Anatomy of an IT Outsourcing Deal - marcomm.mccarthy.ca · 6 Due Diligence Key Considerations: • An outsourcing relationship is long term and a ‘successful’ deal in the long-term

Anatomy of an IT Outsourcing Deal

Bruce Laco – DeloitteJohn Pickett – IT World Canada

Barry Sookman – McCarthy Tetrault

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Agenda

• Key Considerations for IT Outsourcing Decision

• Anatomy of an Outsourcing Deal

– Due Diligence

– RFP?

– Vendor Selection

– Negotiation

– Closing or Walk Away

– Transition and Compliance

• Final Thoughts and Questions

• Contact Details

• Appendix: Detailed Information on Outsourcing Anatomy

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Key Considerations for IT Outsourcing Decision

• Determine executive make-up of team to make any outsourcing decision

– Not a large committee as decision will have significant effects to various business areas

– Significant executive time will be spent during the lifecycle – be aware of potential conflicts

• Determine business drivers for considering IT Outsourcing including:

– Cost savings

– IT performance efficiency improvements• Maintain and improve system availability and performance

– Management focus• Obtain efficient utilization of all resources

– Obtain advanced technology and support from a knowledgeable and effective third-party service provider

• Be able to redeploy technology to meet continually changing requirements• Provider to bring new capabilities to enable a new business or enhance an existing one

– Enhance capability to merge IT operations from acquired businesses

– Develop commercial quality IT service agreements for each portion of business

• Document business drivers and use them as the report card criteria to assess any outsourcing deal

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Key Considerations for IT Outsourcing Decision

• Define any ‘deal stoppers’ up front (layoffs, geographical considerations etc.)

• Other Considerations

– Revised OSFI Guideline B-10 on Outsourcing (December 15, 2003)

– Sets out OSFI’s expectations for federally regulated entities (“FREs”) which outsource their business activities. Requires: • An outsourcing risk philosophy;• A materiality assessment;• An outsourcing risk management program;• Appropriate approval levels for outsourcing arrangements

– See also, CSA policies regarding alternative trading systems and other electronic marketplaces, IDA rules etc.

– Consider advanced notifications to regulators, risk exposure policy compliance

– Approval from board of directors

– Labor issues

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Transition and ComplianceTransition and Compliance

Due DiligenceDue Diligence

RFP & Base Case DevelopmentRFP & Base Case Development

Vendor SelectionVendor SelectionClosing or Walk AwayClosing or Walk Away

Negotiation Negotiation

Anatomy of an Outsourcing Deal



RFP ?RFP ?



Outsourcing Outsourcing LifecycleLifecycle

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Due Diligence

Key Considerations:

• An outsourcing relationship is long term and a ‘successful’ deal in the long-term needs to have good working relationships in place between the client and vendors

• Ensure the internal team has the appropriate skills and is committed to the mandate

– Executive participation, protocol and approval process

– Degree of involvement of technical personnel and trade-off of completeness of information and impact of disclosing outsourcing plans

– Consider outside advisors and ensure vendors operating style and approach is not in conflict with your organization• Outside vendor assistance varies at this stage from pure ‘outsourcing advisory’

services to engaging preferred outsourcing vendor from initial due diligence stage• Consider RFQ, RFI, recommended suppliers and established relationships








RFP?RFP?

Vendor SelectionVendor Selection



Closing or Walk AwayClosing or Walk Away

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Due Diligence

Key Considerations Continued:

• Understand the current situation – develop an as-is base case:

– Scope of services • Applications, servers, helpdesk, telecom etc.

– Service levels and performance

– Total costs including tax considerations

– Identify any timing drivers or barriers








RFP?RFP?





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RFP?

Key Considerations:

• Is a RFP the right step or should you directly deal with one vendor

– Timing issues should be considered

– Will the RFP process allow you the opportunity to assess the working style and approach of the vendor

– Weigh the cost of the RFP process with the benefits

– If a RFP is not pursued, how do you know you are getting a ‘fair deal’

• RFP approach

– Agree on approach for including vendors

– Ensure tight specifications for comparative purposes but allow deviations

– Ensure executive sign off on table of contents of document








RFP?RFP?





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RFP?


• RFP approach

– Key components of document to include:• Client overview and business drivers• Bidder Information• Human Resource information• Definition of scope• Timetable• Selection process and criteria• Appendices for detailed information including example contracting terms








RFP?RFP?





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Vendor Selection

Key Considerations:

• Determine whether vendor selection will be performed with outside assistance of a paid advisor

• Assess approach and working style of vendor/advisor along with relevant experience

• Ensure selection criteria is used where RFP is used; if RFP is not used, ensure fit to report card criteria drives decision and terms

• Price can be deceiving

– Ensure that price and assumptions are clarified prior to selection

– Assess price for current services but also consider future changes

– Assess P/L and cash flow impacts

– Consider total cost of ownership








RFP?RFP?





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Negotiation

Key Considerations:

• Decide on single vendor negotiation or multi vendor negotiation

– Consider the time investment of engaging two vendors

– Risk to organization in dragging out lengthy negotiations

• Determine extent of outside assistance required in negotiation

– Consider extent of internal expertise available

– Look for outside counsel that can bring business and legal expertise together

• Use business terms as much as possible during negotiation

– Consider business term sheet approach

• Ensure the business case is updated to reflect negotiated terms








RFP?RFP?





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Negotiation


• Consider use of commitment fee to ensure negotiation timeline is met

• Keep revisiting the established report card criteria to assess deal

• Key areas that should be considered during negotiation:– Definition of services and responsibilities matrix– Service levels and approaches to establish, change and add– Remedies for poor performance and rewards for exceptional performance– Termination of contract provisions– Fees and all associated assumptions– Transition services and timelines– Limitation of liability– Exclusivity– Dispute resolution– HR considerations– Privacy/confidentiality– Security and audit








RFP?RFP?





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Closing or Walk Away

Key Considerations:

• Take into account the risk associated with delays in making a decision– Key people leaving organization because they fear their position is at risk– Delay may cause conflicts with transition timelines and other executive priorities

• Revisit the established report card criteria to assess deal – ensure that there are clearly defined criteria that if met, will result in a go decision

• The deal should not be too ‘good’ for any one party

• Consider closely the approach the vendor took in negotiation before making a final decision

• The client must drive the final decision with outside advisors playing only an advisory role

• If you decide to walk away, ensure appropriate communications are made to the organization to dispel rumors

• If a ‘go’ decision is made, ensure that appropriate communication plans are in place– Outside shareholders and other stakeholders– Internal staff directly impacted and other employees








RFP?RFP?





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Transition and Compliance

Key Considerations:

• Areas of importance for a smooth transition and cut-over

– Communications strategy in place and ready prior to deal announcement

– Capabilities transfer plans in place and key knowledge staff identified up front

– Risks identified with appropriate mitigation approaches

– Hardware transition plans in place with appropriate emphasis on downtime and data

retention

• Defined and agreed governance process in place prior to cut-over

• Ensure there is appropriate executive focus to complete transition








RFP?RFP?





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Transition and Compliance

Key Considerations continued:

• Convert business terms into final definitive agreement

• Definitive agreement should be structured to accommodate change with minimal effort

– Statement of work to document business specific terms while definitive agreement body contains T’s and C’s

– Attempt to include rate schedules for other services and timeline expectations for services

• Include process for dispute resolution process that includes outside intervention as a last resort








RFP?RFP?





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Final Thoughts and Questions

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Contact Details

Bruce Laco

Deloitte

905-948-6289

[email protected]

John Pickett

IT World Canada

(416) 290-0240

[email protected]

Barry Sookman

McCarthy Tetrault

(416) 601-7949

[email protected]

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Appendix: Detailed Information on Outsourcing Anatomy

• Anatomy of an Outsourcing Deal

– Due Diligence

– RFP?

– Vendor Selection

– Negotiation

– Closing or Walk Away

– Transition Planning

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Due DiligenceAssembling the Project Team

• Need for skilled and committed staff

– Project manager-organize meetings, people, and tasks

– Technical personnel to write proposals, SLAs and SLOs

– Financial personnel to analyze costs and do pricing

– Operations staff to perform diligence on current systems and service levels

– Staff to perform diligence on existing agreements and to assist in obtaining assignments and licenses

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Due DiligenceComposition Steering Committee

• Requirement for steering committee

• Composition of steering committee

– Executive leadership

– Business unit leaders

– Human resources

– Project teams members

– Audit

– Outside consultant advisors

– Internal legal

– External legal advisors

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Due DiligenceOutside advisors

• Varies with outsourcing project

• Developing business case

• Performing diligence

• Assisting with procurement process

• Developing service descriptions, requirements, SLAs

• Evaluating and clarifying bids and selecting the supplier

• Transition and compliance

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Due Diligence

• Existing services

• Existing service levels

• Current resources used in obtaining services

• Personnel involved in providing services

• Existing assets being used

• Existing costs

• Identify timing drivers

• Consents required

• Existing policies e.g. change management, problem management, security, audit

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Due Diligence OSFI Due Diligence Process

• Requires the FRE to conduct internal due diligence to determine the nature and scope of the business activity to be outsourced, its relationship to the rest of the FRE’s activities, and how the activity is managed

• The due diligence of service providers may include, but is not necessarily limited to, examining a service provider in light of these factors:

– Experience and technical competence to implement and support the proposed activity

– Financial strength (e.g., most recent audited financial statements and other relevant

– Information (to the best of the service provider’s ability)

– Business reputation, complaints, compliance and pending litigation

– Internal controls, reporting and monitoring environment

– Business resumption and contingency plans including technology recovery testing

– Reliance on and success in dealing with sub-contractors

– Insurance coverage

– Business objectives, human resource policies, service philosophies, business culture, and how

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Due Diligence Identifying the Right Suppliers

• Consider best process:

– RFQ process

– Bidder qualification

– Recommended suppliers

– Established relationships

• Off-shoring considerations

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Due DiligenceDealing with Assets

• Identify tax ramifications of how assets are to be dealt with

• Identify which party has responsibility for each asset class after closing, e.g., financial responsibility, maintenance and support obligations

• Asset classes include: retained assets, assigned contracts, retained third party contracts, managed contracts

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RFPDrafting the Technical and Financial Aspects of the RFP

• Undertaking that involves all project team members

• Modular approach often used

• Contains description of all information required for suppliers to prepare adequate proposal

• How detailed is enough?

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Key Contents of RFP

• Executive summary

• Purpose of the RFP

• Overview of customer operations

• Customer’s information systems group organization

• Evaluation process and criteria

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Key Contents of RFP - Bidder Information

• Organizational structure and financial information

• Alliances/partnerships

• Quality measurements

• Scope of prior experience

• Managing significant growth and decline

• Other clients

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Key Contents of RFP - Human Resource Information

• Terms of employment

• Offer of continued employment by bidder

• Liability for severance of employees

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Key Contents of RFP - Services to be Provided

• Description of current systems and services

• Services to be provided by bidder

• Performance standards

• Ownership of hardware and software

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Key Contents of RFP - Detailed Appendices of Information

• Customer information

• Pricing tables

• Infrastructure and operating fact books

• Customer and service provider, roles and responsibilities matrices

• Service level metrics

• Summary of customer employee benefits

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RFP Other Key Information

• Timetable

• Customer contacts

• Negotiation process:

– Vendor objectives

– Customer objectives

• Customer selection criteria:

– Should comply with common law duty of fairness to bidders e.g., selection is based on prescribed process

• Consider broad protective clause for maximum discretion

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RFPThe “Contractual Provisions Matrix”

• Can vary considerably depending on nature of RFP - can range from:

– Complete contract which must be accepted, esp. in Federal and Provincial government context

– Complete contract with option for supplier to comment on terms

– Table in RFP format requiring supplier to comment specifically on each term

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Vendor Selection

• Disassembly and analysis of proposals

• Clarifying proposals during down selection process

• Diligence on suppliers

• Down selecting to two or three suppliers

• Process of down selecting - objective or subjective, science or art?

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Negotiation

• Dual track:

– Detailed negotiation with both suppliers;

– How far to go before supplier is selected e.g., is supplier selected before all major business and legal terms are agreed to?

• Single track:

– How to ensure “market” terms

• Use of outside experts in negotiation process

• Letter of intent, binding or non-binding, how detailed?

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NegotiationContract Critical Items

• “OSFI expects material outsourcing arrangements to be documented by a written contract that addresses all elements of the arrangement and has been reviewed by the FRE’s legal counsel”

• The Guideline details numerous provisions which OSFI expects should be dealt with in any outsourcing contract

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Negotiation Defining the Services to be Provided

• Use of Service Responsibility Matrix (SRM)

• Do services include all services, functions, responsibilities and other work performed by transitioned employees?

• Exclusivity vs. non-exclusivity

• Scope of services customer can take back without penalty (Repatriated Services)

• Customer flexibility to change scope of services including changes due to business acquisitions and divestitures

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Negotiation Service Level Standards - General

• General standards

• Best in class, standards practiced by other leading national, north American, or international suppliers of services, standards of customer before outsourcing, reasonable skill, care and diligence

• Benchmarked standards

• Standards in service level agreements; specific, objective, measurable, obtainable, within budget

• Customer surveys

• Service measurement and reporting

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Negotiation Setting Specific Service Levels

• List Services to be Outsourced

• Identify those services for which service levels are required

• Determine required severity levels e.g. critical, major, minor, no impact

• Assign a severity level for applicable services

• Improving SLAs over time

• “Premium”, “Enhanced” or “Standard” SLAs?

• Assign termination service levels

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Negotiation Information Availability and Service Levels

• SLA has been measured and information is reliable

• SLA has been measured but data may not be reliable

• SLA not previously measured

• New SLA

• How to set SLAs where information is lacking-customer/ supplier perspectives

• When SLAs become consequential

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Negotiation Remedies for Poor Performance

• Credits

• Credits as exclusive financial remedy

• Credits as optional remedy

• Right to credits and additional damages

• Right to damages after deducting credits

• What is the right amount of credits?

• Phasing in credits

• Escalation procedures

• Specific limited termination rights

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Negotiation Fee Issues

• Charges/Pricing

• Pricing methodology to ensure that all fees and expenses including ARCs (Additional Resource Charges) and RRCs (Reduced Resource Charges) are known.

• Has pricing been provided by service silo for each geographic region?

• Unit pricing v fixed pricing for all services? Calculating floors, ceilings, and banding related to pricing

• COLA

• Gain sharing

• Most favored customer provisions

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Negotiation Benchmarking Reviews

• Benchmarking is done by a third party to compare the services, service levels and charges under an agreement with comparable agreements

• How to structure the benchmarking process to make it effective

• What is the remedy after receiving a report from the benchmarker?

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Negotiation Dispute Resolution

• Escalation to senior management

• Arbitration-supplier - customer perspectives

• Continuity of services during dispute

• Payment of minimums during disputes

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Negotiation Human Resource Issues

• Liabilities of hiring customer employees and best practices for limiting that exposure

• Applicability of the Employment Standards Act

• Supplier’s right/obligation to offer employment

• Terms of employment offers

• What commitments should customers seek from suppliers as to how their employees will be dealt with after being hired by supplier?

• Detailed communication plan

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Negotiation Privacy Issues

• Need to identify what specific privacy and data protection rules will apply

• What obligations does each party have for privacy and security?

• How to address privacy issues in international transactions

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Negotiation Security and Audit

• Customer security policies

• Contaminant control

• Protection against hackers

• Records retention

• Right to supplier auditor’s report

• Independent audit rights

• Right to access data

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Closing or Walking Away

• Is there an established bottom line?

• Escalation processes during negotiations

• Can the deal be too good or too bad?

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Transition Planning

• A description of the services supplier will perform between the effective date and the date of the assumption of the services by the supplier to transition the services to the supplier. Usually includes:

– Transition plan methodology and planned deliverables

– Human resources transition activities

– Technical transition activities for each of the service elements

– Key transition milestones which Supplier must meet

– Transition responsibilities to be performed by or transition resources to be provided by both parties

– Preliminary outline of operational procedures manual

Documents

Anatomy of an IT Outsourcing Deal - marcomm.mccarthy.ca · 6 Due Diligence Key Considerations: • An outsourcing relationship is long term and a ‘successful’ deal in the long-term