By Nick Heath, 7 May 2009 17:09
NEWS
Rights of step in
This allows the customer to step in and take over the supplier's facilities and staff being used to deliver services. These are triggered by certain events, usually consistent or significant failure to deliver the agreed service.
It is important to agree the right trigger events and how much continuing assistance the customer will want from the supplier after stepping in and taking over.
These are unpopular with suppliers because of their reputation, with many suppliers often preferring to terminate a contract rather than allow a step-in-right to be exercised by the customer.
Anticipating termination rights
These clauses allow customers to exit a contract before a supplier's financial difficulties get out of hand, with the idea being to get out of a contract while a managed withdrawal is still possible.
These can be set to be invoked when a solvency/liquidity ratio exceeds a set threshold, the supplier experiences a decline in standing with a credit rating agency or where there is a breach of a banking covenant.
Novation rights/collateral contracts
Novation rights allow for a service subcontractor to take over from the main supplier if the main contractor becomes insolvent or has their contract terminated.
A collateral contract is a parallel agreement where the customer has a contract with a subcontractor to run the service from the beginning but it doesn't come into effect until the departure of the main contractor.
Acquisition of assets
When setting out what assets belonging to the supplier can be taken over by the customer in the event of supplier insolvency, there are several questions to ask.
How will the value of the supplier assets be set, will it be fair market or net book value?
Is the acquisition of assets an option or an obligation for the customer?
Are the assets that can be acquired by a customer limited to those that are wholly used to deliver a service to that customer?
Who will bear the cost of the removal of the assets?
Staff transfer and solicitation
Getting hold of supplier staff and expertise used to deliver a service will be a pressing concern for a customer in the event of supplier insolvency.
Ways that a customer can smooth the takeover of supplier staff are by requiring supplier staff secondments, setting out the right for the customer to pay supplier staff in extreme circumstances and imposing restrictions on staff movements within service delivery team.
Benchmarking and market testing
Ensure that confidentiality agreements allow for benchmarking to allow price and the level of service delivery to be compared against the wider market.
If benchmarking reveals that the customer is paying above the odds then it can lead to contract renegotiation that allows for a better deal.
A gainshare agreement can also allow the customer to share in the cost benefits, for instance where a supplier has made a service more efficient and it costs a supplier less to deliver that service.
Similarly a service level improvement agreement allows for the supplier and the customer to agree an automatic increase in the level of performance to be achieved by the supplier each year.
Comments
There are 3 comments. Join the discussion
1. Deniz
It seems logical to outsource to different companies - but dont forget that you as the outsourcer will have to keep control on the project management then. If you oursource to only one provider, he maybe able to PM your projects.
Like verything, there are pros and cons on both sides and it really depends on the project / tasks you want to outsource.
2. bloghopperA2
Very well written and informative article. Horror stories abound from companies who jump the gun when deciding to outsource. There are many resources readily available to owners and managers that they can use to their benefit. All they need to do is search on-line to find the information. Books articles, blogs, etc. Offshoring, globalization and outsourcing arwe three key words to use.
3. Deniz
It seems logical to outsource to different companies - but dont forget that you as the outsourcer will have to keep control on the project management then. If you oursource to only one provider, he maybe able to PM your projects.
Like verything, there are pros and cons on both sides and it really depends on the project / tasks you want to outsource.