10 April 2024

Outsourced IT Services Termination: Navigating The Rough Seas

Counsel & Co


Counsel & Co. is a law firm based in Mumbai, India that advises on BAU matters such as contracts, compliances, IP, employment, etc. Counsel & Co. is focused on preventive law solutions through application of traditional legal skills, commercial acumen, process orientation and technology. Its team of skilled lawyers comprise a good mix of experience with law firms and in-house practices.
You are a company that has eagerly outsourced its IT services function, expecting significant improvements in efficiency and ROI.
India Employment and HR
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You are a company that has eagerly outsourced its IT services function, expecting significant improvements in efficiency and ROI. However, after a period you realise that the expected improvements have not materialised and are unlikely to happen with the current service provider. You start thinking of either bringing the service back in house, or transitioning to a new service provider. Then, you dig out the contract, brush the dust off, and head to the termination provisions. It is only then that you realise that it is going to cost you a lot of money and expose you to risks in disengaging from the current service provider.

Why did this happen? This is usually because the mechanisms and costs for disengaging have not been clearly defined in the contract. In this article we will highlight the key risks to consider while drafting provisions related to termination of an IT services outsourcing contract from the perspective of the customer.

The main objective of any function is to ensure continuity and quality of its services are maintained. Transition of a function poses a high risk to such continuity and quality. Therefore, these must be addressed in the contract with the service provider in what can be called a Termination Assistance or Transition Services clause.

Some of the risks that must be addressed are as follows:

  • Service Disruption: There's a heightened risk of service disruption which can manifest itself in various ways, such as system downtime or delayed response/resolution of service requests.
  • Increased Costs: Transition involves certain additional costs and lack of proper controls may result in unbudgeted increase in such costs. This may be due to delays in the transition translating to extended period of overlapping costs of exiting service provider and incoming service provider.
  • Degradation of Service Quality: Service quality during the transition period is likely to take a hit as information and responsibilities are transferred from the exiting service provider to the new one. This may occur due to exiting service providers' resources slacking on their deliverables as the engagement comes to an end.
  • Data/Information Loss: In the transition period, large amount of information and data is required to be transitioned from the exiting service provider to the new service provider. Mishandling or mismanagement of data during the transition process, such as incomplete data transfers, data corruption, or accidental deletion, can lead to data loss or information loss.
  • System Integration Issues: While a service provider is engaged in providing services, some of your systems may be integrated with the service provider's systems which will be required to be disengaged, which may give rise to delays and security concerns.

These risks can be mitigated to a significant extent by incorporating certain transition obligations on the exiting service provider. Here are some transition provisions that you should consider incorporating into your outsourced IT Services contracts at the outset itself:

  • Transition Plan: The contract should contain a provision requiring the service provider to (a) provide a transition plan outlining the steps and timelines for transitioning services smoothly to the new provider, (b) have the transition plan approved by you, (c) adhere to the approved transition plan. The service provider should be required to provide such a transition plan within a certain time frame after issuance of a termination notice.
  • Extended Transition Period: The contract must define a reasonable transition period that allows sufficient time to ensure a seamless transition of the services.
  • Cost Caps on transition expenses: Mention caps on transition costs with stringent control mechanisms for any increase to ensure that transition costs remain within budget.
  • Higher Liquidated Damages for SLA Breaches: Specify higher liquidated damages in the contract for any breaches of service level agreements (SLAs) during the transition period to deter drop in service quality during the transition period. Conversely, you may consider reducing liquidated damages or provide incentives to maintain SLA levels.
  • Data Protection and Transfer Protocols: Spell out clear provisions for data transfer in neutral formats to ensure easy transition to the incoming provider's systems. The provision should also include an obligation for the exiting service provider to retain data backup for a specified period post termination and deletion thereafter.
  • System Disengagement Responsibility: If exiting service provider is using any of its own systems in provision of the services, the contract should specify systematic disengagement from such systems, especially where the service provider systems are integrated with your systems.

In conclusion, when considering the termination of an outsourced IT services outsourcing contract, it's crucial to be aware of the potential risks and challenges involved in the transition process. Failure to address these risks adequately in the contract can lead to significant disruptions, increased costs, loss of service quality and data integrity. To mitigate these risks, it is imperative to incorporate specific contractual obligations and provisions that outline the responsibilities of the exiting service provider and establish clear guidelines for the transition period.

By proactively addressing these concerns and ensuring robust contractual safeguards are in place, organizations can navigate the termination of outsourced IT services contracts more effectively, minimize disruptions, and safeguard their interests during the transition to a new service provider or bringing services back in-house.

However, contractual safeguards must be supplemented by adequate operational controls to fully mitigate transition risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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