Anyone who has been involved in an information technology (IT) outsourcing transaction knows that such transactions require careful planning, analysis, negotiation, execution, management, and complex legal agreements.

When an outsourcing transaction involves multiple processes-the stakes and rewards are even higher, because companies will encounter a variety of new and complex business and legal issues due to the interrelationship between the various outsourced services. This article highlights a few of these issues, and offers points for customers to consider when structuring these transactions.

Multi-process outsourcing defined. Multi-process outsourcing or MPO is a transaction in which a customer outsources two or more distinct processes or functions to a third party supplier. These distinct processes and functions may include: IT, human resources (HR), finance and accounting (F&A), revenue management, call center, procurement, facilities management, sales, supply chain, and logistics. Since multiple processes are involved, MPO tend to be fairly large in terms of total contract value and involve the transition of hundreds or even thousands of employees from the customer to the supplier. Due to the variety of processes being outsourced, these transactions are typically much more complex. For example, the demarcation between where the customer's responsibilities end and the supplier's responsibilities begin needs to be stated in the MPO agreement for each process that is outsourced and the MPO agreement must address the parties' ownership and license rights to all intellectual property that may have different rules depending on the process involved.

Why MPO? MPO's are likely to increase in the coming years. Customers are continuing to consider outsourcing as a means to achieve increased cost savings, access to best practices, and higher service levels, each of which is to some degree dependent on suppliers having reached sufficient market penetration and service delivery maturity. Customers pursuing MPO are also looking to the selected supplier to be a single point of accountability for the multiple processes that are being outsourced. Suppliers are becoming increasingly competent in a variety of business processes and there is a movement of consolidation in the supplier marketplace. Suppliers that traditionally focused on IT are building or buying other business process offerings. Suppliers in the non-IT business processing space (such as HR or F&A) are looking to combine with other business process suppliers and/or with the traditional IT suppliers.

Analogy to multi-tower IT transactions. When a supplier takes on multiple IT services or "towers," the customer's outsourcing agreement must address the interrelationship between the various IT towers. For instance, if a supplier is performing services for a portfolio of applications in three towers-application development and maintenance (ADM), hosting, and end-user help desk-the customer's agreement with the supplier must address the consequences of the supplier's failure in any discrete tower as well as the impact of such a failure on the other towers. If a supplier fails to maintain an application properly and thereby breaches an ADM service level, should the supplier also be responsible for a failure to meet a service level for availability because the application crashed? Should the supplier also be responsible for a failure to meet a service level for help desk response time because the help desk was inundated with calls due to the unavailability of the application? The ripple effect and the desired result from a contract point of view requires careful consideration and analysis.

Enter MPO. Imagine the complexity of interdependencies if, in addition to providing services for several IT towers, the same supplier were also providing services for one or more of the following processes: HR, F&A, revenue management, customer care, sales, and logistics. Not only are these additional processes all directly or indirectly dependent on IT but many also have interdependencies of their own. For example, a significant error in an invoice sent to several thousand customers could wreak havoc on the supplier's customer care call center.

The following is an overview of some of the principal issues that customers need to address in MPO transactions.

Service levels. The interrelationship of service levels between service categories is readily apparent. As stated above, most business processes ultimately rely on some component of IT. In addition, many business processes have interdependencies with other business processes. Customers must assess the impact of a supplier's failure to meet one service level on all of the services being provided by the supplier and make certain that the MPO agreement clearly states the consequences of each such service level failure.

Pricing. Frequently, different pricing mechanisms will be used for different service categories. Just as important as understanding and accurately describing these different pricing mechanisms is documenting what happens to pricing if one or more towers within a service category are terminated or one or more service categories themselves are terminated. For instance, if an MPO agreement treats cross-functional services as a separate service category with its own pricing that just happens to be on a fixed fee basis then the customer may be surprised to learn that it is required to pay the same fixed fee for cross-functional services even if the customer terminates one or more towers or even service categories and the supplier is providing less of those cross-functional services.

Liability. Customers and suppliers typically disclaim certain types of damages (e.g., consequential) and limit their exposure to direct damages in some manner. In MPO transactions customers need to examine carefully the type of harm that would result from a supplier's breach of the MPO agreement. In certain service categories the damage caused by a supplier's failure may be largely, if not entirely, of the type nature that is generally disclaimed. For example, the supplier's failure of supplier to prepare the customer's invoices on time and the resulting loss of revenue to the customer is a type of damage that is usually disclaimed. Customers need to work very closely with their legal advisors to identify the types of damages that would result from a supplier's breach of its commitments in each service category and make certain that the MPO agreement explicitly addresses these situations.

In addition, the MPO agreement must address the unique interactions between the processes in an MPO in the compliance with law, intellectual property and termination provisions.

Conclusions. MPO transactions are gaining traction in the marketplace. The complexity of these transactions requires customers to face issues not normally encountered in outsourcing transactions involving only one business process. This emerging trend presents a unique opportunity for customers and suppliers and their consulting and legal advisers to take a fresh look at current outsourcing models. The outsourcing marketplace may be best served by retaining the proven methodologies and legal structures developed in the IT market and actively seeking new methodologies and legal constructs to address the unique and complex challenges presented by multi-process outsourcing.

David M. Hudanish is a partner at Mayer, Brown, Rowe & Maw LLP, a global practice with 1300 lawyers in 13 cities worldwide (http://www.mayerbrown.com/)

David M. Hudanish
Partner - New York
Mayer, Brown, Rowe & Maw LLP
Tel: 212-5062524
Email: dhudanish@mayerbrownrowe.com