The importance of contract disengagement

Some organisations have a need to establish contracts that are almost guaranteed to be difficult and time-consuming to arrange and implement. This includes contracts that conform to the design-build-operate-maintain model. One poster child for such contracts is the outsourcing of business functions, like IT or Payroll.

The transition of responsibility from the organisation to a third-party service provider requires detailed planning and strong coordination. It allows the identification of everything that needs to be done and ensures that it gets done with minimum disruption to the organisation.

Inevitably such a contract will come to an end, either through non-renewal at end-of-term or termination. At the organisation’s choice, that ending might result in complete cessation of the services, or their transition back to the organisation, to another service provider or to both in some proportion.

Irrespective of that choice, right from the outset the contract should provide for the planning and execution of an agreed approach to disengagement, the process of undoing whatever has been set up to make the contract work."

With respect to an outsourcing contract, this article covers:

1. The need for contract disengagement.
2. The objectives of contract disengagement.
3. Contract disengagement fundamentals.
4. The disengagement period.
5. Common contract disengagement requirements.
   
   

The need for contract disengagement

In most cases, ending a contract is generally taken to mean its use is being discontinued, whatever the reason. This doesn’t necessarily mean that all activities pertaining to the contract come to a screeching halt at midnight on the agreed last day of the contract’s operational life, even though that’s a distinct possibility in some cases.

A wide range of activities might be needed to help ensure the successful disengagement of the parties from a complex contract, to be performed in a specific sequence over a certain time period with a great deal of coordination and close management.

Figuring out how to end an outsourcing contract only after the decision has been made to end it can prove extremely costly, a lesson learned the hard way by many organisations.'

If the contract doesn’t cover disengagement, or lacks specifics about the nature or duration of service provider assistance required, an unwilling or unhappy service provider may refuse, or charge hefty fees, to help with disengagement activities.

The objectives of contract disengagement

Contract disengagement’s key objectives are to enable:

• Termination of the outsourced services when there is no need for transition back to the organisation or to other service providers.
• Assessment of options for substitution of the outsourced services, and the planning for and conduct of tender, renegotiation or other selection processes.
• Planning for the transition of the outsourced services from the service provider back to the organisation or to other service providers.
• Transition of the outsourced services from the service provider by the organisation or its nominees.
• Performance of the outsourced services by the organisation or its nominees in place of the service provider following handover of the outsourced services.
• Elimination or minimisation of any disruption to or deterioration of the outsourced services, or the service provider’s failure to achieve agreed service levels, during and as a result of the transition and handover of the outsourced services to the organisation or its nominees.

Contract disengagement fundamentals

Consideration about disengagement should take place during contract negotiations between the parties, and address a number of elements to be embodied in the contract, including:

• Disengagement duration. A realistic ballpark duration must be specified, perhaps based on the expected or worst-case contract implementation time, but extendable by agreement to accommodate unexpected delays in tendering or transitioning.
• Termination notice periods. No immediate termination rights for either party should be accepted, nor any termination notice periods less than the disengagement duration.
• Precise specification of assistance required. Clarity about the assistance the organisation expects from the service provider is necessary for scoping purposes but should be modifiable to cater for changing circumstances.
• Costs.  Disengagement fees should be expected to apply unless the organisation terminates the contract for the service provider’s breach.
• Disengagement plan. A detailed plan of the disengagement approach and its associated activities must be agreed and attached to the contract prior to contract signature. The plan should be regularly reviewed and adapted as necessary to deal with any changes to requirements, operating conditions, timelines and so on that may occur during its lifetime. When disengagement gets triggered, an immediate review of the plan is needed to finalise all its details before kick-off.
• Disengagement. Once activated, the activities detailed in the disengagement plan must be conducted and managed professionally, respectfully and cooperatively. Visibility of progress should be high, and a clear escalation path must exist to deal with issues as quickly and effectively as practicable.

The disengagement period

A notice of expiry or termination typically triggers the commencement of the agreed disengagement period during which the contracted services will continue to be delivered as expected without disruption while the contract is ended in a structured manner.

Consideration of all the activities likely to be needed to achieve disengagement is necessary to establish both an expected and a maximum duration for the effort.'

For a transition-based disengagement, where the outsourced services will be moved from the service provider, the activities needed will often more or less mirror those undertaken in the transition from the organisation in the first place.

The expected duration of that original transition can then be used as a basis for the actual disengagement effort. However, extra time should be allowed for the organisation to go to market for a replacement service provider if desired.

For a shutdown-based disengagement, where the organisation no longer needs the transitioned activities to continue, the disengagement period will almost certainly be shorter than that needed for re-transition.

Though conceptually simple, a shutdown will inevitably be more involved than say simply disabling access to computer systems and switching off equipment. Regardless, there is really no need to estimate the disengagement period specifically for a shutdown, since the period estimated for a re-transition should be more than adequate.

Common contract disengagement requirements

A common set of contractual rights and obligations targeted specifically at disengagement can include the following:

• Assets. Whatever the organisation has loaned or transferred to the service provider must be registered and eventually returned at no cost, and where relevant, in good working order, fair wear-and-tear excepted.
• Audit rights. The organisation needs the right to audit the service provider’s compliance with the disengagement plan.
• Completion. A precise specification is required to define when disengagement will be considered as finished, allowing the contract to be formally terminated.
• Compliance with service levels. Activation of the disengagement plan should not result in any reduction in service continuity or quality during the disengagement period. Existing consequences for service level failures might need to be boosted during disengagement to encourage service provider compliance during this critical time.
• Continued delivery of services. The service provider must be obliged to continue to provide the contracted services for the duration of the disengagement period to at least the agreed service levels, including during business continuity or disaster recovery processes.
• Cooperation. When a transition-based disengagement is required, whether to the organisation or a competitor of the service provider, high levels of service provider cooperation with respect to provision of access to expertise about the services until the contract ends is a must.
• Costs. Where not incorporated into the pricing for the outsourced services, costs for disengagement services must be clearly specified and not duplicate any other costs normally applied for day-to-day operations.
• Data.To the maximum extent possible, the organisation’s data must be returned in an agreed format on agreed media as at an agreed point in time within an agreed period and validated by the organisation before being deleted or erased from its systems by the service provider.
• Disengagement plan finalisation. Within an agreed period of the issuing by either party of a notice to expire or terminate the contract, the service provider must prepare a final, detailed disengagement plan for review and agreement with the organisation, including a full breakdown of expected costs.
• Issue escalation. A strong issue escalation approach is required, to ensure prompt attention to issues arising during disengagement that affect ongoing operations or disengagement timelines.
• Knowledge transfer. Whenever requested by the organisation, the service provider must provide up-to-date information and documentation, excepting its proprietary and confidential information, needed to support tenders for the outsourced services, assessment of the service provider’s business continuity plans, or other legitimate purposes of the organisation. Intellectual property rights and licensing also need to be addressed.
• Payment. A schedule for payment of disengagement costs will be needed to cater for the uncertainty surrounding the duration of disengagement activities. Payment might need to be conditional on the service provider successfully meeting milestones.
• Project management. The service provider must ensure that appropriately qualified and experienced staff are used in the planning, performance and management of the disengagement activities, and are sufficiently available to not compromise achievement of milestones.
• Subcontractors. The service provider must liaise with and manage any of its subcontractors who are involved in the delivery of services to the organisation, to ensure their compliance with any disengagement obligations .
• Third-party contracts. Any such contracts arranged by the service provider solely for providing services to the organisation should permit novation, and, if requested and when possible, be novated to the organisation or a replacement third-party service provider at no cost. The organisation should not be liable for any early termination fees on such contracts when novation is not possible or required.

Wrap Up

All contracts eventually end, either when time is up or the job is done, or when the contract fails for some reason. Many endings are quiet, some with a bit of celebratory fanfare, others under a bit of a cloud, a few in disgrace.

Contracts that are complicated to set up and take some time to become operational can be equally as difficult and time-consuming to dismantle and shut down.'

History has proven that the best way to achieve a successful end to such contracts is to do all the essential end-planning up-front and get the details recorded in the contract prior to signature. Adapt the plan as necessary during the contract’s operational life, finalise it when it needs to be activated.

Leaving such planning to the last minute, when options are limited and/or expensive and there’s little wiggle room available, runs the risk of achieving sub-optimal outcomes.

Going out forwards is infinitely preferable to going out backwards. It’s neither necessary nor advisable to have to learn that lesson first-hand.

If you would like more information about contract disengagement, or how Gatekeeper can assist with that activity, then contact us today.