EquaTerra 2010 Legal Pulse Survey Results: Outsourcing Contract Complexity Continues to Increase (and This Is Not a Bad Thing….)
Stan Lepeak, Managing Director, Global Research
EquaTerra will soon release the results of the 2010 global Legal Pulse survey. The 2009 edition focused on European counsel while this year the study was expanded to incorporate feedback from counsel in North America.
EquaTerra polled approximately 70 senior legal counsel in more than 40 of the top third-party North American and European law firms that support and advise buyers on outsourcing efforts. The Legal Pulse is similar to EquaTerra’s long-standing global service provider/advisor Pulse in that it examines trends and futures in the global outsourcing market, but its focus is on topics that are best addressed by legal counsel supporting outsourcing deals, such as contract complexity, deal terms and conditions and negotiating contentiousness.
A topic examined in the Legal Pulse survey is outsourcing contract complexity (e.g., service levels, contract structure, pricing models, use of global sourcing, etc.). There are two perspectives in the market on contract complexity. One is that, as buyers and their internal counsel and procurement organization become more experienced with outsourcing and structure and with more repeatable and standardized outsourcing efforts, contracts should become less complex and more standardized. The other position is that, as outsourcing usage grows in scale and scope, becomes increasingly global in nature, and more often involves multiple service providers, contract complexity will continue to increase. Study results support this latter position.
There was consensus among counsel surveyed that outsourcing contract complexity is increasing (see figure below). Thirty-four percent of respondents overall (39 percent in Europe and 28 percent in North America) cite increased contract complexity in the market today, while under 20 percent feel that complexity is decreasing. While contract complexity varies significantly across deal types, these results confirm that the contracting for outsourced services is not getting simpler through standardization. This is especially true in larger, multi-process deals and with buyers actively multi-sourcing. Counsel also cite greater focus on the post-transaction outsourcing governance needs, consideration of and confusion over cloud computing options, greater emphasis on accounting for potential deal and service provider risk, and greater focus on pricing and pricing models as driving increased contract complexity.
The increase in contract complexity is not surprising given the general increase in complexity of outsourcing deals pursued by buyers in the market today. Complexity is also a moving target. What is viewed as complex today often may become routine in the not too distant future. Importantly (and this was called out by numerous survey respondents) greater complexity does not necessarily have a negative connotation, assuming buyers and their service providers can adequately account for it in outsourcing contracts, service levels, and operating and governance models and processes. This is an area where third party counsel – and sourcing advisors – can play a valuable role even if their services are less needed for more mundane, standardized and mature aspects of outsourcing sourcing contracting.
For more EquaTerra Pulse surveys and the latest global outsourcing market trends, visit www.equaterra.com/pulse.
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Many lawyers are not taking enough responsibility for understanding the businesses they are dealing with. There appears to be a trend for firms acting for large customers to use a one size fits all outsourcing agreement, so that eg a complex offshore outsourcing agreement template is being used for more straightforward onshore BPO, and the same template is used for a range of very different business processes. This appears to be due to a number of factors:
1. lack of understanding of the customer’s business, leading to fear of omitting boilerplate just in case it might theoretically be relevant
2.misguided views on what is an appropriate approach to corporate policy and risk management.
3.procurement and internal commercial/outsourcing teams allowing external lawyers to drive the deal based on legal theory rather than operational reality. Hours are wasted negotiating irrelevant provisions which should not have been included in the early drafts but which the draftsmen feels he then has to defend. Internal teams seem to be falling into a pattern of letting their lawyers run with points rather than stepping in to introduce a dose of commercial reality.
As a consequence the legal process becomes more contentious, drawn out and expensive. On smaller outsourcings the business case/cost savings can disappear in legal fees. Supplier goodwill evaporates against a background of prescriptive provisions and penalties that bear little relevance to operations on the ground, nor to a sensible approach to risk management. The favours and add ons that Suppliers often provide at no cost suddenly dry up and become change request items. The most depressing feature of the recent trend in contracting is that in many cases the operational teams have no idea how their contractual relationship is being shaped or re-shaped.If they did they would realise how much time and money is wasted in the ritual dance between the lawyers.They would also realise why working relationships with their suppliers are deteriorating.
Outsourcing documents should be living documents outlining the working relationship between customer and supplier. It is time for legal advisers to come to grips with their client’s real business needs, to encourage the commercial/operational teams to engage more closely and stop treating the contracting process as trench warfare. Too many advisers forget how critical it is to achieve a win win outcome.
Richard – good points on the dangers of applying a “one size fits all” approach to legal support for outsourcing. This highlights that the selection and vetting process for third party legal support, and for third party sourcing advisor support, should be as rigorous as selecting the outsourcing service provider. It is also likely a contributing factor to the slow decline in the use of outside counsel to support outsourcing efforts.