Preserving the Service Provider’s Inheritance

As service provider’s counsel, I watched it happen many times. After the Service Provider worked diligently to prepare a response to a Customer RFP and was down-selected based on the Service Provider’s proposed solution, the scope of services was reduced. The reasons varied. Sometimes they were financial: the Customer was not able to afford particular aspects of the solution or the benefits arising from parts of the solution no longer justified the expense. In other cases the reasons were operational or delivery-based: the Customer lacked the necessary infrastructure to implement components of the solution or it would have taken the Service Provider too long to develop certain parts. Regardless of the reason for which the Customer was seeking to remove scope, the Service Provider usually concluded that, in the circumstances, it had little option but to agree with the Customer that the work was “off the table”.

But that was never the end of the story. Just because some part of the work was no longer in scope, that did not mean that it could not be referred to in the outsourcing agreement. Indeed, the Service Provider was usually anxious to ensure there was some reference to the omitted scope in the contract. These contractual references were referred to, colloquially, as a way to “protect the Service Provider’s birthright” or to “preserve the Service Provider’s inheritance”.

In this posting, I want to discuss three ways that the Customer and Service Provider can deal, in the outsourcing agreement, with committed scope that ceases to be committed or that evaporates during the negotiating process (referred to below as the “Potential Scope”). The focus will be on how to deal with the Potential Scope in the outsourcing agreement. Clearly, the Customer will also need to ensure that it is able to do so under its procurement regime, but that is a separate issue.

There are benefits to both the Customer and the Service Provider from doing so. For the Customer, dealing with the Potential Scope explicitly can provide it with contracting flexibility to incorporate the work into the agreement in the future quickly, efficiently and without having to comply with procrustean procurement processes. For the Service Provider, while these approaches do not guarantee that the Customer will award the Potential Scope to the Service Provider, they can provide the Service Provider with a leg up and a reference point in the contract from which it can argue that the parties contemplated the work might be awarded to it.

The avenues open to the Customer and the Service Provider to deal with the Potential Scope include the following:

1. Right of First Proposal: In recognition of the fact that the Potential Scope formed part of the Service Provider’s original RFP response but was subsequently removed, the Customer and the Service Provider can agree to include a Right of First Proposal in the outsourcing agreement. The Right of First Proposal requires the Customer to invite the Service Provider to make a proposal for the implementation of the Potential Scope before the Customer is entitled to solicit or accept proposals from third parties relating to such implementation. This right does not require the Customer to accept the Service Provider’s proposal, only to invite the Service Provider to submit one.

The Right of First Proposal can be included in the outsourcing agreement in the following terms:

“(a) If the Customer intends to implement the Potential Scope or a material part thereof (the “Proposed Additional Scope”) at any time or from time to time during the term of the Agreement, the Customer shall provide notice thereof (each, a “Potential Scope Notice”) to the Service Provider. The Potential Scope Notice will describe the Proposed Additional Scope the Customer intends to implement and include reasonable details of any specific requirements, conditions or terms of the Customer affecting its implementation, e.g. scheduling constraints or geographic restrictions affecting the solution. The Potential Scope Notice will be considered to be a Change Request delivered by the Customer and will be subject to the Change Order Procedures, provided that:

(i) the Customer shall not solicit third party proposals for the implementation of the Proposed Additional Scope until such time as the Service Provider shall have had a reasonable opportunity to submit a Change Proposal therefor in accordance with the Change Order Procedures or the Service Provider shall have informed the Customer that it will not be submitting such a Change Proposal; and 

(ii) the Customer shall review any Change Proposal in respect of the Proposed Additional Scope submitted by the Service Provider in good faith in accordance with this Section but nothing in this Section shall require the Customer to accept any Change Proposal in respect of the Proposed Additional Scope that is submitted by the Service Provider.

The Customer shall not be required to deliver a Potential Scope Notice to the Service Provider if the Customer implements the Proposed Additional Scope internally without the use of subcontractors or third party personnel

(b) This paragraph shall apply if the Customer receives an unsolicited proposal from a third party (including another service provider or supplier of the Customer) for implementation of the Potential Scope or any material part thereof which the Customer wishes to accept or to discuss with the third party or any other person. Before accepting the third party proposal or discussing the third party proposal with the third party or any other person, the Customer shall provide the Service Provider with a Potential Scope Notice. The Potential Scope Notice shall relate to any part of the Potential Scope that the Customer will consider implementing including any part that is included in the third party proposal that the Customer wishes to accept or discuss with the third party or other person and the provisions of paragraph (a) shall apply, with necessary changes, to such Potential Scope Notice.”

The Right of First Proposal is not the same thing as a right of first refusal. A right of first refusal may well be problematic for Customers: any third party proposal that would be subject to the right of first refusal would also likely include confidentiality obligations in favour of a third party that would prevent the Customer from sharing the contents of the proposal with the Service Provider.

2. Option: If the parties can define the Potential Scope precisely and the Service Provider is able to determine both the resources it requires to deliver the services and the price of performance, then the parties can accommodate the Potential Scope in the outsourcing agreement by way of an Option. The Option entitles the Customer to require the Potential Scope to be implemented for a specified period of time on notice to the Service Provider. The Option can be phrased in the following terms (where the Service Provider resources required to implement the Potential Scope are referred to as the “Potential Scope Resources” and the price of performance is the “Potential Scope Charges”):

“(a) The Customer shall have the option (the “Option”) to require the Service Provider to implement the Potential Scope using the Potential Scope Resources for the Potential Scope Charges. The Option shall be exercisable for a period of 180 days after the Effective Date on written notice (the “Notice of Exercise of Option”) from the Customer to the Service Provider referring to this Section but may not be exercised thereafter. Upon the Service Provider’s receipt of the Notice of Exercise of Option, the Service Provider and the Customer shall cooperate in good faith to implement the Potential Scope as set out above pursuant to the Change Order Procedures.

(b) The Customer acknowledges that the Potential Scope Charges do not include the Service Provider’s charges:

(i) to re-work any Services that will already have been performed for the Customer by the Service Provider prior to the time at which the Option is exercised by the Customer pursuant to paragraph (a) and the Potential Scope is implemented pursuant to the Change Order Procedures; and

(ii) for additional testing, acceptance and project management effort necessary if the Services for the implementation of the Potential Scope are not integrated with other services being provided by the Service Provider.” 

Unlike the Right of First Proposal which can endure for the term of the outsourcing agreement, the Option normally survives for only a limited period of time. This is because the longer the option period, the more difficult it will be for the Service Provider to be confident about its costs. There will come a point at which the risks to the Service Provider associated with lengthening the option period will outweigh whatever benefit the Option provides to the Service Provider in terms of preserving its birthright. 

3. Acknowledgement of the Potential Scope: The Customer may be unwilling or unable to provide the Service Provider with a Right of First Proposal and the nature of the Potential Scope may be such that it is not practical to include an Option for the Customer to implement the Potential Scope in the outsourcing agreement. In these circumstances, the Customer and the Service Provider have the option of including an express acknowledgement in the outsourcing agreement that the Potential Scope continues to be “potentially in scope”. This acknowledgement can be phrased as follows:

“The potential scope of the Services to be provided by the Service Provider during the term of this Agreement includes the following, subject to the implementation of such Services at the discretion of Customer in accordance with the Change Order Procedures and other applicable terms of this Agreement:

1. the Services that are described in the Statements of Work as being in-scope for this Agreement; 
2. the Potential Scope; and
3. any other potential scope for the project described in the RFP issued by the Customer.”

It is easy to question the value of such an Acknowledgement. Regardless of whether it is included, the Service Provider can always make a proposal to the Customer to bring the Potential Scope into the outsourcing agreement. And the Acknowledgement does not compel the Customer to award the Potential Scope to the Service Provider. So what, ultimately, is the point of including the Acknowledgement in the agreement?

The point, for the Customer, is about having options to deal with scope in the future without assuming obligations to do so. And, for the Service Provider, the Acknowledgment provides a vehicle to award the work to it. Including the Acknowledgement in the outsourcing agreement removes possible roadblocks. It prevents the Customer from forgetting that the Potential Scope was ever part of the agreement. It eliminates claims that a separate procurement process with open bidding is necessary. And, if the Service Provider is fortunate, it changes the nature of the discussion from “should the work be awarded to the Service Provider” to “under what terms and conditions should the work be awarded?” Wayne Gretzky captured the Service Provider’s perspective well when, in a different context, he said “I miss 100% of the shots I don’t take.”