Preempting Problems

When should you start worrying about your outsourcer being acquired? When you draw up the initial contract. Here are some suggestions for heading off acquisition woes at deal-signing time.

Advance Notice of a Sale

Stipulate that the customer must get advance notice of the outsourcer's acquisition or merger plans, says Neil Hirshman, a partner at Kirkland & Ellis LLP in Chicago. This gives your company time to perform due diligence on the buyer or to review other options, such as insourcing, choosing another provider or negotiating for contract modifications.

Exit Provisions

This is the best time to think about how you're going to end the deal, Hirshman says. "The pain one feels transitioning into these arrangements is the same as one feels getting out of them," he says. Establish how you will extricate all the things you need, including tangible assets, software licensing agreements, employee knowledge and data -- especially if you need it in a particular format. Knowledge transfer is a huge challenge, Hirshman says, because a lot of institutional knowledge is tied up with the outsourcer's employees. "You have to think about what kind of access you need to the provider's employees, for how long, which employees and what kind of documentation has to be put together," he says.

Many contracts have nonsolicitation provisions that prohibit companies from hiring the outsourcer's employees for the length of the deal, he adds, so make sure there are exceptions to those provisions. "There might be certain employees you absolutely need to bring in-house or transfer to the new provider," Hirshman says.

Intellectual Property

Intellectual property rights can become a big issue, Hirshman says, because some outsourcers use proprietary processes. For the customer to continue operating the way it did before, it might be necessary to transfer a license from the old provider to the new one. "You'd want to negotiate access and license rights in advance, or you might have to transform your processes all over again," he says.

Termination Rights

Include change-of-control rights, which enable the customer to terminate the contract if ownership changes hands. The terms can vary from absolute termination rights to conditional rights, such as those that would come into play if the acquirer were a competitor of yours. Some outsourcers may require a fee upon termination. In that case, ask that the fee be reduced if insufficient notice is given.

Copyright © 2006 IDG Communications, Inc.

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