Last June we read with interest Zack Whittaker’s article Microsoft admits Patriot Act can access EU- based cloud data . The article focuses on the effects of the USA Patriot Act on cloud computing. Interestingly, the article states an admission made by the managing director of Microsoft UK that cloud data, regardless of where it is in the world, is not protected against the USA Patriot Act. As the data processor for cloud computing services, Microsoft, a US based company, can be compelled to hand-over data to the US authorities without any kind of prior notice or consent (even where doing so may be in contravention of other local laws in non-US jurisdictions).

This raises an interesting issue in the context of outsourcing deals where IT Managers and CIOs are constantly under pressure to deliver scalable, cost effective, “built for the future” solutions, and public cloud computing is one such IT solution offering just those features.

In the case of public cloud computing, many have argued that all data and information is potentially at risk of being disclosed under the USA Patriot Act where the cloud computing processor is US-based. Business owners need to look past the ownership and control of the information, as well as the privacy protection covenants in the outsourcing agreement, and consider how and where the information is processed and stored, and by whom. The effect of the USA Patriot Act on an outsourced transaction involving Canadian business owners and US-based service providers is nothing new. However, what is at risk of being overlooked is the back-door opening to the USA Patriot Act where non-US-based service providers are using cloud computing offered through a US-based company as part of the deal. This is where privacy protection provisions may fall short, and although they will not be effective to stop a disclosure of information under the USA Patriot Act, they could at least address the issue of damages were that to occur.

So what does this mean for business owners and service providers? Based on our review of the literature, some recommend that:

• business owners must understand their legal obligations to protect personal information and how the legal exceptions might apply to their businesses (for example, an appropriate customer consent at the time that information is collected may or may not be required). The legal obligations vary by jurisdiction – in some cases it may be enough to take reasonable steps to protect the information, even though protection cannot be guaranteed;
• business owners should assess the personal information that they are collecting and determine if they collecting too much information, or even the right information, for their business purpose;
• business owners must understand what they are representing to their customers concerning any personal information collected and whether those representations are accurate or need changing;
• the parties should consider specific contractual terms designed to address privacy in the cloud computing environment, such as early warning where legally permitted – this may mean some customization of the cloud computing contract; and
• business owners should adopt policies and procedures for dealing with unauthorized disclosure of personal information, to the extent that the disclosure becomes known to them.

Imagine the 20/20 vision of hindsight, and consider the following:

1. The Importance of Innovation.

Key value propositions of any BPO are, put simply, better, faster and cheaper. However, there is an often overlooked, long term value proposition of a BPO – the ongoing strategic business improvements that vendors ought to provide throughout the term.

Outsourcing service providers typically focus on business solutions as they are challenged by clients to solve problems. Reaching the end of the long road of transition and transformation, navigating the many potholes along the way, service providers, and indeed clients, are content and even relieved to settle into the new state of “status quo”. But once the deal moves beyond the operational cost savings and improved efficiencies there is always room for improvement.

Ensuring the outsourcing service provider continues to bring thought leadership and leading industry expertise to the deal, over the term, is an important factor in the success of the deal. But more importantly, continuing to bring operational efficiencies and strategic business value, whether it’s the introduction of new business processes, products and services, or continuous improvements, may be the ticket to ensuring a successful, healthy business relationship over the longer term.

Make sure you include in your BPO contract the expectation of the parties around ongoing innovation and make sure that you manage the contract to achieve those expectations. Complacency in the face of a rapidly changing industry is a recipe for relationship disappointment and worse, disaster.

2. Remember, BPOs are not Turnkey Contracts.

Clients who undertake BPOs for the first time often underestimate the ongoing requirement for their continued involvement in the outsourced business after the deal is signed. Clients sometimes have a tendency to treat the contract like a turnkey agreement where everything will be done by the service provider without much input, if any, from the client.

The key to success of any BPO is to keep the client informed and engaged so that it can make meaningful decisions in a timely way. All to often clients lose sight of the outsourced business and end up relying on either the service provider, or newly retained consultants, to make business decisions that have both budget and business implications for the client.

Clients need to keep abreast of all developments of the outsourced business (both in terms of technology and process changes). This not only assists the client in making informed decisions as the business is transformed, but it will also facilitate knowledge transfer back to the client when the contract comes to an end. Managing the contract, and keeping informed of all developments is, and should be, a full time job, for any BPO of significance or complexity. This is not something that can be successfully achieved on the corner of someone’s desk – a lesson that is often learned when it is too late.

In almost all business process outsourcing transactions it is virtually impossible for one service provider to perform all of the services required. So subcontractors become fundamental to the delivery of the services. Here’s our list of some key issues to manage when dealing with subcontractors. 

1. One Throat to Choke.
Or perhaps more politely, one hand to shake. Remember that whether your deal involves one subcontractor or a consortium of them, the customer will insist on the prime contractor remaining liable for performing all of the obligations under the outsourcing contract, regardless of whether some of the obligations have been subcontracted. As a result, it is essential that the prime contractor carefully and clearly identifies, and flows to its subcontractors, any and all obligations to be performed by the subcontractors to ensure complete performance of the services. Each link in the service delivery chain must be carefully considered from a business, technical, operational, financial and legal perspective to ensure that the liability for performance of the subcontracted obligations is appropriately and fully allocated, contractually, among the subcontractors. This is where negotiating limitations of liability (an certain other “sacred cow” provisions) can become tricky, as they are often the last agreement made before signing, and must be flowed through to the subcontractors.

2. Subcontractor Failures.
A failure under one subcontract may, in the context of that subcontract, be contained and relatively inconsequential, in the scheme of the larger deal. However, for the prime contractor, that failure may trigger onerous consequences under its contract with the customer. For example, a specific failure by a subcontractor may required that the subcontractor be removed from the deal. The removal of a subcontractor is never without consequences. In order to back stop the prime contractor’s obligations to its customer, the consequences of failure by the subcontractor, regardless of the materiality of the subcontract or the subcontractor’s obligations, must be addressed . . . carefully! 

3. Timing is Everything.
The time constraints involved in negotiating an outsourcing transaction are often unrealistic . . . and time is money for the prime contractor and the customer! While the negotiations between the customer and the prime contractor inevitably, completely absorb much of the negotiating time in an outsourcing deal, it is critical that the prime contractor engage its subcontractors early and often. It is even more critical that the customer keep tabs on the status of the subcontractor negotiations. The consequences of failing to manage the timing of the subcontractor negotiations range from delay to deal jeopardy.

4. Negotiating Strategy.
Ideally, the prime contractor and its subcontractors, as a team, will have a strategy in place as to various puts and takes that the prime contractor may have in its back pocket for negotiations with the customer. But we all know that deal teams do not live in ideal worlds. When negotiating complex outsourcing arrangements, the implications of decisions made at the core negotiation table (and sometimes the lack of decisions), can significantly impact the subcontractors. Additional due diligence may be required, the subcontractor’s solution or services may need to be re-tooled or completely over-hauled, or the subcontractor’s input (or multiple subcontractors’ input) is required to find a solution to a problem. All of this takes time and adds complexity. Good management of this process, behind the curtain from the customer, is essential to a smooth, successful deal, being completed on time. For the prime contractor, subcontractor negotiations can be a sizeable task (any magnified by the complexity of the transaction, the complexity of the solutions, the number of subcontractors to manage). 

Whether the prime contractor uses separate deal teams to negotiate the subcontracts running almost concurrently with the core table negotiations, or the subcontract negotiations take place on specific days of the week using the prime contractor team, or the prime contractor crystallizes the business deal first before negotiating with the subcontractors, or some other negotiation strategy is implemented, the prime contractor must have a plan and a strategy for managing its negotiations with subcontracts before it starts the negotiations with the customer. Mismanaged subcontractor negotiations not only jeopardize the entire outsourcing, but can also add significantly to the pre-contract deal costs of all involved.

5. Managing Subcontractor Defaults.
Key to the one throat to choke concept is the management of subcontractor defaults. Customers may often ask for one throat to choke (that is to say, only one party to the contract – the prime contractor), but when defaults occur, customers can sometimes be quick to jump the queue in an attempt to deal directly with the subcontractor. The relationships need to be honoured when addressing subcontractor defaults. This needs to be facilitated in the default provisions agreed to in the outsourcing contract. It is in the interests of both the customer and the prime contractor to ensure that notification periods, cure periods, reporting obligations, and problem escalation procedures will work from a practical level when flowed down to the subcontractor, and through the prime contractor as gate keeper. These processes and timelines should be carefully mapped out to ensure that workable processes can be managed that allow the parties to focus on solving the problem first, and dealing with the liabilities second.

6. Practical Realities.
While having one throat to choke, or one hand to shake, by directing all dealings with a subcontractor through a prime contractor may be the preferred approach for many customers, the customer and the subcontractor may need the ability to work directly with each other, instead of through the prime contractor. While the contract will customarily say that all dealings between the customer and the Subcontractor will be through the prime contractor, the on-the-ground operations will likely involve the co-operation of all three parties working together. Appropriate clauses should be negotiated between the customer and the prime contractor, and between the prime contractor and the Subcontractor, to facilitate the cooperation of the parties so they can they can work jointly together required (which may include joint decisions where they are all affected), while still honouring the concept of one hand to shake.

Now that 2010 has come to a close and the ink is dry on the flurry of year end deals, many of us can now sit back . . . draw in a long, deep breath . . . relax . . . and start to focus our vision on the opportunities that lie ahead for 2011. What would the start of a new year be without some predictions on the future of business process outsourcings (BPO). Here’s some of our projections for 2011: 

Importance of Cost Reduction – Cutting Measures 

The debates continues as to whether or not we are starting to come out of the economic recession. Regardless, most of us will agree that we are not quite out of it yet. This is having some definite effects on outsourcing transactions, whether the ink on the deal is dry or not. Clients are looking for ways to extract cost and value from their outsourcing deals. Some deals are being completely renegotiated, while others are just trying to do things differently through their governance and change order processes. There is one common thread that we see emerging – vendors are being asked to partner with the clients to come up with creative ways to drive down deal costs. This is a trend that we expect to see continue throughout 2011.

Innovation – Deal Value

Clients are increasingly looking for vendors to come forward with innovative technologies and solutions to drive value from the deal. This is linked to the shift in focus towards cost reduction (as discussed above). Vendors are expected to come forward with better, cheaper, faster ways of performing, with some emphasis on the “cheaper”. It’s a bit of a double-edged sword as innovation typically requires capital investment. If the outsourcing isn’t priced to accommodate innovation (and the corresponding capital investment), then there could be a conflict between a client’s desire to have ongoing innovation and a vendor’s willingness to provide it without additional funding.

What clients mean by innovation is something that warrants further discussion between the parties, preferably during the negotiation phase of the outsourcing (instead after the deal is signed). For example, we all know that virtualization isn’t new as it has now been around for a few years. Nonetheless, virtualization in one method that is gaining popularity for both innovation and cost cutting (although some may say that it is no longer innovative). One key element of innovation will be coming to a common understanding between the parties as to what it means as innovation will be different depending on the life cycle and technical maturity of the outsourcing. Given that we are not out of the rescission yet, we expect to see the “innovation” trend to be used as a cost reduction throughout 2011, for existing deals and for new outsourcings. 

Security of Data 

With Wikileaks on everyone’s mind, and the focus on keeping sensitive information confidential, we expect to see a tightening of technology and other protocols around the security of data. Its no longer good enough to worry about the main technology system supporting an outsourcing – thought now has to be given to all of the peripheral devices that are used in day-to-day business from basic blackberries to iPads and whatever the next greatest thing will be. We expect this to manifest itself in 2011 through a tightening of internal controls, corporate policies, specialized training and technical safeguards, to name a few. We also expect that stringent data security controls will become a cost of doing business and that the luxury of doing just “enough” will no longer be afforded to industries dealing with sensitive data or personal information. 

Continued BOP Opportunities – Growth Bundling One Comprehensive Approach 

2009 projected into 2010 indicated that BPO was still really strong. For 2010 projecting into 2011 we are seeing more bundling of IT delivery with BPO. This is a trend towards holistic solutions that clients can use in numerous applications. For example, some tools with multiple functionality will replace multiple BPO outsourcings for each distinct service, giving a holistic solution to the client from one service provider. What does this mean? Perhaps we will see some rationalization of the number of different service providers used by any one client. This will put service providers with the competitive edge in the forefront. We expect that the competitive edge could fall to service providers with a broader experience base, the ability to innovate and cost cut, and who can survive and ride out the economic recession.

Supplier Consolidation

Several industry leading vendors have gone through their own merger activities in the last few years. While this consolidation inevitably results in “synergies”, new opportunities, the shifting in market reach (and market share) result in changes to the competitive landscape that make it difficult for the smaller vendors to survive, particularly in slow economic times. This will create challenges for some vendors and opportunities for others. It may also result in some unexpected mergers of vendors as a defence strategy for survival. For clients, this may mean some disruption to the status quo as the landscape changes, but it could also bring about opportunities for changing the status quo for clients who are looking for more value, cost savings and innovation. 

Summary

2011 will be a dynamic interesting year for BPOs, both existing deals and new ones. We expect to see many changes in the landscape with a growing and continued emphasis on deal value, costs savings and innovation at a time when the vendors are going through a lifecycle of consolidation and change. While this year promises new challenges, we expect to see positive outcomes from the growing trends that may change the shape of outsourcings as we move through 2011 and into 2012. 

Risk allocation is rarely the impetus for entering into an outsourcing, but it is often a critical element in long term, complex outsourcing contracts, particularly where business transformation is involved. Risk allocation can be addressed in an outsourcing contract in the same traditional manner as in any commercial agreement (such as representations, warranties, limitation of liability, and so on). You rarely, if ever, see a provision in the contract that lays out the allocation of risk between the parties. 

So how exactly is all of this related to the game of hockey?

Getting to the Playoffs

The teams have lined up and faced off on the topic of risk transfer throughout the due diligence and contract negotiation phases of your outsourcing deal. The regular season has ended and you’ve made it to the playoffs. The outsourcing playbook is negotiated (the contract is signed) and the allocation of risk is set. But wait, is it really?

Once the contract is signed and your team is at the start of playoff season, the operational players take to the ice to implement the strategy of the playbook. But the strategy of the game for the playoff season is different and it can change very quickly. You have to be aware of the special teams, penalty killers, and, of course, the goons. What you think you negotiated in the contract can be #^&*%$! with just one cross check or errant pass (or something like that). Before you know it, you’ve suffered unintended consequences… SCORE… and your risk profile just changed.

The implementation of an outsourcing is like any great hockey game… lots of passing, checking, a little bit of fighting and a lot of hard work – and that’s just the day to day business operations of an outsourcing deal.

Your playbook (the contract) is just the start…so, as your team is skilfully passing the puck back and forth and executing on your well thought out playbook, there are a few things you may want to consider.

The Players

Once the outsourcing contract is signed, the initial risk allocation between the parties is determined. But all too often the contract is handed over to the special teams and penalty killers to implement and manage. But those players are not always involved in the due diligence or contract negotiation. As a result, special teams and penalty killers may not have as detailed an understanding of the plays and how they work together, particularly in the area of risk allocation. As well, they may be distracted by the background noise from the stands (running the day-to-day business). The effect is that their actions may have an unintended impact on the allocation of risk in the game and set the other team up for an offensive rush and scoring opportunity.

One of the defensive plays and a way to preserve the initial allocation of risk is to “operationalize” the playbook with the special teams and penalty killers (who will be managing the contract after it is signed). In the world of contracts, this is more than just diarizing milestones and due dates. The parties both need to plan in advance to meet their respective contractual commitments. In short, they don’t want to come up short – they need to project manage themselves. This applies to both teams, particularly where the matter in question affects more than one line of players (or business units in an organization).

If your line-up includes Kane, Towes, Keith and Seabrook, you probably have nothing to worry about.

The Coach

A strong coach is critical to the success of the team, especially in a complex, long term outsourcing that is based upon business transformation. Without strong oversight to execute on the playbook, there is a risk that the players will not be in position to adapt to the changes on the ice, to pass the puck to their teammates or to defend against the goons. A good coach will have the players functioning as a well integrated team… each knowing his/her role and contributing to the overall success of the team.

Avoid the Penalty Box

High sticking, charging, hooking, interference… beware of the potential “gotchas”. The “joint approach” to governance and decision making is a potential “gotcha” that can land you in the penalty box and leave your team short handed if you are not careful. It is common in an outsourcing to use a post-signing governance structure that is based upon joint committees (for example, a joint operational committee, joint executive committee and joint program office). The “joint approach” is predicated on the parties jointly reviewing, discussing, considering and often agreeing and approving deal issues as and when they arise. While the joint approach may be, and usually is, critical to good governance and the success of the relationship, it can also supplant the contractual rights and obligations of the parties and may result in an inadvertent re-allocation of risk and one that was never part of the playbook.

This joint decision making can be an effective means for transferring operational risk from one team to the other, or at a minimum, result in a sharing of that risk. This can manifest itself in unexpected change orders, requests for additional funds for operational support, expansion of scope or other increased costs arising out of the joint decision of the parties. The responsibility of the risk for such decisions is rarely discussed at the time the joint decision is made. These joint decisions and approvals can occur at any level of the organization, and be deemed to be accepted through unknowing acquiescence and subsequent conduct of the parties. The artful deke.

The Trades

Last year they were playing for your team… but this year they are playing for the other side. The trades! You may be able to manage them but you may not be able to prevent them. When the trade happens the balance of power shifts. Knowledge and skill sets that are essential to your strategy may just have switched teams. All good playbooks have a defensive non-solicitation strategy and strict rules on trade eligibility to manage the risk of trades. 

The Free Agents

Recognizing the importance of continuity for the ongoing success of the team and the chance to win the Stanley Cup, efforts should be made to minimize turn-over from year to year, particularly in the initial team building years. While promotions, being put on waivers and other turn-over are inevitable, maintaining consistency of your players (in particular your stars) will help to ensure you stay in the game. 

Game Misconduct – The Call of the Referee

To say that the responsibility for risk should rest with the party best suited to manage it is nothing new. An unreasonable allocation of risk will affect the value proposition of the outsourcing. This can happen intentionally through specific contract provisions or unintentionally through the conduct of the parties after the contract is signed. So when you get to the playoffs, consider how your team’s conduct will affect the outcome of the game… risk allocation and the transfer of risk need to be carefully addressed in your playbook and continually monitored throughout the game. Failing to do so might just land you with a game misconduct call by the referee. That game misconduct penalty might carry with it an automatic fine and an appearance before the Commissioner (or the court or an arbitrator) who shall have full power to impose such further sanctions.