Structuring Sourcing Projects
Structuring Sourcing Projects
In outsourcing, as in the wider economy, trends in recent years have been driven by the rise of the global corporation. Multinational customers have increasingly turned their backs on the traditional datacentre/desktop offshoring model and looked instead to work with global service providers. Having an international presence has enabled suppliers to offer standardised performance and pricing across geographies and so major outsourcing providers have increased their offshore presence in order to win business from multinational customers.
This fourth post in the series looks at the contractual and commercial structures used for multinational transactions.
Multinational customers aim to standardise their operations as much as possible but there will always be some adjustments necessary for local legal and regulatory compliance so they’re inevitably faced with competing goals: retaining global control whilst achieving local implementation. Contractually, this arrangement can be structured in one of three ways.
Option 1
The customer and supplier enter into one global agreement, but with country-specific issues addressed in schedules. This model is theoretically more straightforward than options 2 and 3 below (and usually less time consuming to set up), but it does present difficulties of enforcement because there is no privity of contract between the customer’s and supplier’s local subsidiaries. These risks have to be managed through indemnities in the contract.
The customer may try to insist on the flow down of proforma clauses to subcontractors as a way of exerting closer control through management of the supply chain.
Option 2
An alternative approach is for the subsidiaries of the customer and supplier in each jurisdiction to enter into a contract which is limited to that geography. This model is most suited to customers who are offshoring disparate business functions to several jurisdictions or where key subcontractors are involved in providing the services. It’s generally not appropriate where a customer wants to standardise operations globally. Conducting the necessary parallel negotiations can also be very demanding for both parties, particularly when coordinating liability caps across the suite of agreements.
Option 3
The third option has the customer and supplier entering into a master services agreement (MSA) governing everything which is not jurisdiction-specific. The subsidiaries of the customer and supplier in each locality then sign a local services agreement which will be called-off under the MSA. Each local services agreement will be substantially in the form of a pro-forma which is annexed to the MSA. This will incorporate the terms of the MSA to the extent they’re not varied by the local agreement. The local agreement sets out jurisdiction-specific terms which tend to focus on the transfer of personnel and assets. Using this model, each local supplier and customer enjoys directly enforceable contractual rights under a locally negotiated service agreement.
In order to negotiate the MSA effectively the customer should have a clear understanding of its global service requirements and any regional variances (in addition to those variances mandated by local law).
The local services agreements should contractualise all local law obligations which will override the governing law provisions. These are likely to include implied warranties, employment rights, IPR, regulatory issues, the transfer of assets and contracts, data protection, termination, limitation of liability, and pricing (particularly in relation to tax). There may be specific legislation governing outsourcing in the local jurisdiction or general contract law may apply. Either way, failure to address these issues may render the local services agreements unenforceable.
Further matters to consider include:
•the wider implications of service failures or contract termination in any single jurisdiction (i.e. how this might affect other local jurisdictions, and the MSA as a whole);
•the supplier’s right to benefit from relief under local service agreements in the event of a customer default which affects several jurisdictions;
•what contract changes might be necessary at a local rather than global level during the term of the agreement.
Regardless of the contractual model adopted, there are a few areas which should be addressed uniformly across the offshoring arrangement, including the allocation of risk, the financial model, performance measures and governance. It’s also important that customer protections and supplier incentivisation mechanisms complement each other across the piece.
In the rest of this series I’ll be looking at the various commercial structures used for international transactions and the pros and cons of each.
Structuring Sourcing Projects (Part 4)
16/11/2010
Part 4
International transactions
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