Indian information technology and information technology enabled services providers (IT and ITES providers) have been at the cutting edge of India’s emergence as a serious player in global trade and commerce. Over the last 15 years, Indian IT service providers have moved up the value chain to the stage today where they compete not just on being able to deliver projects on time and at significantly lower costs, but also on being able to deliver end to end business transformation deals. In most public discussions, all of the work that is done by the Indian firms and their multinational peers gets lumped under the umbrella term of outsourcing, but that is actually an over simplification of the many different types of service offerings that are available. The spectrum of service offerings range from simple staff augmentation through discrete application development and maintenance project work to full-fledged outsourcing deals and demand driven or outcome based deals.
Some of the major types of service offerings are briefly described below. These service offerings comprise a simplified and high -level view of the plethora of service offerings that are available in the IT services market.
As the name suggests, a client which has a shortfall in a particular type of skill set will approach service providers to augment its permanent staff with additional staff possessing said skill set(s) for a defined period of time. In such deals, the service provider’s responsibility is limited to providing the client with personnel who have the requisite skills. All of the work is performed under the supervision and direction of the client’s managers with little or no control from the service provider.
A client that wants a particular IT project implemented will contract with a services provider to deliver that discrete project. Typically, the client develops the business specifications internally, translates that into high level IT specifications and then asks service providers to quote for the project. Depending on the specificity of the project, it may be delivered as a fixed price project or as a time and materials project. The service provider is responsible for delivering the project to certain specifications but the risk passes to the client on acceptance of the project (if it is an application development project). Application maintenance projects are measured against service levels and the service provider’s job is done once the agreed service levels are met.
A traditional outsourcing deal means a deal in which the client outsources it entire responsibility for the whole or a part of its IT organization. In the pre-offshore days, this often included handing over responsibility for existing hardware and software;
IT planning and implementation including technology upgrade and refresh cycles; and the transfer of the personnel and the physical facilities that housed the outsourced IT department. The service provider takes responsibility for satisfying all of the IT needs of the client. Outsourcing deals may be split into separate hardware, telecom and applications outsourcing deals. Over the last decade, the advent of Indian services providers has meant that that the model has changed somewhat, especially with regard to the transfer of personnel and physical facilities, but the primary rights and responsibilities of the parties have continued to remain the same.
These deals are more complex than traditional outsourcing deals. They typically start with a business consulting element, where the service provider studies a client’s existing business processes and suggests changes to improve efficiency and reduce costs usually using IT. This is followed by a technology consulting assignment in which the service provider takes the results of the business consulting study and recommends the most appropriate IT solution to achieve the results set out in the business consulting study. Once the client has accepted the technology consulting recommendations, the vendor proceeds to implement the IT project which will most often include package software from software vendors and considerable customization and integration work from the service provider. Once the IT implementation is complete, the service provider will provide ongoing maintenance and support for the implementation. This type of deal is complex and, if successfully implemented, will transform the client’s business capabilities in some form or shape for the better. While such a project can be broken up among multiple service providers for the different stages, the most sophisticated service providers have the capabilities to deliver such deals from end to end. As one can imagine, the parties have different rights and responsibilities at different stages in this type of deal which is further complicated by the presence of multiple third party partners at different stages who have limited but critical roles in the success of the overall project.
The different service offerings described above have obvious differences in how rights and responsibilities are allocated between the parties. The natural corollary is that a vendor. undertaking discrete project work will be subject to very different contract terms from a vendor undertaking a full outsourcing deal. This was true, for the most part, till the middle of the last decade. There were distinct forms used for staff augmentation, discrete project work and outsourcing deals. While there are still some jurisdictions and clients who make this sort of differentiation, the last five years has seen an increased tendency on the part of clients across the globe to put out “one size fits all” contract forms.
It is useful at this point to take a brief look at the typical contracting structure for IT services and in fact, for most outsourced services. The typical IT services contract use a multi-tier structure. At the top of the pyramid is framework agreement typically called a Master Services Agreement (MSA). The main body of the MSA sets out the rules which will uniformly apply to all types of work undertaken by a vendor for the client. The MSA’s schedules set out the more specific commercial and operational aspects of the deal such as rate cards and pricing rules, pro-forma statements of work, IT and physical security rules and governance mechanisms. Each project or deal is then contracted for under one or more statements of work which are subject to the MSA and its schedules. The discussion that follows is primarily focused on the terms that go into a MSA’s main body in the major common law jurisdictions across the world.
Returning to the current situation in contracting for IT services, the “one size fits all” approach has obvious advantages for both clients and vendors. A primary advantage is the ability to ask for bids and award projects without having to negotiate the entire contract for each transaction. The larger vendors particularly benefit from having omnibus MSAs since it allows them sell most if not all of their services into large enterprise clients with relative ease. There is however a fine balance between the convenience of easier contracting and the use of onerous and inappropriate contracts terms for relatively simple business transactions.
Outsourcing contract forms have become increasingly adversarial over the last five years. This is a global phenomenon and is under laid by the move to “one size fits all” formats. Some UK contract forms are still a pleasure to work with, but there is a trend of harmonization with the highly prescriptive and adversarial US formats gaining at the expense of pragmatic contracting. Another troubling development is the use of common law forms embodying common law principles in civil law jurisdictions with its attendant interpretation issues.
The word “pragmatic” is extremely relevant because the essence of commercial deal making is being lost in the bid for the perfect contract. In essence, the contract document is a memorialisation of the business arrangement, but it now increasingly seems that the document has become an end in itself and the underlying transaction has been reduced to an afterthought. Where in the past a project work deal would be subject to a MSA that was twenty to thirty pages long, of which three or four pages would cover the entire gamut of provisions from the representations and warranties through to termination, the warranties themselves run into three or four pages in current generation contracts. What real value is being added to the underlying business transaction by the ever expanding set of hooks on which the vendor can be hung?
Earlier this year DLA Piper’s Middle East Practice published a list of the top10 reasons why outsourcing transactions fail. The reasons are:
While one may disagree with the specific entries in the list, what is undeniable is that the vast majority of contracts fail when some aspect of the underlying business transaction fails. The corollary to this is that the successful deals are the ones where both parties have a healthy relationship that is based on a good understanding of each other and a healthy degree of give and take.
One of the more irritating statistics that is bandied about when considering outsourced IT projects is that a large majority of them fail. A quick study of the major Indian IT service providers will tell you that this is at best an over-generalisation. At Infosys, the repeat business percentage is over 90% and the percentage is similar for the other major Indian outsourcers as well. It is hard to imagine that clients would continue to do business with a service provider unless they are realizing consistent economic value from the relationship. However, it is probably fair to say that the failure rate in transformational IT projects – whether inhouse or outsourced – is higher than that for project based deals or even full-fledged outsourcing deals. Transformational projects fail for a number of reasons – prime among them being the inability to translate a business vision into discrete steps that are achievable. An adversarial contract certainly contributes to failures as well.
Some of the adversarial nature of these contracts is a direct consequence of vendor behaviour. A client who has had a bad experience in a particular aspect will certainly look to cover that area in an exhaustive manner in the next contract. While it is important, especially from a psychological perspective, to know that a problem area has been addressed, the manner in which it is addressed is also very important. Clients and service providers must ensure that there is proper governance and project management on the ground during the term of the contract – contracts and projects do not fail one fine morning – the symptoms are visible for a long period of time. The real problem is that, instead of tackling problems head-on, most people postpone the hard decisions until such time as there is no other option and, often, the situation is no longer rectifiable. Lawyers have to recognise that it is not possible to legislate for human behaviour beyond a point. All the warranties and indemnities and exclusions from the limitation of liability are not going to solve that problem. It is part of a lawyer’s responsibility to counsel clients that they have got to stop looking to the contract for magic bullets and actually work on making their deals work.
One other aspect that is not necessarily appreciated by a lot of lawyers working on outsourcing transactions globally is the cultural aspect of working with Indian outsourcing vendors. One of the defining characteristics of working with Indian outsourcers is their attitude to problems. If a client has a problem, the first instinct is to throw more resources at the problem to get it resolved. More often than not, this solution works. Indian service providers were never the masters of the change order process. However, as offshore outsourcing contracts have become more and more prescriptive, the Indian service providers are also now focusing on building out contract management capabilities just like their multinational peers. It is not something that comes naturally and not something that they would do if they were not worried about falling foul of one of the many hooks that are scattered through our contracts. The major victim of this process is this cultural tendency to try and solve problems. A client may have every right to expect that vendors comply with the contract 100%, but that is probably an unrealistic expectation. People make mistakes and forget things. A services contract is entirely about people working with other people and even the most diligent human being cannot be perfect all the time. What is important is the spirit with which the parties to a deal approach the deal – if they work together to solve problems, the deal will be a success. If there is a formal structure which casts parties as adversaries, as the new contract models do, parties retreat to the trenches and lob letters and claims at each other to the detriment of the underlying business transaction.
Another primary area of concern is the constant diminution of buyer responsibilities and the passing of more and more of responsibility to vendors irrespective of what is required to make a deal work well. A good example of where this issue manifests itself is in the dilution of the ‘savings’ or excuse clause. The current formula has the following minimum requirements: Vendors are only excused from performing their obligations if the client has failed to perform an obligation which is solely and exclusively its responsibility; the vendor has notified the client of its failure to perform in the most expeditious manner; and the vendor has taken all the steps that should have reasonably been taken to overcome the failure of the client to perform. A savings clause of this is next to impossible to enforce in the real world since it is extremely rare for a failure to be clearly attributable to one party. However, that does not change the fact that if a client fails to do something that they need to do, there is every chance that the service provider’s end product will be deficient.
Ranjan Talwar Regional Finance Head-North, Tata Teleservices Limited
I think one major reason for the failure of Outsourcing Contracts is the ownership aspect as nobody is interested to take the onus of ownership of the business. The issue revolves on the question that if the business fails then who will pay for it? In Indian context, there are government regulations, ministries and authorities which act strongly on the issue of Outsourcing Contracts. This means that any failure on part of the company outsourcing a business would invite stringent penalties. In today’s world, every company adheres to the rules and regulations existing in a country where the business is outsourced as any violation would result in closure of the business. The need for ownership arises only when the companies own the outsourcing contractors i.e., the agencies. The contracts signed on the basis of outsourcing are all performance-based contracts and need proper skill sets and expertise for generating revenue. In my view, adaptability and communication skills play a vital role in setting up a distinguished relationship between two business entities. On one hand, there is a need to train the employees in such a manner that they come up the learning curve in a short period of time and on the other hand the business which outsources must understand the viability of Outsourcing Contracts when it comes to setting up standard procedures and mechanisms so as to standardize as per their business requirements. Thus, unless these two conditions are treated at par with each other the outsourced contracts will fail to subsist. The agreements play a vital role in the entire process of Outsourcing Contracts. The Master Service Agreement is an important document and is thus mandatory for all outsourced businesses. Of course, there is enough competence which exists where Master Service Agreements are entered into by the business entities in Outsourcing Contracts, but not otherwise. There are many laws prevalent in our country and the Government has imposed certain strictures to keep a check on companies who outsource their businesses without procuring proper licenses and sanctions.
In India, Telecom and Information Technology form the backbone of our business models thereby providing support to the development and growth. The procedures laid down by the Government must be adhered to as mandatory provisions. This will give effect to two factors. Firstly, it raises the presumption of the business entities which outsource their businesses to be extra cautious while preparing the Master Service Agreement and secondly, this will help the Government to hold such business entities accountable for their services as per the terms set out in the Master Service Agreement
Vaibhav Aghase, Head – Fraud, Investigation & Vigilance, Alcatel Lucent
I think that the Outsourcing Contracts do not fail completely in India. In context to the service industry, one major sector which has seen a boon in the recent times is that of telecom, as more and more of telecom operators are outsourcing their core activities of even maintenance of Telecom Network Management Services and this itself signifies the importance of Outsourcing Contracts by these companies. This changing trend is favourable to the telecom industry as it helps in bringing core competencies, expertise and specialization in terms of business entities for network management and to bring in specialized concepts and as such add value to the business.
Well, in my view, India is a good example of legal and management competence pertaining to Outsourcing Contracts. In relation to the telecom industry, the outsourced business is all the more competitive and the operators are focusing majorly on front end and acquisition of customers while trying to set up a standard business model. The niche players and the players who have core competencies in specific areas of work have an upper hand in procuring the Outsourcing Contracts.
John Wilson (Barrister-at-Law) John Wilson Partners, Colombo, Sri Lanka
In general, care must be taken to ensure that the client’s expectations as to business outcomes are reflected and protected in the drafting and structure of the contract and the obligations undertaken by the parties thereto. In particular, clauses dealing with service standards, termination and consequences of termination, notice provisions and dispute resolution mechanisms need to be drafted very carefully. Local law advice must be obtained in regard to the possible impact of local law/regulation on the obligations of the parties under the contract. This is by way of example, especially important in the context of confidentiality clauses and non-competition/solicitation clauses. In the Sri Lankan context, there is currently a statutory prohibition on the employment of women at night (subject to certain exceptions) but an amendment to the law is expected to be passed by Parliament in the not too distant future.
Let me answer this question only from the Sri Lankan position and my assessment based on information provided to me by the outsourcing industry association SLASSCOM (as you have NASSCOM in India), is that the large majority of outsourcing ventures here in Sri Lanka, particularly those involving more value-added activities such as financial and accounting functions, have been very successful.
I do not think specialised training is necessary, although prior experience is always useful when dealing with such a matter. Any lawyer, who has sufficient experience of and expertise in complex commercial transactions would be competent to advise in regard to local law issues and the impact thereof on the provisions of an outsourcing contract.
Contracts need to be fundamentally fair. The current outsourcing contracting forms have departed from that norm in their attempt to protect client interests. There is an urgent need for everyone involved to stop and take a close look at what works and what does not work in the real world and realign their contracting positions accordingly. The change will not come unless lawyers, procurements officers, technology professionals and business decision makers take cognizance of the fact that making contracts work takes a lot of effort from both sides and that ‘wordsmithing’ a contract to death to favour one party over another will never be a substitute for working hard every day to make a deal successful.
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