Outsourcing checklist1

Joseph Orlando TorchLIte Group
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Outsourcing Outline Page 1 of 22
Outstanding Outsourcing
From the start, outsourcing initiatives can be plagued with heartache and regret. All too
often, these initiatives are vendor led and the vendor drives the agreement and transition
plans. Customers/Users are least likely to be familiar and experienced in ways to avoid the
potential “landmines” surrounding outsourcing. The following hopes to outline what industry
experts suggest would assist in reducing the complications in typical outsourcing deals.
Landmine #1: Inadequate Knowledge Transfer
Remedies for Landmine #1
(1) In the service provider’s approach to transition, a key tactic is adequate
transfer of knowledge. This facilitates both the training of the provider’s employees to
take over the buyer’s outsourced functions, as well as identifying process steps that need
to be changed to create new efficiencies.
The first step is to document how the buyer organization does business,
identifying each protocol and procedure (“rules of engagement”). Unfortunately, the
situation most providers find at transition is that the way business is supposed to be done
is extremely different from the way things actually are done. This is especially true in
large organizations and in situations where an employee has been performing a task or
function for many years.
A best practice for providers is to insert a validation step in this documentation
process, testing the prescribed rules of engagement against the actual operations and
informal procedures that have built up over time. The provider’s employees can then be
trained on the way business is actually conducted.
This validation practice is especially useful in transforming and streamlining the
business process to be outsourced. As the validation flushes out individual intricacies and
non-prescribed methods of performing a function, it opens the door to demonstrate how a
process can be shifted to a more precise and high-performance-driven process.
Failure to due this well will doom the initiative to fail before it starts. Efficiencies will not be realized and
costs not managed to the ROI expected from the start.

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Landmine #2: Inadequate Measurement of Service Level Performance
Remedy for Landmine #2
A best practice approach to transition is to first establish a baseline of the buyer’s
current performance level. This is the basis for the provider’s reports that it is not only
meeting contractual service level specifications but that overall performance metrics within
the process are better or as good as they were when the buyer had control of the process.
The fact that service level performance has not gone backwards must be demonstrated for
the credibility and protection of the buyer’s decision-makers who said, “outsourcing is the
way to go.”
If a baseline analysis has not been done by the buyer (or if there are baseline metrics,
the provider should verify them), the service provider must demonstrate the importance of
this procedure, acknowledging that it will add to costs. This set of metrics is as important as
the contractual service level specifications.
Landmine #3: Lack of Response Scenario Planning
The best practice approach is to assume that early on there will be some challenges
and do some scenario planning for how to handle those events. The planning is similar to a
disaster recovery plan – it exists just in case a disaster occurs.
A Scenario Response Plan should include the following components:
. If extra resources are required for additional effort, where do we go to mobilize
those resources? Who is in charge of communication and updating the
organization as to the event?
. If the buyer organization’s user community resists an action, it is the committed
executive in the buyer organization who will – on a frequent basis – need to
communicate why this decision was made and reinforce the organization’s
commitment to it?
. Who is responsible for feeding back to the buyer organization the provider’s
recognition of pressure building and what the provider is doing about it?
Landmine #4: Lack of Executive Sponsorship and Staying the Course
Remedies for Landmine #4
(1) Success is sustained by calling up anew the vision of the goal. This can be
accomplished only by a committed executive who is not in the fray of the day-to-day
relationship with the service provider. In an outsourced accounting process, for example, the
committed executive should be a Chief Accounting Officer or Chief Financial Officer, rather
than the accounting department manager. This executive must stress that the buyer
organization is committed to the outsourcing initiative and that it is the responsibility of all
people in the organization to make it work.

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(2) Much like the effect of a two-year old child’s temper tantrum, the natural
temptation in dealing with the noise of negative feedback and dissatisfaction is to abort the
course too early. The noise is driven by an inadequate Scenario Response Plan. The key to
avoiding the Landmine of changing the plan is to put in place a mechanism that encourages
staying the course.
The best practice approach is to structure weekly performance and transition reviews
throughout the entire first year of the relationship. Attendees should include the buyer’s
highest-level sponsor of the outsourcing (CEO, CIO, CFO, for example). This is the
individual who has the capability of making strategic decisions for the buyer organization.
The person who was originally responsible for making the outsourcing decision must stay
involved and intimately familiar with where the parties are in the cycle, why things are
happening the way they are and what happens next. Also attending the meetings should be
the people who are responsible for the tactical execution (the day-to-day client liaison, for
example).
Landmine #5: Lack of Flexibility
A best practice approach to avoiding this landmine is to build in a formal review and
tightening phase around the contractual service level commitments, to occur 180 days
from the effective date. If recalibration is needed, changes to the contractual
commitments then can be refined upon mutual agreement. Every contract has provisions
to manage scope changes and change orders, but they are typically styled around very
substantial changes in the business environment, as opposed to fine-tuning.
Understanding this best practices approach, the following outlines the elements for
constructing the performance based agreement for outsourcing.
Outsourcing Checklist
This checklist is designed to be useful in developing a cllient’s acquisition objectives and subsequent
contractual documents. Although checklists are effective aids in negotiating and drafting an optimum
user-oriented agreement, the substance of each provision is the key to proper user protection. An
agreement drafted with weak provisions covering all of the checklist subjects would provide little
protection to the user. Alternatively, an agreement drafted with strong pro-user versions of less than all
of the checklist points could offer excellent protection.
This is a most generic checklist that will address the needs of any outsourced service, not simply call
centre or food services or HR. The construct of an agreement will be based on the following elements.
The essence to be captured should certainly be “performance based” in all cases.

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One cautionary note, the writer of this is not expert in the EU legal and regulatory
aspects and thus those are not necessarily reflected herein.
Constructing the Agreement
· Identification of Parties:
a. Legal name and address (including division).
b. State of incorporation, if any.
c. Short reference name of party used in agreement.
· Definition of Terms Used in Agreement:
a. Parenthetical definitions used throughout agreement.
b. Special definition or glossary section.
· Description of Services to Be Provided:
a. Specify services to be provided in detail (do not use open-ended description or indicate that exact
services will be mutually agreed upon at a later date). Include:
1. Frequency of each service, including user and vendor time deadlines.
2. Quality or type of service, including any relevant standards, processing procedures and
environmental controls, specifications, and tolerances.
3. Special modifications or conversions of standard services or programs.
4. Type of equipment, software and communications network to be used, if relevant to user,
including minimum required hardware and software, and availability of UPS.
5. Type of input and output to be supplied, including media, print quality, format, delivery and
timing.
6. Degree of systems support to be supplied by vendor (with specific person-hours or
objective/completion standards).
7. Operations manuals and other documentation to be supplied to user.
8. Ownership of all data, input and output, storage media, and similar user-supplied or user-
based data and materials.
9. Disaster services.
10. Terminal response times, rerun and turnaround times (with specific indication of priority to
be provided to reruns due to vendor and/or user error).
11. Procedures for requesting sample and special reports, including response time.
12. Security and safeguards to be provided, including limitations on access to terminals, data and
programs, and destruction of excess paper and carbon paper.
13. Provision of computer accounting logs to user.
14. Vendor personnel assigned to account
a. Specify minimum qualifications of project coordinator assigned to user.
b. Specify minimum qualifications of key systems, programming, communications and
support personnel assigned to user.
c Provide user with reasonable right to approve replacement vendor personnel who fail to
meet minimum specified qualifications or right to cancel agreement.

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d. Cross-reference to "Assignment" and ensure that vendor cannot assign agreement or
delegate its duties (in whole or in part) without prior written approval from user.
e. Reference and incorporate any relevant vendor schedules, proposals, benchmarks and
marketing materials.
f. Consider use of addenda or schedules to permit addition or deletion of services.
g. Cross-reference to "Preliminary Acquisition and Developments" and "Performance
Deadlines."
· Responsibilities of User:
a. Indicate each user responsibility in detail; ensure that all relevant user personnel concur
(particularly specify user's obligation to maintain backup data or facilities and security
procedures).
b. Specify all user deadlines involved and include reasonable grace periods.
c. Tie user's responsibilities to vendor's responsibilities. (Failure of user to perform on time should
generally extend vendor's deadlines, not remove vendor's deadlines or terminate agreement).
d. Cross-reference to "Force Majeure."
· Term of Agreement:
a. Effective date of agreement as a binding contract between vendor and user ("agreement" to be
void if not signed by vendor, user, and any necessary third party within specified period).
b. Commencement date for each category or type of service.
c. Termination dates for specified categories or types of services.
d. Termination date for agreement as a binding contract between vendor and user.
e. Early termination and cancellation dates for agreement and/or specified categories or types of
services (cross-reference to "Default").
· Payment Terms:
a. Indicate price to be paid by user for each service, including preliminary acquisition and
development work, normal work, special reports, delivery and transportation, and
additional services. (If user is required to pay for delivery and transportation, impose limits on
maximum charges and/or maximum shipping distance.)
b. Specify any additional charges for correction of user errors or for overtime to compensate for
user delays.
c. Specify any applicable volume discounts or volume pricing differentials.
d. Indicate any required down payments and interim payments for preliminary acquisition and
development work (all should be as low as possible).
e. Ensure that final payment requirements for preliminary acquisition and development work are
consistent with any relevant acceptance tests. (Cross-reference to "Acceptance".)
f. If periodic payments are due, specify apportionment procedures for partial periods.
g. Specify procedures to be used to calculate any increases or decreases in vendor charges.
h. Ensure that price increase limitation provisions are consistent with vendor's right to terminate.
i. Include user "offset" or "credit" against amounts due in event vendor fails to meet specified
performance deadlines or quality standards. (Cross-reference to "Default".)
j. Specify any penalty or interest factors to be imposed in event of late payment by user (avoid if
possible or exclude where billing controversy exists).

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k. Include "most favored nation" or similar pricing provision, if possible.
l. If hardware is to be leased to user, consider the following (Note: some of the following items are
applicable only if a third party lease is involved):
1. Price to be paid to manufacturer for each item, product or service (attach copy of relevant
lessor/manufacturer contract to lease).
2. Initial payment or pre-commencement rental days payment (generally to be avoided).
3. Rental/lease payments during initial term and any renewal terms (watch length of minimum
renewal term).
4. Relationship of use to payment due (overtime charges, unlimited use or other).
5. Calculation of lease/rental payments in advance or in arrears (use proper calculator setting
for type of annuity involved in calculations).
6. Apportionment of lease/rental payments during partial months (do not confuse with
"pre-commencement rental days").
7. Increases or decreases in lease/rental payments during initial and renewal terms, including
predetermined step increases and decreases, cost-of-living escalators and lessor-mandated
increases (include amounts, timing, notice periods and methods).
8. Compare lease/rental payments and other obligations to any loan agreement, stock or debt
restrictions on user's maximum financial obligations.
9. Determine whether lease payments must be capitalized under Financial Accounting Standards
Board (FASB) Statement No. 13 and related federal securities law accounting standards.
· Preliminary Acquisition and Development:
a. Specify source, conditions, specifications, availability and deadlines for all equipment, software,
communications and other items to be acquired or developed by vendor in connection with the
services to be provided to user.
b. Specify vendor's obligations to perform any preliminary surveys, studies, benchmarks,
conversions, or systems or development work.
c. Indicate all relevant deadlines and provide user remedies (including cancellation rights) in the
event that specified performance windows are missed. (Cross-reference to "Default".)
· Specifications:
Note: Be sure to include detailed specifications for all products and services to be acquired. The
following is an example and is not intended to be a comprehensive checklist:
a. Define responsibility for network:
1. Total user.
2. Total vendor.
3. Hybrid.
b. Host software utilized.
1. Responsibility for host maintenance and troubleshooting.
2. Provision for third party troubleshooting.
3. Vendor and user reports.
4. Service levels guaranteed.
c. Remote hardware utilized.
1. Front-end processors.
2. Modems.

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3. Printers.
4. Remote job entry devices.
5. PCs and distributed CPUs.
d. Remote software utilized.
1. Responsibility for support.
2. Responsibility for updates and maintenance.
e. Remote user support.
1. Responsibility for training.
a. Use of equipment.
b. Use of software.
2. Hot-line support.
a. Hardware.
b. Software.
3. Enhancements to software and hardware.
f. LANs
1. Hot-line support.
2. Responsibility for support and maintenance.
· Performance Deadlines:
a. Specify all relevant performance deadlines for preliminary and ongoing vendor services.
b. Detail procedures for periodic user review and approval of vendor services, particularly during
preliminary acquisition and development work.
c. State deadlines and review procedures separately for each major project or system.
d. Provide reasonable grace periods for user or vendor delay in meeting specified deadlines (User
delay should give the vendor additional time to perform but should never result in waiver of
quality or acceptance standards.)
e. Cross-reference to "Acceptance" and "Default."
· Purchase Option Credits; Option to Purchase:
a. Specify availability of purchase option credits for hardware lease and rental payments and for
software license payments; include method of calculating and exercising and tie to "most favored
nation" provision.
b. Consider using accrued "purchase option credits" to convert a limited software license into a
perpetual, multisite license.
c. Ensure availability of purchase option credits in addition to relevant discounts.
d. Specify any option(s) to purchase, with or without purchase option credits; clearly identify prices
and terms (attach) proposed purchase or perpetual license agreement if available); clearly
identify hardware or software to be purchased (specify revision and future enhancements to be
provided).
e. Cross-reference to "Insurance and Risk of Loss," "Payment Terms" and "Title."
· Taxes:
a. Indicate party responsible for any sales or use taxes due on services to be provided by vendor or
amounts to be paid by user.

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b. Indicate party responsible for intangible or other taxes due on software provided or used by
vendor.
c. Indicate party responsible for personal property taxes due on hardware provided or used by
vendor.
d. Indicate party responsible for taxes due on gross or net income of vendor.
e. Indicate party responsible for additional taxes, interest or penalties imposed because of late or
nonpayment of taxes due or failure to file required returns. (Limit user's liability where vendor
fails to timely remit or file.)
f. Specify ability and method of challenging any taxes imposed, including degree of cooperation and
control in any suit.
g. Provide for allocation and/or return of taxes subsequently determined not to be payable.
· Delivery and Installation:
Note: Delivery and installation may prove to be important if the contract involves special hardware
(from terminals to mainframes) to be installed at the user's or vendor's site, or if the agreement
includes substantial amounts of prepackaged software to be provided to
the user. The following items cover a variety of matters that may not be applicable to services
contracts where these elements are not present.
a. Indicate shipping specifications, methods and carriers; provide for notification of shipment.
b. Specify parties responsible for crating, shipping, delivery, uncrating, floor setup and positioning,
and installation, including arrangements, payments, insurance and risk of loss.
c. State site plan and installation environment specifications, including party responsible for
necessary site modifications and lessor or manufacturer warranty of site plan and environment
adequacy.
d. Specify shipment, delivery and installation deadlines, including applicable schedules, liquidated
damage, agreement termination or other recourse provisions, and adjustment of dates in certain
user-oriented situations.
e. Indicate ability of user to delay or accelerate shipment, delivery or installation upon specified
terms and conditions.
f. Include provisions requiring delivery or installation of all hardware, software and communications
components by required deadline(s), in order to eliminate risk of partial delivery.
g. Separately state various requirements as necessary for specific subsystems, hardware, software
or communications.
h. Use separate agreement between manufacturer and user where necessary to ensure availability
of assistance from manufacturer or to otherwise protect user's interest; provide for user to be
third party beneficiary under manufacturer/lessor purchase agreement. (This is especially critical
where software is being developed by a third party.)
i. Cross-reference to "Default."
j. Cross-reference to "Payment Terms."
· Acceptance Criteria:
Note: Where hardware and software acceptance tests are not applicable or required, similar tests
may be advisable for vendor-supplied reports, billings and other output.
a. Specify detailed acceptance tests and criteria for:
1. Each major hardware system, subsystem and communications system, if applicable.

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2. Each major software system, conversions, support project and communications.
3. Any applicable hardware and software system as a whole, including all equipment, programs,
support work and communications.
4. All critical output items, including reports, billings and files.
5. Include detailed acceptance test criteria for all service level commitments requiring specific
response times and/or performance criteria.
b. Indicate the parties responsible for, and the procedures to be used in, certifying completion of
various preliminary steps (e.g., installation, conversion, program preparation) and readiness for
acceptance testing.
c. Indicate procedures for correcting deficient performance and rerunning tests in event of failure.
d. Include provision for replacing hardware or software components, or terminating agreement
(with or without penalty to vendor) in the event of continued failure to meet acceptance tests.
e. Include or cross-reference (to "Allowance for Operational Failure") to appropriate minimum
standards of continuing performance (following satisfactory completion of acceptance testing).
f. Coordinate obligations of vendor with those of any vendor subcontractor or other third party.
(Do not permit vendor to avoid liability by forcing user to look only to vendor's subcontractor or
third party.) If applicable, review terms of any relevant vendor contract with third parties.
g. Cross-reference to "Default."
· Warranties by Each Party:
a. Include warranty by each party that it is a validly organized corporate entity with valid authority
to enter into each applicable agreement.
b. Include warranty by each party that no government approvals are required to permit the party to
enter into and perform pursuant to any applicable agreement.
c. Include warranty by each party that entry into and performance under any applicable agreement
is not restricted or prohibited by any loan, security, financing, contractual or other agreement of
any kind.
d. Include warranty by each party that no existing or threatened legal proceedings against it will
have a material adverse effect upon its ability to perform its obligations under any applicable
agreement.
e. Cross-reference to "Default."
· Warranties by Vendor:
a. Include specific obligation of vendor to pass through all warranty benefits available from any
third party manufacturer, software supplier or other vendor subcontractor. (If practical, also
obtain direct, separate warranties from all such third parties.)
b. Include warranty by vendor that it has, and will at all relevant times retain, unencumbered title
(or other acceptable rights) to all hardware, software and supplies to be furnished to user.
c. Include warranty by vendor that it has obtained any required financing or subcontract
commitments or that it can and will obtain such commitments on specified terms by stated
deadlines. (Attach copies of commitments and/or contracts where advisable to do so.)
d. Include configuration warranty by vendor that the services (and/or equipment, software and
communications) ordered by user include all items, components and services necessary to
provide user with all services and processing capabilities represented by the vendor (attach and
incorporate relevant vendor proposals and benchmarks).

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e. Include basic vendor warranty on quality of services, supplies, hardware, software and
communications to be provided to user. (All items should meet all relevant
standards and specifications; do not limit warranty to defects in materials or workmanship.)
f. Specify user procedures for obtaining correction or relief pursuant to basic vendor warranty.
g. Mesh all applicable warranty periods with any hardware, software or communications
maintenance agreement terms and prices.
h. Accept reasonable limitations on warranties by vendor, but only following careful review by user's
counsel and approval by user's data processing manager.
j. Cross-reference to "Warranties by Each Party."
· Warranties by Manufacturer:
Note: All or some of the following warranties may be useful if certain hardware or software is being
acquired by the services vendor from one or more third parties.
a. Provide for pass through and assignment to user of all equipment, software and systems
warranties in lessor/manufacturer purchase agreement (make user and/or its applicable affiliates
third party beneficiaries; consider direct warranty agreement between user and manufacturer).
b. Mesh all applicable warranty periods with maintenance agreement terms and prices.
c. Review the scope of all the manufacturer's equipment, software, and systems warranties
(including all limitations) before executing any documents.
d. Provide for warranty of title by manufacturer to lessor and pass-through of warranty (or direct
manufacturer warranty) to user.
e. Provide for patent indemnity warranty by manufacturer to lessor and pass-through of warranty
(or direct manufacturer warranty) to user; ensure that user and/or its affiliates have direct
enforcement rights; provide related protection for software and programs supplied by
manufacturer.
f. Provide for configuration warranty that equipment ordered includes all components necessary to
perform the processing represented by the manufacturer (pass-through to user).
g. Provide for warranty that equipment meets ANSI or other applicable standards, if desired, and
that equipment will perform according to manufacturer's published specifications (pass-through
to user).
h. Cross-reference to "Warranties by Each Party."
· Warranties by User:
a. If reasonably required, include warranties and representations concerning user's financial
condition (however, limit to warranties necessary for lease or other financing; review all such
user warranties with securities counsel for user).
b. Cross-reference to "Warranties by Each Party."
c. Cross-reference to "Default."
· Insurance and Risk of Loss:
a. Indicate responsibilities of vendor, user and relevant third parties (e.g., manufacturer, vendor
suppliers and subcontractors) for risk of loss and for obtaining various types of insurance
(hazard, liability, workmen's compensation) during each relevant period, e.g., shipping,

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installation, testing, lease term, return to lessor (separate items, such as hardware, software,
programming work and proprietary data, may require separate coverage); coordinate risks and
obligations under vendor/user agreement with those under any applicable third party
agreements.
b. Specify whether and how agreement is to continue in event of loss at each relevant period, e.g.,
shipping, installation, testing, lease term, return to lessor. Include obligation to replace, ability to
terminate and allocation of insurance proceeds.
c. If advisable, require vendor to maintain records reconstruction insurance and business
interruption or termination insurance. (Note: User should still maintain adequate records
reconstruction insurance.)
d. Consider extending all or selected insurance requirements to vendor suppliers, subcontractors
and similar third parties.
e. State minimum insurance requirements, including any approval of company selected, mandatory
policy provisions, and proof of insurance and premium payment.
f. Permit user to insure through valid self-insurance, blanket or master policies.
g. Cross-reference to "Payment Terms," "Title," "Indemnification" and "Term" provisions.
· Title:
a. Specify manner and time in which title to various items of hardware, software, manuals and
other items will be transferred to user (coordinate with all other applicable provisions, including
"Acceptance," "Insurance and Risk of Loss" and "Payment Terms."
b. If title to specified items or categories of hardware, software, manuals or other materials will
remain with the vendor or with third parties (e.g., leased equipment, licensed software), specify
that fact and provide for the following:
1. Warranty of title by vendor or applicable third party to user.
2. Warranty that no liens will be permitted upon the title-holder's interest during the applicable
lease or license period (except as may be specified and agreed to by user).
3. Appropriate labels or other notices naming true title-holder and indicating that user does not
hold title.
4. Filing of UCC or similar financing statements to indicate interest of true
title-holder (title-holder or vendor to pay all costs of filing and to file releases at end of
applicable term).
5. Reasonable inspection of leased hardware by true title-holder, with appropriate protection for
user's proprietary and customer information.
· Default (and Remedies):
a. Provide detailed definitions of events of "Default" by vendor and by user (consider extending to
certain acts by vendor suppliers, subcontractors and similar third parties); particularly cover
liability for data lost in transit, in processing and in handling.
b. Specify notice required and opportunity to cure both financial/payment defaults and nonfinancial
defaults.
c. Provide statement of legal and equitable remedies, including liquidated damages, specific
performance, rights at law and in equity, actual, consequential and punitive damages.

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d. Provide statement of special contractual remedies, including repossession (insist upon lawful
notice), return of all user-supplied or user-based data and materials, assignment of software, and
escrow and/or release of software source codes.
e. Include remedies in event of bankruptcy, business termination, significant change in economic
condition and related financial problems.
f. Consider giving user special rights to assets of vendor's business in event vendor ceases to do
business or to supply the type of services covered by the agreement (e.g., convert software
license to perpetual term, provide source code listings, grant nonexclusive assignments of
copyrights and other proprietary processes).
g. Include remedies and contingency provisions in event vendor fails to obtain required financing or
subcontracts.
h. Include reasonable limitations on liability, including restrictions on punitive and consequential
damages. (Such limitations should protect the user as well as the lessor.)
i. Cross-reference to "Force Majeure" and "Patent Indemnity."
j. Cross-reference to "Warranty" and tie to limitations of warranty provisions.
· "Force Majeure" or "Act of God" Provision:
a. Include only after careful analysis of wording to be used.
b. Ensure that provision protects user as well as vendor. ("Acts of God" may also cause the user to
be unable to perform.)
c. Ensure that the user can still cancel and "get out" in the event the vendor's nonperformance
continues past a specified point (for example, if the vendor's labor strike prevents production or
shipment of a vendor system or prevents operation of the specified data center).
d. In assessing the wording to be used, determine which party should bear the costs and risks
associated with nonperformance or improper performance.
e. Cross-reference to "Default."
· Manuals and Other Publications:
a. Specify number of copies of manuals to be received by user and state price, if any, per copy.
b. Specify whether user will receive future updates and releases for manuals and state price, if any,
and procedures involved.
c. Indicate whether reproduction of manuals is permitted and specify copyright notice required.
d. Indicate whether manuals or copies can be used at other user sites or sold or transferred to
others.
e. Require vendor and any applicable third parties to provide user, at no charge, with periodic lists
of all relevant available publications, revisions and updates.
f. Coordinate obligations of vendor and any third parties (e.g., lessors, manufacturers, software
houses) with respect to manuals and other printed materials.
· Education and Training by Vendor:
a. Specify amount, type, and price (if any).
b. State site(s), number of participants and times available.
c. Specify quality (number of instructors, background, training and the like).
d. Attach vendor's training materials or brochures, if available, and incorporate by reference.
e. Specify number of training and other manuals to be received by user, indicating price (if any).

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f. Grant user right to teach internally from vendor materials. (Include right to reproduce manuals
and other materials.)
· Proprietary Rights and Nondisclosure:
a. Indicate which party or parties own various proprietary data, storage media, programs and the
like. (Pay special attention to programs to be developed through joint efforts or to be modified
by user.)
b. Set out all restrictions on disclosure for all parties. (Include user's business data as well as DP
information and programs.)
c. Provide licenses to user or vendor for all relevant software and other proprietary materials.
· Software Enhancement:
a. Specify vendor's obligation to supply software corrections and enhancements:
1. Term.
2. Price.
3. Mandatory or voluntary.
b. Indicate penalty, if any, if user or vendor fails to incorporate.
c. State time periods within which major software errors must be corrected.
d. Include warranty period for all enhancements and corrections.
e. Indicate that no enhancement or correction may cause system to fail to meet original
performance specifications.
f. Specify that user may utilize another contractor to implement all or some changes or
enhancements.
g. Include guarantee for vendor support for back releases of software.
h. Specify level of support for third party software.
· Software Source Code Availability:
a. Ensure availability of program source codes through source code escrow agreement or later
conveyance provision.
b. Cross-reference to "Default."
· Hardware and Software Modification:
a. Indicate whether user may modify hardware or software.
b. State any conditions or costs imposed in event of modification by user.
c. Specify obligation of vendor and/or third parties to modify hardware or software; require notice
to, and consent of, user for all such modifications.
d. Cross-reference to "Warrants," "Maintenance" and "Proprietary Rights."
· De-installation and Redelivery of Equipment:
a. Indicate shipping specifications, methods and carriers; provide for notification of shipment.
b. Specify parties responsible for de-installing, crating, shipping and delivery, including
arrangements, payment, insurance and risk of loss.
c. Indicate de-installation and redelivery deadlines.

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d. If user is required to pay for redelivery, place limits on maximum shipping distance and/or
maximum costs.
e. Use separate agreement between manufacturer and user where necessary to ensure availability
of assistance from manufacturer or to otherwise protect user's interest.
· Guarantees of Performance:
a. Where vendor or key third party supplier is relatively new or has insufficient financial standing to
ensure performance, consider requiring written guarantee of performance executed by:
1. Key officers or shareholders of vendor or applicable third party.
2. The patent, subsidiary or affiliate companies of the vendor or applicable third party.
3. Another party interested in the overall transaction (e.g., a guarantee by the equipment
manufacturer of the performance of the software supplier).
4. A bonding company or escrow agent.
b. Where absolutely required to obtain financing or other commitments, consider permitting the
user's parent, subsidiary or affiliate companies to guarantee all or certain of the user's obligations
under the applicable agreement(s).
· Audit:
a. Specify vendor's obligation to permit user's internal and/or external accountants and/or auditors
to audit vendor and relevant third parties or vendor must provide certified audit by vendors'
auditors.
b. Permit user verification of user copy of all programs.
c. Require permanent record of all program changes, with prompt written notice to user.
d. Cross-reference to "Software Escrow Provision."
· Patent Indemnity:
a. Include strict patent, software and proprietary rights indemnity provision for all hardware and
software provided to user (provide for pass-through to user from each manufacturer, software
supplier or other third party).
b. Review corresponding patent indemnity provisions of any applicable vendor/third party
agreements; ensure that user/vendor agreement provides appropriate "out" and/or remedies for
user in event vendor cannot perform due to patent indemnity problems caused by a third party.
· Maintenance:
Note: The following items may apply to maintenance of hardware by the vendor, or by the
manufacturer, lessor or another third party. Certain of the items may also apply to "maintenance" of
software supplied and/or maintained by the vendor or by a software house or other third party. In
each case, the provision must be tailored to reflect the obligation and the party involved. A separate
user/third party may be required.
a. Specify preventive, remedial and "update" maintenance to be provided, including type of service,
prices and other terms.
b. Require vendor or manufacturer or other third party to warrant that maintenance will be available
to user and/or vendor (at standard rates and terms or better) during the term of the applicable
services agreement, including any relevant lease or license term. (Mesh maintenance availability


warranty with any maintenance requirements imposed in other agreements, e.g., third party
leases.)
c. Determine and specify shifts or other periods during which various categories of maintenance will
be performed; ensure that coverage will be available at specified prices during other periods;
consider limiting preventive and "update" maintenance to non-prime-time shifts.
d. Determine whether parts and supplies must be obtained from manufacturer or other specified
source and, if so, whether adequate availability is assured (by written agreement); state any
applicable supply specifications.
e. Consider use of maintenance and/or rental or lease payment credit or other special remedy in the
event hardware or software does not meet applicable standards for continuing performance. In
this regard, consider the following:
1. Allowance must be consistent with protection of stream of lease payments to assignee
financial institution.
2. Consider payment of credit by lessor or manufacturer (including credit or payment under
user/manufacturer maintenance agreement).
3. Consider mandatory vendor or manufacturer replacement of hardware or software during
first year if necessary.
4. Consider extending lease term at no cost to user for period equal to aggregate failure period.
5. State methods of determining failure, calculating allowance and notifying applicable parties.
f. Ensure that any exclusions from maintenance coverage are reasonable and acceptable to user
(particularly review so-called "expendable" items).
g. Ensure that maintenance will be provided at no charge to user during all acceptance testing.
h. Consider inclusion of a vendor or manufacturer "refurbishment warranty" (i.e., no refurbishment
at user expense for at least five years), particularly if used hardware is involved.
i. Strictly limit user's liability for possible additional or extra maintenance charges (e.g., user will not
pay for remedial maintenance required within a 48-hour period due to a
recurrence of the same malfunction; user will not pay for remedial maintenance required when
scheduled preventive maintenance preceding the malfunction was not performed).
j. Relate all applicable warranty periods to term and price of corresponding maintenance
agreements.
k. Mesh all applicable maintenance agreement obligations (i.e., vendor, hardware manufacturer,
software supplier).
l. Negotiate all applicable maintenance agreements before signing any hardware or services
agreement (condition effectiveness of each agreement on execution of all relevant agreements).
m. Consider requiring services vendor to have all relevant equipment (used by vendor) maintained
by manufacturer or other acceptable third party at all times during services agreement term;
consider requiring vendor to supply user with copies of applicable maintenance agreements.
n. Ensure that all maintenance agreements include appropriate flexibility in event of user
assignment, sublease or other transfer pursuant to services, software and/or hardware
agreements.
· Assignment, Sublease and Other Transfer:
a. Maximize user's assignment, sublease and transfer rights to ensure flexibility and to meet
unforeseen circumstances during term(s) of all applicable agreements (including hardware,
software, maintenance and other services); provide special assignment, sublease and transfer
rights among user's parent, subsidiary and affiliate companies.


b. Limit right of vendor and any third party supplier to assign or transfer applicable agreements (or
delegate duties) in whole or in part and require vendor or other such third party to guarantee
performance under any permissible assignment; however, permit broad assignment rights where
necessary to obtain senior lease financing.
c. State type of notice and degree of permission, if any, required for assignment, sublease or other
transfer; consider use of "such permission not to be unreasonably withheld or delayed" language.
d. Indicate whether assignor, sublessor or transferor remains responsible for performance after
assignment, sublease or other transfer.
e. Specify whether warranties continue after assignment, sublease or other transfer and, if so, to
whom such warranties then run.
f. Specify that user's right to assign, sublease, sell or otherwise transfer any hardware or software
includes the right to assign, sublease, sublicense or transfer all related software, maintenance,
services, manuals and documentation, and copyrights at prices and upon terms and conditions no
more onerous than those then binding the user and the vendor or applicable third party.
g. Consider impact of "Sale of Time" or "Processing" by user on all assignment, sublease and
transfer provisions.
h. Cross-reference to "Maintenance," "Right to Move" and "Right to Use" provisions.
· Right to Move:
a. Indicate whether user has the right to move the hardware, software, manuals, and other items;
specify all limitations and conditions on such right (imposed directly or indirectly by the vendor,
manufacturer, lessor, assignee financial institution or other entity) and ensure that all necessary
conditions can be met, if necessary.
b. Indicate whether software, programs, manuals and other materials can be used at more than
one site or at alternative sites.
c. Provide for assistance in any move by the vendor, manufacturer and/or lessor, as may be
required.
d. Specify whether maintenance will be available at new or alternative site; review possible
application of any refurbishment or other extra cost provisions in applicable hardware or software
maintenance agreement.
e. Restrict right of vendor or any key services supplier to move its site(s) or data input facilities
without prior written consent of user.
f. Cross-reference to "Assignment," "Maintenance" and "Right to Use" provisions.
· Right to Use:
a. State any limitations on who has the right to operate and/or use the equipment, software,
programs, manuals and other materials; provide for adequate flexibility among user's parent,
subsidiary and affiliate companies; coordinate with assignment and right to move provisions.
b. Review restrictions on use that may be directly or indirectly imposed by lessor/manufacturer
purchase agreement and/or any applicable software license agreements or policies.
c. Cross-reference to "Assignment," "Maintenance" and "Right to Move" provisions.
· Indemnification:
a. Provide for basic user indemnification of vendor (and, if relevant, certain third parties, including
any assignee financial institution providing senior financing for third party lease); include
exception for loss caused by indemnified party and other appropriate exclusions; strictly limit


time period and types of events; provide user with reasonable right to contest and to control
litigation.
b. Provide for reasonable indemnification of user by vendor and certain third parties, limiting types
of events and time periods involved.
c. Review vendor/third party indemnification provisions included in any relevant vendor agreement
with a third party manufacturer, software house or other supplier.
d. Review all user indemnification obligations in light of user's existing insurance coverage; mesh
indemnification obligations of each party with relevant insurance and risk of loss provisions.
e. Cross-reference to "Default," "Force Majeure" and "Insurance Risk of Loss."
· Covenant of Quiet Enjoyment:
a. Provide covenant of "quiet enjoyment" running from vendor, lessor or licensor to user throughout
term of any applicable lease or license (with usual requirement that user must comply with lease
or license terms and make all required payments).
b. Ensure that the covenant of quiet enjoyment binds any assignee of the lessor or licensor
including any assignee financial institution, and any other secured party of the lessor or licensor,
(such as the manufacturer before the purchase price is paid); provide for reasonable attornment
by user to such assignee or secured party.
· Financial Statements and Disclosure:
a. If required for financing or credit status, provide for delivery of user financial reports and other
information to lessor and/or assignee financial institution during lease term.
b. If desired by user, provide for delivery of vendor, lessor and/or manufacturer financial reports
and other information to user and/or assignee financial institution during various periods,
including negotiations, acceptance testing, and term of lease(s) or license(s).
c. Avoid disclosure of confidential insider information; review user disclosure requirements with
user's securities law counsel.
· Applicability of Uniform Commercial Code (UCC): (or similar agency for protection in EU country)
a. Specify that UCC is applicable to all hardware, software and services items supplied by vendor or
by any third party.
b. Consider imposing similar UCC provision on any relevant vendor agreement with a third party.
· Third Party Beneficiary Provision:
a. Specify that user and/or its parent, subsidiary and affiliate companies will be third party
beneficiaries under each relevant vendor agreement with a manufacturer, software supplier or
other third party.
b. Specify that user's parent, subsidiary and affiliate companies will be third party beneficiaries
under the user/vendor agreement.
c. Consider utilizing separate agreements directly with key third parties in order to ensure adequate
protection for user or its parent, subsidiary or affiliate companies.
d. Review all third party beneficiary issues carefully in light of applicable state law, especially legal
concepts of "privity."


DEFINITIONS:
Attribute – a quality or
characteristic.
Measure or Measurement – the
quantification of an attribute.
Metric – a combination of
three measures.
Quantification – the
determination of quantity.
· Notices:
Compliance with ANSI or Other Standards Non-Waiver in Event of Non-
Enforcement or Delayed Enforcement.
Partial Invalidity of Agreement.
Governing Law.
Execution of Amendments.
· Entire Agreement:
a. Integrate all representations and agreements into the written agreement, with incorporation by
reference of specified manufacturer and lessor representations, proposals and marketing
materials.
b. Consider "merger" of specified provisions at closing (strictly limit or preclude where merged
provision would be beneficial to user after closing).
c. Provide for survival of key provisions (in all applicable contracts, including vendor/third party
agreements) beyond closing of agreement and/or termination of applicable lease or license term.
· Signature Blocks:
a. Indicate full legal name of each corporate party.
b. Include name and title of each officer executing the agreement on behalf of each corporate
party.
c. Determine any special execution requirements (e.g., corporate resolutions) that may be advisable
or that may be imposed by any party (e.g., an assignee financial institution under a third party
lease).
One thing that MUST be discussed in detail would be what the industry refers to as “path
back.” For example, either as a result of poor performance or a change in strategy, the
customer needs to regain control of the services, records, equipment, etc. In advance, the
transition plan needs to be spelled out. For example, if customer takes back in house –
transfer of assets acquired for customer’s behalf; training; documentation; processes; etc.
including transition timelines, roles and performance metrics for the transition out. If the
customer is transferring to another provider, the transition, hand-off, non-interruption of
service transition, conduct and timeframes should be spelled out in advance – a prenuptial, if
you will.
Determining the Measures
1. Use a metric of at least three measures. Select the
measures to be used
according to the buyer’s business objective (the desired
result). The precision of the
measurement depends on the business objective.
2. Next, determine the most important attributes of the
process to measure,
according to the business objective. If, for example, the
objective is to perform the
process faster and better, it would be best to measure such
attributes as speed, cost and


quality of result. Use statistics in order to understand the behavior of occurrences of an
attribute.
3. Finally, determine the precision of the measures to be used by judging the
context of how it is to be used.
Service Level Specification Styles
There are three styles of service level specification. The appropriate style is determined
by the objective (result) the buyer hopes to achieve by outsourcing. Problems can occur
when the style and objective do not match.
1. Utility
This style of service level specification is similar to what we expect from an electric
company or a telephone company. If the service is on, all is well. If the service is off, we
want a credit applied to our invoice for the amount of downtime. Basically, there are two
levels of service: acceptable and unacceptable. A penalty (a credit to the buyer’s account,
for example) is associated with the unacceptable level.
Examples of outsourced business processes that use the utility style for service level
specifications are network, desktop, help desk, and data center.
The Role of Value Creation
The next two of the three styles are tied to creation and capture of additional value that
can be achieved by outsourcing. The objectives in this type of outsourcing are to
contribute value beyond reduced costs associated with a particular function or
transaction. Added-value outsourcing will have a strategic impact on the enterprise. As an
example, the objective for a “utility-style” service level specification in a hospital’s
outsourced food service process might be to centralize the operation and, thus, reduce
operational costs. But if the objective for outsourcing the food service process is to
improve patient nutrition and satisfaction, the impact of the outsourcing will create a far
greater value in addition to the cost reduction.
Where the objectives in outsourcing are to add value with a strategic impact on the
organization, the service level specification style to use will be either the “process
improvement” or the “value-added” style.
2. Process Improvement Style
This style of service level specification is used when the buyer’s business objective is
process improvement after the service provider takes responsibility for the process. This
type of service level specification is often used in business process outsourcing (BPO).


The service level specifications for a process improvement objective will measure
success of changes introduced to the process, rather than the end result.
It is not uncommon for organizations to write utility service level specifications when
what they really want and expect from the service provider is process improvement. In
such an instance, the wrong things will be measured.
3. Value Added Style
This style of service level specification must describe the actual value – the quality of the
desired result. Using an HR recruiting example, the service level should measure the right
fit of talent in a position or duration of employment – not just how many people are
recruited. A well-constructed value-added service level specification will measure the
effectiveness of results in creating value for the buyer’s organization.
This style is also used where the pricing structure of the agreement is contingency-based
on a specified achievement of the provider or where the pricing structure involves the buyer and service
provider both sharing the risk and reward. Examples of such incentive
structures include gainsharing agreements that apportion to the provider a percentage of
savings achieved or equity stakes, where the buyer and/or supplier purchase stock in each
other’s companies.
Steps to Determine a Service Level Specification
No process is too complex to measure if the buyer simply follows the steps outlined
below:
1. SELECT THE SERVICE TO BE MEASURED. This will be one of the following:
(a) whether the objective is achieved,
(b) the process itself, or
(c) the product.
Since it increases the price to collect measurement/performance data, the selected service
should be the most important one to analyze and measure.
It is this step that determines which style of service level specification to use (utility,
process improvement or value added).
2. CHOOSE THE ATTRIBUTES TO MEASURE.
These attributes are the things the buyer determines to be the most critical components of
service and the relationship. Together, the attributes paint a clear picture of what
“success” looks like.
3. SELECT THE PRECISION OF THE MEASUREMENT TO BE USED.
Since it increases the price to collect measurement/performance data, being too precise is
not the most effective plan.
4. DETERMINE THE CURRENT IN-HOUSE SERVICE LEVEL AND THE COST FOR THAT
SERVICE LEVEL. NEXT, COMPARE THE FIGURES TO INDUSTRY STANDARDS AND
BENCHMARKING, AS WELL AS BEST-OF-BREED SERVICE LEVEL SPECIFICATIONS.
THEN DETERMINE HOW MUCH IMPROVEMENT IS DESIRED.
The process of determining current in-house costs is full of Landmines, as most organizations
are not aware of all the hidden cost factors affecting the total cost. If this procedure is not
performed adequately, the parameters the buyer uses to determine its desired level of
spending will not be accurate and may give rise to dissatisfaction later in the relationship.


This is one area where it is vital that buyers use the services of an outsourcing consulting
firm with broad experience in cost assessments for a wide range of processes and
industries.
Since improvements affect the price, the buyer must determine how much it is willing to
pay, for that will affect the level of desired improvement.
If the business objective is one that lends itself to risk/reward sharing and contingency-based
fees, Step Four also will include determining the premium to award to the service
provider if it accomplishes the contingency, value-added performance.
Components of Service Level Specifications
Each service level specification is composed of the following items:
• A definition of the metric and what is being measured;
• A description of the reason for measuring the metric;
• A description of the method and process for capturing the data; and
• A statement of the timing interval for measurement.
Metric -- the value that defines the data points that will be measured and reported.
Value -- a description of the level of performance to measure against. Typical values
will be:
• Service Level – an acceptable level of service; however, a service provider
is usually expected to perform above this level.
• Impact Level – where performance is unacceptable and adversely impacts
the buyer’s business. (Performance below Service Level may trigger
automatic penalties; consistent performance at this level may trigger a
lawsuit.)
Examples of How to Determine Service Level Specifications
1. Outsourced Process: Call Center
Style: Process Improvement
Step 1: Determine the service to be measured:
• first call resolution rate;
• cost per call;
• customer satisfaction; or
• call abandonment.
Sample Metric for First Call Resolution Rate:
Values Metrics
Service Level 90% answered with 50 seconds
Impact Level 90% answered within 55 seconds
2. Outsourced Process: Maintenance of Point-of-Sale Equipment
Style: Process Improvement
Desired result (and service to be measured):
. Ensure minimal disruption of buyer’s revenue
Sample Metric for Maintenance Responsiveness:


Values Metrics
Service Level 98% of all POS equipment failures per period
are resolved within 24 hours.
Impact Level 97% of all POS equipment failures per period
are resolved within 24 hours.
Naturally, there are nuances, and industry standards to be adhered to tha are not adequately reflected in
this generic document. It is important to ensure that the buyer/customer/user takes the lead in
establishing their expectations, resources and process for ensuring a successful outsourcing initiative.
Whether the client is seeking to spin-out a service providing business unit or contracts a third party to
provide the services, the steps are the same. If we don’t stress a metric, a timeframe and a well defined
goal – how will anyone know when it’s working and when it is not?

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