Liability Management in Outsourcing Contracts Marsh Technology Conference Zurich May 2005 David Barrett Partner, Global Head of IT & Outsourcing Simmons & Simmons, International Law Firm

2/1B89184 Outsourcing Contracts – the disaster zone of IT law! Reputation is dismal 70% renegotiated/unhappy within 2 years - 50% within in 1 year 90% have major issues arising between the parties 55% have disputes – many of which lead to formal ADR or litigation 95% end early (50% are formally terminated) Public sector experience in North America & Europe is even more dismal

3/1B89184 Often not a dramatic breakdown in delivery So many fail – why? “Pound of flesh” – contract is met but not expectations No progress when most customers seek change and even evolution Cultural issues A complex relationships is bound to have issues –Poor communication –Blame culture –No admission –Issues escalate out of control

4/1B89184 Big problems do arise More failures in build than delivery Timing is usual the issue Pressures to accept incomplete build and lack of clarity about impact of partial acceptance Deemed acceptance provisions Customers often refuse sign-offs Lack of clarity Relationship breaks down

5/1B89184 Other major problems Scope creep Cost escalate Technology evolves – cost remains same Lack of pricing granularity Lack of fundamental establishment of what service is……….even before it changes Service levels – quality - remedies Feeling of lock-in No contract management No governance

6/1B89184 Partnership Contracting in Outsourcing A possible solution Build better relationships Manage liability – even avoid it in the first place Restore faith in the contracting process Proper attribution of risk Delight in outsourcing

7/1B89184 A Partnership Contract Comprehensive Capable of evolution Reflect good practice Tailored to both sides expectations – at senior level Understood by key players Negotiated Must reflect wisdom of models and precedents – not slave to them

8/1B89184 Partnership Facilitating Provisions Clear delineation of customer and supplier roles and responsibilities Services and service regime properly established Consequences of process and deliverables firmly established Governance Pricing Granularity Benchmarking Pricing and Service Review

9/1B89184 Partnership Facilitating Provisions Balanced and open change control which avoids unstructured scope creep Balanced liabilities Termination rights Post-termination and assistance Allowing re-competition Risk balance

10/1B89184 The Win: Win Contracting Mindset Customer Must negotiate Must allow time – for itself and suppliers Balance not arrogance Understand need for fair return Look for priced options Needs to reflect deal wanted by top executives Supplier Needs to engage Deploy proper negotiating team - empowered Be prepared to explain constraints and price options Must negotiate Must not accept what cannot deliver – or afford Deal-making important for offshore suppliers – need to understand outsourcing is a relationship; not price “sell” Understand differences in US and European marketplaces