Whether you are negotiating a long term IT services or outsourcing agreement or you have already entered into one of these agreements, you need to start planning your exit now.
When parties are considering entering into a long term information technology services contract, other factors such as the price, the scope and the level of services provided under the agreement can dominate negotiations. However, it is essential to keep one eye on the exit to ensure the agreement will be sufficient to protect your business’ IT systems and services, and to ensure that your business is not left without key IT systems or services during the transition out (whether in house or to a new supplier).
There are three key issues you should keep in mind when preparing your transition-out plan:
- the timing for preparation of the plan – it is generally best to prepare the plan as early as possible, provided that you remember to keep it updated as the term progresses and services are added or altered;
- making sure that the process for negotiating the transition-out plan is well managed and that the right people are involved in the preparation of the plan; and
- ensuring that the plan contains the right level of detail but also a degree of flexibility to ensure that your business’ needs are supported during the transition-out phase.
- When should you negotiate your transition-out plan?
After months of negotiation, your services agreement has finally been executed and the overwhelming temptation is to lock it away in your filing cabinets. However, if you can negotiate the terms of your transition-out plan now, while you still have the momentum, you should be best placed to negotiate a transition-out plan on terms most favourable to your business.
If your agreement contains an obligation to negotiate a transition plan within a specific period, you should open negotiations with your supplier as soon as possible to ensure the plan is agreed within the specified period, especially following the NSW Supreme Court decision in Cuscal v First Data1. In that case, parties to a master services agreement were required to agree to a “Termination Assistance Plan” within one year after the commencement date. Two and a half years after commencement, Cuscal provided a draft Termination Assistance Plan to First Data; however the parties did not reach an agreement and ended up in a lengthy legal dispute. Ultimately, Cuscal had no right to require First Data to enter into a Plan or follow the specified dispute resolution procedure due to the “inordinate” delay.
If your agreement is silent as to when the transition plan should be negotiated, you should start this process as soon as possible for a number of reasons:
- it will help ensure that the right people are involved in the preparation of the plan (as to which see section 2 below for further discussion);
- if your agreement is unexpectedly terminated, you already have a transition plan in place. Equally, the lack of a transition plan should not be a deterrent to you exercising your right to terminate the agreement; and
- you will be preparing the transition plan off the back of the (relative) euphoria of having signed the agreement and the supplier is more likely to be in a co-operative frame of mind (and you are therefore likely to be in a better bargaining position) than if you were trying to negotiate at a time when the supplier knows that you will be moving the services to a competitor or back in house.
- How should the process be managed and who should be involved?
Ensuring that the negotiation process is well managed, and that the right people are involved, will be key to ensuring that you end up with the best possible transition plan. But how do you achieve that?
If your agreement, like many long term services or outsourcing agreements, expressly obliges parties to negotiate a termination plan “in good faith” or requires the supplier to provide “reasonable assistance”, you may think that you’re safe. However:
- as explained in our client alert, ‘Agreement to Negotiate in Good Faith’, contractual obligations to “negotiate in good faith” may be deemed too uncertain to be enforceable by the courts unless sufficient certainty is provided in the agreement (such as through key principles guiding the development of the plan and key matters to be covered in the plan); and
- even if sufficient detail is provided to enable a duty to negotiate in good faith to be considered enforceable, it’s not clear that the duty to negotiate “in good faith” actually gives you any further protection (or a better bargaining position) than the general duty to co-operate gives you (see our article ‘Duty to Cooperate’ from the January edition of our Information Technology Update).
Given that it’s not safe to rely on the obligation to negotiate in good faith alone, it’s worth including some key principles in your services agreement to ensure that the parties are aligned on the process for negotiating the transition plan, who should be involved and what the plan should cover. For example, how often will meetings be held? Who will attend? Where will they be held? What will the output be and will the supplier be reimbursed for its time and efforts in preparing the transition plan? See section 3 for a list of key issues you may want to address in your transition plan.
Who should be involved in the preparation of a transition plan will often be heavily influenced by the time at which it is prepared.
- If you’re negotiating your transition plan shortly after signing (whether it’s for the whole agreement or a particular statement of work), it’s likely that there will be people within your business (or external consultants) who have great insight, including into what services would be required in the event of a transition-out and how those services should be provided, as a result of the due diligence they have done in scoping the services for the agreement. Accordingly, these people should be the key people involved in ensuring that the transition plan speaks to the actual requirements of the business in relation to the project (and that it is not just a standard document you’ve taken from an old project because you haven’t been able to get sufficient business input).
- If you’re negotiating your transition plan significantly after commencement, you should ensure that you maintain a centralised file to document the knowledge obtained throughout the due diligence and negotiation period as well as during the receipt of the services to ensure that this knowledge is not lost through employee changes or no longer having access to your external IT consultants. It is also useful to require sufficient records and reports to be provided by the supplier in order to capture their knowledge about implementing your IT system and what has been learned during the process.
- Is your plan sufficiently detailed and yet flexible enough to meet your changing needs?
Now you’ve got your commercial team and supplier on board to start negotiating the transition plan, what services should the plan cover and what terms should it include in order to protect the changing needs of your business?
The recent decisions in Cuscal v First Data2 and the English AstraZeneca3 case serve as a timely reminder of the importance of ensuring that the obligations during any transitional period are very clear.
In Cuscal v First Data, the master services agreement provided that:
- the supplier was obliged to provide “termination assistance” regardless of whether or not the parties agreed the transition plan; and
- “termination assistance” meant the services to be provided to assist the transition of the services to the customer or a replacement supplier (including obligations such as data back-up, answering questions about services and delivering outstanding reports).
As there was no agreed termination assistance plan, Cuscal could not point to any intention that the BAU services should be provided during the period of termination assistance. Accordingly, the NSW Supreme Court ultimately held that the provision of BAU services was not within the scope of termination assistance.
The AstraZeneca case underscores the danger if service recipients do not scope the transition obligations sufficiently clearly. In this case:
- a master services agreement required IBM to provide “Shared Services” for a further 12 months after the “Exit Period” if termination services required shared infrastructure, systems or third party contracts which were not reasonably transferable to an incoming supplier;
- the parties disagreed on the meaning of “Infrastructure” as it was not defined or used consistently in the agreement; and
- unclear drafting led to confusion over whether IBM was obliged only to continue providing BAU services (as opposed to Shared Services) until the end of the Exit Period, or whether this obligation continued until the BAU services were transferred to the incoming supplier.
Again, the court found in favour of the supplier in determining that the scope of the termination assistance / provision of the shared services did not extend to providing BAU services after the term of the contract, leaving AstraZeneca in the unenviable position of having a gap between the end of IBM’s obligation to provide services and the commencement of the incoming supplier.
However, in AstraZeneca’s favour, it was held that infrastructure referred to more than just IT hardware and software and included facilities at IBM’s shared data centres. The effect was that IBM had to continue providing Shared Services in its shared data centres for a further 12 months after the Exit Period (other than in relation to BAU services).
These decisions highlight the significance of planning your exit: if you don’t consider all of your requirements carefully, you may be left without services until you are able to transition the services in house or to a replacement supplier. Following these decisions:
- you should consider defining the term of your agreement so that it applies to the transition out period (eg Term means the Initial Term and the Extended Term (if any) and continues during the period in which transition assistance is being provided). Not only does this help show that you intend for the supplier to continue to provide BAU services after you have triggered termination of the main part of the agreement (or it has expired) but it also ensures that other provisions of the agreement (eg as to governance, change control (and the ability to add extra services) and key personnel) continue to apply;
- if the term of your agreement does not include the period when transition assistance is being provided, you should make it clear in your transition plan that the supplier is required to continue to provide the BAU services for a period of time; and
- in any event, it is vital that you clearly define what each party’s rights and obligations are with respect to transition and what “transition assistance” actually means.
In practical terms, as a minimum you should consider whether you need to deal with the following issues as part of the transition assistance:
Click here to view table.
As suggested above, if you’re not agreeing the transition plan at the time of commencement of your services agreement or shortly after, consider including a list of key principles in your agreement which will apply at the time the parties actually formulate the transition plan. This could address each of the key issues highlighted above to ensure that the parties’ intentions are aligned. This should help focus the negotiation process once the transition plans are being developed and agreed and should help to ensure that there aren’t major disagreements in relation to key issues.
However tempting it may be, there may be adverse consequences if you just file your services agreement away after signing and leave the supplier and your commercial team to prepare (or not prepare) a transition-out plan.
To reduce the risk that your business is unable it to do what it does best during the transition-out period because of insufficient access to services or infrastructure, it is important to plan for termination and transition of services as early as possible. This applies whether or not your agreement obliges the parties to negotiate a transition plan. If you leave transition-out planning until the time that the agreement is due to expire, there is a risk that the persons in your business with detailed knowledge about the systems and services gleaned during the due diligence process will have moved on. The longer the term of your agreement and the longer you leave the preparation of the plan, the greater the likelihood that key personnel will not be available to assist with transition-out planning.
You can also mitigate the risks of the transition-out plan being insufficient to cover your BAU and transitional services requirements during the transition-out period by ensuring that your transition plan is designed to suit the business’ changing needs by:
- setting out the processes and principles for negotiating your transition plan in your services agreement;
- ensuring that any transition plan has sufficient flexibility to allow you to respond to changing circumstances over the life of the agreement;
- clearly defining the terms and scope of your transition plan (including any obligations on you/your new supplier) to ensure it protects your business’ assets and IT services throughout the transition-out period;
- putting internal mechanisms in place to periodically review the agreement (because terms allowing flexibility to amend the agreement will not be much use if you don’t take advantage of them); and
- maintaining an internal database / working file to centrally store knowledge about your business’ IT systems and services to assist with planning for (and successfully executing) your exit.
By taking the time to thoroughly plan your exit well before the expiry of your services agreement and by keeping one eye on the exit, your business should be well-placed to continue on a ‘business as usual’ basis, and to successfully transfer to your new in-house or third party supplier team – helping ensure that your customers (both internal and external) have a seamless transition.