CORE Discussion Forum: How to Keep Your Outsourcing Contract Current Victoria, B.C. January 25, 2017 David Crane, Partner, McCarthy Tétrault

Agenda The Need to Stay Current How to Stay Current Panel Discussion Business needs Technology needs Market pressures Regulatory compliance New or emerging external risks How to Stay Current Traditional techniques Innovative techniques Panel Discussion

Need to Stay Current – Business Needs Organizational changes – Business growth, acquisition or sale, change in business units, or service integration Process changes – New processes introduced or existing processes updated / changed New products – Customer expands offerings or vendor introduces new product Changes in key personnel – Vendor or customer loses relationship manager or other key personnel Deficient contract – Contract improperly or insufficiently memorializes the original deal Other business needs – Cut costs, compliance with new policies, etc.

Need to Stay Current – Technology Needs Change in delivery model – Often not contemplated in older agreements (e.g. traditional licensing to SaaS) Change in customer technology needs Interoperability – Change in technology used by the customer or vendor creates need to change other technology Move to cloud – Customer needs to move vendor solution to cloud New solutions – Technology that was non-existent or emerging at time of agreement has become “must have” (e.g. data analytics, mobile)

Need to Stay Current – Market Pressures Market disruptors – Competitor disrupts existing market Market prices – Increase (or decrease) in pricing Consumer behavior – Consumer demand drives change in solution (e.g. mobile payment) Industry standards – Keeping up with industry standards

Need to Stay Current – Regulatory Compliance Legal / regulatory changes – Changes in laws, regulations or guidelines/policies force a change in the solution or services e.g. privacy laws change and vendor plays role in handling personal information

Need to Stay Current – New or Emerging External Risks Security risks – New security threats necessitate improved security measures/controls Political / jurisdictional risks – There is a change in the risk profile for using an offshore jurisdiction Reputation risks – Risk to customer reputation necessitates a change Currency risks – The economics of the deal are affected by currency exchange rate fluctuations

How to Stay Current – Traditional Techniques Selecting right vendor Vendor reputation for flexibility and cooperation Breadth of service offerings Track record of innovation Managing vendor dependency Negotiating the right deal from the outset Clear business case Risk / reward balance Sufficient transparency No deferment of negotiations Avoidance of customization and ad hoc solutions

How to Stay Current – Standard Techniques (cont.) Designing the contract to prepare for change Prescriptiveness of requirements Scalability of services and pricing Change order processes Including defining “Change” Benchmarking (service levels, pricing) Most favoured customer pricing commitment Length of term Termination for convenience rights No fault termination right to respond to external changes (e.g. regulatory change makes model unprofitable)

How to Stay Current – Standard Techniques (cont.) Designing the contract to prepare for change (cont.) Key personnel provisions Governance processes to deal with change (e.g. to drive timely communications and decision making) Assignment rights (e.g. for corporate reorganization) Temporary provision of services to a purchaser of a division or line of business of the customer

How to Stay Current – Standard Techniques (cont.) Driving innovation Technology refresh obligations General continuous improvement obligations Automatic and/or gradual automatic adjustments provisions (e.g. increasing service level metrics to reflect performance improvements) Opportunity provisions Gainsharing General periodic governance reviews / discussions

How to Stay Current – Standard Techniques (cont.) Managing change “Operational” changes Rely on existing provisions (change orders, work orders, etc.) Modify / renegotiate through amendment procedure

How to Stay Current – Innovative Techniques Pre-contract techniques Joint solutioning procurement processes Leveraging less capital intensive solutions / technologies Selecting “as-a-service” solutions Transformation planning Contract techniques Vested outsourcing / outcome-based approaches Unconventional incentives (e.g. renewals/extensions as a reward) Utilizing agile methodologies for change-related projects

How to Stay Current – Innovative Techniques Contract Techniques (cont.) Pricing techniques Incentive / outcome-based pricing Transparent economic model Strategic investment fund / innovation job jars Service migration rights Flexible and well-defined customer exit rights

Contact Information David Crane, Partner McCarthy Tétrault LLP 604-643-5891 dcrane@mccarthy.ca © 2017 McCarthy Tétrault LLP. All rights reserved. Panel Discussion

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