    • other services or deliverables.

When a Service Provider Should Withdraw from Negotiations

In competitive procurement and auctions, each bidder must analyze the value of the transaction and draw its own conclusions as to circumstances that might make its bid no longer commercially reasonable. Experience suggests that a bidder should withdraw under any of the following conditions:

  • Overpriced.
    The combination of the costs of acquisition and the reward for future services rendered does not meet the financial hurdles imposed by senior management. The financial hurdles could be imposed either individually on each segment of the operation or globally on the combination of the operations.
  • Inability to Integrate Personnel.
    In this case, ACS alluded to “culture” as a factor. In essence, an observer might conclude that each of the finalist bidders, in its own time, concluded that there were insurmountable cultural differences with the P&G employees who would be in scope and who would become the winning bidder’s employees.
  • Unsuitability of the Bundle as a Deal or as a Deal Structure.
    If both finalist bidders were willing to withdraw, then each must have concluded that the “package” was unsuitable for economic reasons. Suitability might have meant that the post-transaction commitments to be assumed by the winning bidder were excessive. Customers and their specialized consultants may take note of the fact that EDS was invited back into the bidding at a time when ACS was still the sole bidder, and that in order to entice EDS to come back to the negotiating table P&G and its specialized consultant must have acquiesced in some of their demands about the deal structure.
  • Risk Allocation.
    Certain news reports suggested the transaction would have an estimated value (excluding the acquisition of the shared services unit) of $8 billion for an 8-year term. Another article estimated the overall value of services at between $4 billion and $10 billion over an estimated 10-year term. If the winning bidder has no means of projecting actual revenues, it cannot determine whether the risk of the initial investment — in the acquisition, transition and post-transition commitments relating to the acquisition and transition — was outweighed by the prospective profit. In short, the profitability was not sufficiently clear.
  • Mismatch of Expectations and Post-Effective Corporate Culture of the Customer.
    Having lived with an outsourced “back office” environment already for two or three years, P&G’s end users should probably adapt to the hiring of an external outsourced services provider. However, one might wonder why P&G wanted to outsource the environment to an external services provider. The press reports do not suggest that P&G was unhappy with its shared services unit. But certainly a bidder should ask whether there was any reason for the customer to be unhappy. And if the customer were actually unhappy with the quality of the service, the customer might have unreasonable expectations about the level of responsiveness, service or alignment of its shared services unit. Conversely, if the customer were very happy with the shared services unit, the only reason for outsourcing might have been to generate cash flow from asset divestiture. At that point, the service provider becomes a venture capitalist, hoping that the acquisition will be accretive to the cash flow. In either case, the bidders must analyze the suitability and cultural fit of the bidder with the customer’s expectations.

Lessons Learned from the Customer’s Perspective

Flexibility.
This extraordinary case study suggests that, in complex transactions with multiple functions being outsourced, the customer’s self-assessment and preparation for negotiations should include some flexibility and fall-back positions. Where both finalists are cornered and see no alternative but to walk away from negotiations, clearly the customer has played the game of “corporate chicken” and run both the bidders off the road. Such an outcome would be a serious lost opportunity, not to mention unrecoverable expense, for all involved. What guiding principles should inspire the customer?

True Competition.
The key requirement for a competitive procurement is that it remain truly competitive. If a scoring factor becomes clearly overwhelming for or against one of the finalist bidders, then the continuing bidding war is a farce between the guaranteed winner and the stalking horse.

Why should the customer want true competition? Without a viable final competitor, the guaranteed winner will normally revert to some of the more costly behaviors and tactics evident in a sole-source procurement – delays, quibbling, attempts to apply unfair pressure. Such behaviors normally deprive the customer of the best competitive price, terms and conditions.

Disclosure of Ongoing Negotiations.
Despite corporate policy statements, non-disclosure agreements with employees, contractors, bidders and others, the news of this outsourcing transaction became publicized. Information leaks by disgruntled in-scope employees can have an impact on decision-making and strategy by the prospective service providers, since the employees can identify the other bidders. Every bidder can be expected to want, and get, this information. The bidding could become transparent, not only to the customer and its employees, but also to the bidders.

Acceleration of Benefits.
An accelerated contract yields benefits earlier. Acceleration also facilitates commitments in the transition phase, encouraging in-scope personnel to remain and support the outsourcing, and avoids the risk that the entire project will be abandoned. Abandoned projects, like failed deals, can easily cause loss and disruption, not to mention litigation and continuing distraction.

Ethics in Competitive Procurement.
Competitive procurement has been a fundamental precept of modern capitalism. But when it degrades into stalking horse disguise, one may question whether conduct is ethical and fair. Every customer has an interest in being known for its ethical conduct, and indeed must question its own conduct internally if skewed procurement practices violate stated corporate governance principles. In an era of renewed governmental and shareholder needs for trust and confidence, and to avoid certifying financial statements that do not accurately reflect in all material respects the risks of claims from stalking horses, senior management of major enterprises should ensure that the customer’s stated business ethics are implemented in its competitive procurement practices. See Corporate Governance in Outsourcing

Initial Definition of the “Rules of the Game.”
The customer normally defines the rules of engagement with prospective vendors. The customer must determine the degree to which it wishes to address the legal, business and ethical issues presented in this case study.

Lessons for Multinational Alliances or Teams

Experts in the outsourcing process may wish to rethink their methodologies as a result of this potential fiasco

No Teams for P&G.
The P&G case was limited to single enterprises bidding to take ownership if the shared services business and provide outsourced services in their place. This case differed from the decision by J.P. Morgan, in the famous “Pinnacle Alliance” outsourcing, to hire four vendors to manage complex IT infrastructures, software and other back office operations. P&G insisted on a single point of accountability and single owner of all transferred IT infrastructures.

Subcontractors in the Bidding Process.
Many outsourcing transactions, particularly large and complex ones, may involve foreign subcontractors, such as software developers and maintenance services providers in Asia. Teaming alliances can fall apart if the customer engages in pitting a team against a globally integrated company.

Self-Interest in Competitive Bidding.
In adopting “stalking horse” tactics for a massive outsourcing across multiple functions and countries, the multinational enterprise customer risks alienating the best services providers. It also risks losing the benefits of outsourcing by so narrowly defining the transaction as to prevent the entry of competent competing teams.

Outsourcing: Evolution From Single Supplier to Best of Breed

October 9, 2009 by

In a globalizing, services-based economy, outsourcing has rapidly grown in the last decade. Once confined to “low-value,” low-technology services such as a company’s in-house photocopy machines, messengers, food services and janitorial operations, outsourcing has moved “up the value chain.” At the same time, changes in the nature of outsourcing have led to a variety of other management tools such as multiple outsourcings for “best of breed,” greater internal discipline through “insourcing” under a “managed scorecard” and “shared services” subsidiaries. Roles and identities of service users are merging with those of service providers in a continuum of services.

This article focuses on the evolution of outsourcing in the last ten years and how new models have developed.

“Outsourcing” vs. “Out-Tasking.”

Outsourcing is the process of transferring to an external services provider (the “outsourcer”) the day-to-day responsibility for operating a business process of the corporate enterprise (the “user”). Typically, this involves a transfer of the personnel then employed by the user to the outsourcer’s payroll. Frequently, other assets are transferred as well.

In contrast, “out-tasking” is a more limited approach involving “contracting out” or “subcontracting” a task to a “consultant” or other service provider. This can run the gamut from individual projects for product development to a string of projects that are interdependent and require a certain workflow.

Types of Outsourced Services Today.

Currently, external services providers offer virtually any type of ongoing support for business processes. These range from human resources management, tax compliance, internal audit and real estate asset management to product design, manufacture, design, testing, marketing, logistics, distribution of goods and services worldwide. Given the right mix, one can “outsource” an entire enterprise. Indeed, some new businesses are based exclusively on Internet sales with outsourced support.

Deciding When to Outsource.

Outsourcing is suitable for many different situations. For publicly held companies seeking “efficient” and favorable share pricing, the earnings multiples generated by many capital-intensive assets might fail to support management’s high targets for ROI and ROE from “core business.” For such businesses, outsourcing allows liberation of capital from the constraints of price-earnings ratios and promote management focus on essential determinants of shareholder value. “Do the best, outsource the rest.”

For rapidly changing industries, outsourcing may be the tool of choice for obtaining rapid access to scalable production or to new technologies, a “partnership” with a recognized leader for transitional and long-term technology planning and marginal cost pricing for business processes requiring heavy capital investment.

In the context of mergers and acquisitions, divested companies need operational support from the day of a spin-off or split-off. Outsourced facilities can span the gap and give new management the necessary “breathing room” and allow focus on the core business. Outsourcing can also expedite integration of two merged companies with incompatible technical infrastructures.

Deciding What to Outsource.

In making any “buy” vs. “build” decision, as in outsourcing, financial considerations are critical. But the key driver is to distinguish between functions that are “core” (non-delegable) and those that are merely “essential.” Many “essential” functions are ripe for outsourcing under suitable conditions. For some enterprises, the “hard” decision is deciding what not to outsource.

The classic example of outsourcing revolves around information technology. Today, this field includes the converging technologies of data processing (especially using “enterprise resource planning” (ERP) and “supply-chain management” (SCM) software), telecommunications, Internet “e-commerce,” and remote processing through Internet service providers. In business and industry, this can involve both “back office” and “front office.” In financial services, it can even include the “middle office,” for compliance with financial reporting and securities laws.

At the “back office” level, this business function can be divided into a number of discrete elements. Customers rely upon, but rarely see

  1. the operation of a data center with mainframe computers running “legacy” applications,
  2. certain applications development and maintenance for custom programs,
  3. network administration for local area networks, wide area networks (including telecommunications) and now even “storage area networks” of storage devices for the burgeoning volumes of archival data and
  4. “help desk” services for employees with problems using the company’s information technology infrastructures.

At the “front office” level interfacing directly with the customer, outsourcers can provide “private label” services that allow a company to offer a host of resources that it does not own. In doing so, the company can specify in advance what it wants to do, how it wants to do it, and what it is willing to pay. By combining such services as customer relationship management, remote electric meter reading, electronic billing and the like, some new companies can sprout up to compete directly with “bricks and mortar” companies on a cost-effective basis without loss of service quality.

Evolution of Deal Structures.

In the early 1990’s, data services providers such as EDS, IBM, CSC, Perot Systems made their fortunes on long-term, monolithic packages of services covering a broad scope. The trend today is to find niche players to provide specialty services, but this requires significant supervisory and planning skills for the user enterprise. Sometimes one supplier acts as general contractor, or “first among equals,” and manages a consortium. Occasionally, joint ventures supplant the supplier-customer relationship, providing added incentives and risks for both sides. Current methodologies for competitive procurement of outsourcing services reflect the learning of former (or current) long-term deals. Renegotiation occurs regularly, but can only be effective if the necessary tools have been crafted into the deal in the first place.

Making It Work.

Senior management needs to be committed. After the deal is signed, in-house managers need to monitor and manage the supplier’s performance.

Done wrong, however, outsourcing can be a catastrophe. Multiple business risks are inherent in the outsourcing process.

If mismanaged, an outsourcing process could retard growth and result in unintended losses of momentum and key personnel. In such cases, the resulting disenchantment may swing the business process back to “insourcing.” However, “re-sourcing” to another vendor might prove more effective.

“Genetic Mutations” on Outsourcing: Shared Services, Insourcing, Managed Scorecard.

In the last five years, responses to outsourcing deals have generated the quest for “better” deal structures.

“Insourcing” is the process of bringing in-house a business function that was, or was at risk of, being transferred to an external service provider. “Shared services” subsidiaries provide common administrative functions for a group of affiliated companies.

To improve performance and forestall being outsourced, some in-house staffs are focusing on process improvement, sometimes agreeing to be managed as if they were external providers. In some cases, this reaction can produce self-management by “managed scorecard” techniques or in the establishment of “shared services” subsidiaries for cost efficiency. In either case, the “threatened” personnel then become external services providers of their own specialized, albeit generic, processes in the market.

The Independent Lawyer and the “Two Hat” Client.

Virtually every corporate user has the capacity to wear the two “hats” of “user” (in one outsourced business process) and supplier (in another). In major procurements, the assistance of knowledgeable “infrastructure services” lawyers can accelerate the process, reduce risk and facilitate future adjustments. For users-turned-suppliers, knowledgeable legal and business advisers can expedite the “go-to-market” strategy and achieve valuable payoffs in the selection, due diligence and negotiations phases.

Independent legal counsel with experience in both sides of these strategies can expedite and facilitate the process of determining the scope, selecting the outsourcer, negotiating the contract and ensuring implementation.

Sponsors of www.outsourcinglaw.com provide legal and practical business advice on the structuring and implementation of various strategies discussed in this article. For further information, contact one of our sponsors or Bill Bierce (author).