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6 outsourcing questions to ask during an M&A

Stephanie Overby | Feb. 1, 2016
Merger and acquisition activity is at record levels, requiring selling companies to renegotiate outsourcing arrangements for their divested entities.

Schaffner suggests that the seller solicit buyer input upfront on key legal, commercial, and technical terms. “Subject matter experts of the acquirer should have the opportunity to vet the statements of work, service levels, and pricing since operational ownership will transfer to them after the sale of the divested entity,” he says. “Likewise, the acquirer’s legal representatives should be consulted to provide input on items such as liability caps, termination rights, and intellectual property rights.”

3. Will the terms of a cloud-based deal work for the new entity?

Companies are often eager to start up new IT services for an acquired entity as soon as possible, so cloud computing options may seem like the natural choice. But, notes Schaffner, “as with any cloud agreement, there are tradeoffs between the ability to negotiate customized terms vs. the speed to deploy the solution using the provider’s standard terms.” Typically cloud contracts will stipulate terms that may prove problematic for the buyer, such service-level credits as sole and exclusive remedies, limited audit rights, the right to store and process client data anywhere and the provision of minimal disengagement services.

“The economics of a cloud solution dictate that the provider is not able to offer more robust terms that the divested entity enjoyed under a master agreement while it was owned by the seller,” says Schaffner. “Consequently, the divested entity (and buyer) needs to evaluate these reduced terms and decide whether or not the proposed solution will meet its requirements.”      

4. Is the provider adequately prepared for the ‘hypercare’ period?

In any outsourcing transition, services should be closely monitored during the first three months after the handoff to make sure work is proceeding as planned. Providers typically offer extra resources during this time (for an additional fee) to help ensure successful implementation. This so-called “hypercare” period is even more important in M&A transactions, says Schaffner, due to the number of new players involved.

5. What happens if the acquisition fails?

Companies should include a clause that says the selling entity can cancel the new outsourcing agreement if the sale does not go through, says Shaffner. However, the provider may look to recover business development expenses. “Some, but not all, providers are open to including such a clause,” he says. “Those that oppose including this type of clause typically argue that the seller will most likely want to find another buyer for the entity and, therefore, would still need to contract for the services. These providers also cite that the seller can terminate the agreement for convenience—with payment of termination charges.”  

6. What if we can’t deliver a new outsourcing agreement before divestiture?

All is not necessarily lost. A well-negotiated services contract between the seller and the original provider might have included the right for the divested entity to continue to receive services under that master agreement, says Schaffner.

 

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