Outsourcing Provider Going Bust? 10 Steps to Protecting Your Interests
Byon September 4, 2012
Mainstream media hasn’t been shy in publicising the shortcomings of outsourcing and commissioning providers in recent times. Whether it has been the G4S debacle, or the more recent news that outsourcing specialist Mouchel has been taken over by its bankers, the failure and demise of outsourcing providers is very much in the public eye.
The fact is this — there are a number of outsourcing and commissioned providers going bust that provide services to both the private and public sectors. It has been reported that others too are on the brink. As such, if you outsource mission critical services such as finance, accounting, revenues and benefits, social care and ICT, it would be wise to plan for the worst now.
There are many key issues that you need to consider. Below, we have identified ten of the key issues as a starting point to help you on your way.
10. Check Your Contract Terms
Most outsourcing and commissioning contracts we see don’t provide appropriate protection for the threat of your provider going bust. In such cases, you may well think that there is not much you can do, and that you just have to hope for the best if your provider does hit the wall. But this often isn’t true.
Recent court rulings put your provider under a duty to warn you if there is a likelihood that they will be unable to deliver services in the future to the agreed standard. Frameworks exist to help you move away from a provider quickly where risks exist of the provider going bust. Even if your contract makes no provision for protecting you in the event of your provider’s administration or liquidation, the ‘implied terms’ of a contract are likely to.
9. TUPE Responsibilities
The provider is responsible and has the financial liability when it comes to TUPE, not you. However, any key members of the outsourcing team can be contracted back in-house as employees or interims, in order to ensure continuity of service. Check the terms of your contract and make sure that there is nothing in there that reverts the employee liabilities back to you if the provider goes bust. We have seen commissioning and outsourcing contracts where Unions involved have insisted on such clauses being in place in an attempt to protect their members’ interests.
8. Provider Performance Bonuses
For the most part, performance bonuses for the provider are set against specific milestones. That a provider happens to be in business when a particular milestone is achieved, does not necessarily grant it the right to such a bonus.
The logic behind this is fair and simple — you contracted the provider to deliver an agreed level of service and to achieve certain business objectives for a period of time. If the provider goes bust and stops the service mid-way through the contract term, it can be reasonably argued that a performance bonus should not be awarded on the grounds that it did not fulfill the whole term of achieving the agreed business objectives for the whole period of the contract.
7. Ongoing Performance
If you are in the public sector, and there is a likely danger of your provider being unable to continue with its services, you can invoke an emergency procurement procedure to contract with an alternative, better financed provider for a short fixed time. This will buy you the time necessary to put your house in order and run a procurement process that will help you identify the right provider for the long term .
In such situations, there are likely to be arguments about whether or not the provider is in fact going bust. However, you cannot take this chance. In fact, you would be negligent in your duty as a senior officer if you did not make appropriate provisions to put in place a stand-in provider, should the unthinkable actually happen.
6. Duty of Care and Duty to Warn
As previously mentioned, recent court rulings put your provider under a duty to warn you if they believe that anything will materially impact their ability to maintain them achieving the agreed business objectives for you. Technically, if they do not warn you of this, the provider would also be financially responsible for the cost of any services that failed as a result of the provider being unable to keep to its commitments.
You might argue that a financial remedy is of no use when dealing with a bankrupt company. However, if you drafted your requirements and contract appropriately, the provider should have professional indemnity insurance available. Subject to what services were being delivered, the contract terms you have in place, and the insurance the provider has put in place, it is likely that matters could be organised so that the provider’s insurance company picks up the additional costs that you can claim as a result of the provider not being able to deliver the services it was contracted for, in the event the unthinkable does happen and your provider actually does go bust.
5. Outstanding and Ongoing Payments
It is not unreasonable for you to withhold payments to a provider if you have legitimate concerns over their ability to continue delivering a contracted service. After all, you will incur additional costs in sourcing an alternative provider in the event that your existing provider cannot deliver upon its remit.
The payments that you would typically make to your provider can usually be used to offset some of the additional costs you are likely to incur. As with all agreements, being able to do this depends upon the criticality of the services being delivered and how the contractual arrangements have been structured.
4. Outsourced IT Data Management
If the service you have outsourced or commissioned involves elements of IT/ICT and your provider uses a proprietary data centre, you must act quickly if it is indicated that your provider is in financial difficulty. If you have disaster recovery services which are hosted with a different provider, you can at the least use the disaster recovery data centre to maintain the hosting of your critical data, if your main provider goes bust.
But what happens if your disaster recovery is handled by the same provider that you have commissioned your services to? Under such circumstances, you must ensure that direct access to the disaster recovery hosting facilities are granted in the event that they go under. In reality, this should have been agreed as part of the original contract, but we often find that it is not. In that case, there are mechanisms available to help push amendments through to get prompt access.
3. Personal Data
With the data protection act provisions, you must make sure that adequate provision is made to protect all sensitive data that is covered by the data protection act (not just data that is in electronic form, but hard copy information too) in the event you move to an alternative provider.
2. Business Continuity Plan
Business continuity is critical in the same way as disaster recovery. However, if your disaster recovery and business continuity services currently sit with the same provider who is in danger of going bust, you need to investigate alternative providers as soon as you possibly can.
If your provider does actually go bust, you will then have a contingency in place whilst you find an alternative provider in the long term to maintain deliverability of your services.
1. Exit Management Plan
You must ensure that an up-to-date exit management plan is in place which covers all of the appropriate contingencies. For example, ensuring your specifications of services are up to date, so that you are clear as to what is currently being delivered, rather than what was contracted to be delivered years ago.
Your services will have moved on significantly in the meantime, and the service documentation in your contract is likely to be well out of date. Furthermore, update which staff you would need, when they would need to come across, what parts of the asset estate you would need, and so forth.
Remember — if your provider owns your asset estate, you are unlikely to have first right of assignment to get it back. It is likely that the administrators of the provider’s business will attempt to sell off your estate to competing bidders — and you may not win the day on this.
Taking the Right Action
If you do find yourself in this difficult position of your provider potentially going bust, there are a number of template processes you can execute now that will save you time and money, and ensure that you protect yourself appropriately during what is a difficult and challenging time.
Please contact us for a confidential and informal chat if you are concerned about the financial or operating position of your provider. We can help you ascertain what quick and immediate steps you can take to improve your position rapidly.
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