Your failing strategic supplier relationship is beyond repair and you have reached the point of terminating the contract. You want to make sure the exit goes as smoothly as possible in what might be a very challenging situation where emotions can run high. So what is your best course of action? What should your exit from a terminated contract look like?
In this article we’ll cover:
- What to Consider When Planning an Exit from a Terminated Contract
- Your Exit Plan
- Appointing an Exit Manager
- Your Express Right to Continue to Receive Base Services
- Transferring Resources
- Transfer of Third-Party Contracts
- Ownership of Developed Intellectual Property Rights
- Exit Costs
- Encouraging your Strategic Supplier to Deliver During the Termination and Exit Process
What to Consider When Planning an Exit from a Terminated Contract
Getting out of a relationship is as much of a project as is getting in, but with potentially more operational and financial risks, and as such you should develop a business case for the contract termination. [see related FAQ article: Do I need a business case for early contract termination?]
A well-considered exit plan allows you to identify what you will need to make a successful transition. Ideally, you will have considered the exit process before you outsourced, because at that point you had the information you needed to deliver the service and people who knew how to run it. Both of those resources may now be in your strategic supplier’s hands.
There are many issues that often get missed when planning an exit. While clients typically focus on what is necessary to get to ‘business as usual’ (BAU), they overlook other critical factors such as:
- Key staff not transitioning back in-house or to the new strategic supplier
- Up-to-date service delivery processes not being accurately documented
- On-going disputes between the strategic supplier and its sub-contractors
- Intellectual property rights over processes.
Similarly, both clients and strategic suppliers often fail to appoint a senior responsible officer and project manager for the exit process. Both parties need to dedicate appropriate resource early on, so that a complete plan, measurements and contingencies can be applied.
Your Exit Plan
The exit plan sets out what you want to happen during the exit process. It should cover:
- Continued service provision during the termination period or the run-off to expiry and, if necessary, for a transitional period afterwards
- The strategic supplier’s obligation to provide information (knowledge transfer) relating to the services
- Terms addressing the transfer or licensing of assets, software, know-how and other intellectual property rights that the strategic supplier uses to deliver the services to you
- The transfer of records prepared or data collected by the strategic supplier in connection with the services
- The transfer of relevant third-party contracts
- The treatment of the strategic supplier’s employees who are in scope
- A process by which the strategic supplier will provide reasonable help to you in BAU service delivery as you re-tender all or part of the services, and general assistance and co-operation between you and the legacy strategic supplier
- Other assistance you will need from your legacy strategic supplier, such as consulting services in connection with the transition or continued use of shared networks or similar assets after transition.
If not already in your legacy written contract terms, you should also determine how you can:
- Incentivise professionalism and cross-party team working, to smooth the transition process
- Use, on an on-going basis, any third-party (sub- contractor) assets that are vital to your service delivery until the exit process is complete.
- Appointing an Exit Manager
To guide you through termination, you should appoint an exit manager. This should be an experienced and qualified senior manager, who will liaise with the strategic supplier and ensure that exit terms are followed. If this individual already has a good relationship with the strategic supplier, it will help both parties to leave on constructive terms.
You should also require the strategic supplier to appoint a suitable exit manager to oversee their compliance with the exit terms and to act as your liaison. Given the criticality of this role, you may wish to have the right to approve the exit manager.
Both your and the strategic supplier’s exit managers should, as a key part of their terms of reference, be required to encourage the outgoing strategic supplier to foster effective multi-party working with the new strategic supplier and/or the in-house team who will take over service provision.
Your Express Right to Continue to Receive Base Services
The outsourcing contract should have included an express right for you to continue to receive the base services for a reasonable period after the contract expires or is terminated. This will enable you to continue to receive the services if the transition to a new strategic supplier or back in-house does not go to plan.
Ideally, the contract should require your strategic supplier to provide those services at the same contracted service levels as before. You should also remain free to terminate the base services at any time upon notice.
If your contract does not give you an express right, there will probably be implied obligations on the strategic supplier to help support you through this process.
There may be a significant amount of resources that need to be transferred from the strategic supplier. These could include hardware, software, people, assets, intellectual property and knowledge. You should retrieve any hardware assets that the strategic supplier used to undertake service delivery. If you didn’t provide hardware assets, you must find out what hardware was used to ensure you have the proper tools for use in-house or by the next strategic supplier. You should follow the same principle for software.
Some contracts allow a client to hire the strategic supplier’s employees, which will give you access to valuable people. If you can’t hire from the strategic supplier, you must determine what skills are needed in new employees.
Ensuring that key resources are available immediately is crucial for preventing delays to services. You must plan the transfer of other assets, such as facilities and vehicles. Create a checklist to ensure that keys, insurances and utilities are all transferred. The exit manager should ensure that both parties adhere to this, to avoid any protracted disputes.
Transfer of Third-Party Contracts
Your strategic supplier may have entered into third party contracts to help it provide your services. It’s likely that either you or your new strategic supplier will require some of these after exit. The transfer of third-party contracts is often contentious but with careful planning you can avoid many of the potential problems.
Ideally, you will have already completed the following during the life of your existing agreement:
- ensured that a contracts database was established and maintained, so all third-party contacts can be easily identified, along with the aspects of service delivery they support
- required the strategic supplier, when entering into a third-party contract, to make sure it can be transferred upon exit and that there are no unreasonable provisions preventing such transfers.
The transfer of third-party contracts needs to be handled correctly. You should therefore work with the strategic supplier to coordinate communication with third parties, as there will be confidentiality issues that you need to address. You should also allow sufficient time in the exit process to obtain third party consents and to transfer the contracts.
Ownership of Developed Intellectual Property Rights
Knowledge transfer is usually one of the most crucial aspects of planning an exit from a terminated contract, and you should have agreed intellectual property rights and licensing in the initial contract. Without the right skills, knowledge and processes, all the hardware, software and other resources will be less effective.
Planning for exit from the beginning of a contract should have included maintaining a knowledge base of task procedures. Internal people who were knowledgeable about tasks may have been outsourced or have left. Without in-house or documented knowledge, you will be severely disadvantaged, and will have to quickly develop internal resources to manage the returning process. Part of the transition may therefore include the legacy strategic supplier training new employees and the new strategic supplier to remedy this lack of knowledge.
As with assets, equipment and contracts, it is important to identify which rights will be the subject of ownership or license discussions. Strategic suppliers can often fail to record what it has developed. This can be avoided through effective contract management during the course of the relationship, in particular by defining and recording what your legacy strategic supplier has created. In any event, make sure these are covered during the exit process itself and managed to successful conclusion.
Cost is one of the most contentious areas of exiting an agreement. The different types of costs or fees, when they are payable and whether they are factored into the agreed pricing model, should have been identified at the outset of your relationship with your legacy strategic supplier, to avoid disputes if/when early termination arises.
Encouraging your Strategic Supplier to Deliver During the Exit from a terminated contract
If your strategic supplier has a professional attitude, then it will provide a satisfactory quality of service until the end of the outsourcing relationship. Unfortunately, some providers have hard feelings about an early termination and decide to focus their energies on their continuing customers. As a result, you can’t always rely on the ‘relationship’ to provide motivation.
You may, however, have both carrots and sticks in the contract. The most common carrot is substantial fees for providing termination assistance. Ideally, these will only be payable after a successful transition. For sticks, the contract (or circumstances) may allow you to apply to a court for injunctive relief or damages if your service provider fails to provide termination assistance.
Your contract might include general clauses, such as “Service provider shall provide such termination assistance as reasonably requested by Customer.” These poorly worded clauses can help fill gaps in your contract terms, although the service provider may use the provision’s general nature as an excuse to exclude the help that you particularly need.
Planning an exit from a terminated contract – Conclusion
Planning is critical. Wherever possible, use the business case you created [see associated FAQ: Do I need a business case for early contract termination?] as the performance measure, to ensure outcomes are on track through the exit process.
Need Further Advice?
If you have concerns about an exit you are planning and would like to know what help is available, please call us for a confidential, no obligation chat.
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