What's in a Contract....

SSON:Robert, Milbank has seen a lot of outsourcing contracts pass through its doors. What are some of the changes you’ve witnessed in contracts over the past six months?
Robert Finkel: I’d say that over the past three to four years we’ve seen a roughly 50:50 split between BPO work and IT outsourcing in our practice. It’s been pretty stable. Over the past six months, though, there seems to have been a shift towards more IT outsourcing and somewhat less BPO. One example is HR outsourcing. A few years ago, we saw a large numbers of full scope HR-related outsourcing deals, but there has been very little of that, recently. This may be because cost-conscious clients are looking first and foremost for obvious cost-cutting solutions and IT tends to lend itself to ‘quick wins,’—or more immediate cost savings, than certain other types of outsourcing transactions..

I would also say that, given the very tough market environment, you would normally expect outsourcing deals to increase dramatically as companies act to cut costs to maintain margins despite top line revenue declines. Although outsourcing is certainly continuing, you’d normally expect the level of new transactions to be at a higher rate than we are seeing. I think this is because company executives are focused on more immediately pressing needs—refinancing, headcount and other measures—to keep their businesses above water. In my view, this has resulted in putting some big outsourcing decisions—as well as many other long term strategic decisions—on the back burner.

SSON:Are you seeing vendors bringing more innovative solutions to clients today? To what extent are vendors being more aggressive in their pursuit of business?
Robert Finkel: We were seeing more innovation in the past, than in recent months. For example, vendors were including greater flexibility, bringing in new processes, offering to take on more non-core business and investing in new systems. But the financial crisis is having a tremendous impact, not only on outsourcing but on any deals being considered. There are a number of factors at work. Firstly, clients’ number one concern is cost. If innovations can help cut costs, great; if not, there’s no big appetite right now. Secondly, vendors are becoming more creative in their offerings. It’s a really competitive marketplace. Vendors are more aggressive in pursuing client arrangements, and are willing to take on more risk, offer more flexibility in contract terms, do more and work harder to get clients. A fourth factor is risk: particularly, bankruptcy-related risk. Obviously, clients are concerned about the financial viability of vendors, but it works the other way around, too. Vendors are closely examining the creditworthiness of potential clients. I see greater reluctance to extend credit, to finance investments, or to agree to up-front payments. Contracts now increasingly include exit clauses that allow either party the chance to exit the contract if the counterparty is looking a bit shaky. The ability to exit a contract before bankruptcy proceedings start is crucial; once proceedings are in place, both sides are effectively ‘locked in’ to the contract. You are then effectively stuck, pending court action. We are also seeing clients being very focused on achieving savings and having early exit clauses if the savings are not realized..

SSON: Do you see any sensitivity to continued offshoring? Any pushback?
Robert Finkel: No, I don’t see any increased sensitivity. There has been some concern expressed about the administration limiting opportunities for offshoring, but frankly I don’t think that will happen. The issues we have with the economy and the credit crisis are so great that the focus I think has been rightly directed at restoring confidence in financial institutions and boosting the economy generally. As history has shown, efforts to restrict any kind of trade, including services, in the long term are counterproductive. The US has a competitive advantage in services, so if there were retaliatory measures taken overseas we would be hurt much more than helped.

SSON: What about the contracts themselves? Are they getting more detailed? Or is there a trend to simplify negotiations?
Robert Finkel: I think we are seeing a trend towards simplifying negotiations and streamlining contracts. Generally, contracts were getting longer and more complicated, but over the past months, both clients and vendors appear keen to get the contracts signed sooner rather than later. From the clients’ perspective, this is driven by the desire to lock into cost savings sooner; on the vendors’ side, they are obviously keen to lock into the client without delaying. There is also the issue of not wanting to spend too much time and money negotiating over the contract. Rather, both parties want to get down to business.

Robert M. Finkel is a partner in Milbank’s Technology, Communications and Outsourcing Group, based in New York. His practice areas include IT and BPO, amongst others. He is recognized as a leading U.S. practitioner in Who’s Who in American Law, and the Chambers & Partners Guide to America’s Leading Lawyers for Business. HRO Today named him Advisor and Thought Leader Superstar of the Year, 2009.
Contact: rfinkel@milbank.com