Each outsourcing transaction has its own unique characteristics and business drivers and, therefore, will include its own deal-specific terms. A key initial consideration to think about when beginning an outsourcing initiative is how the personnel of both parties will be managed. This includes how the transaction will impact the customer’s existing employees and contractors, as well as oversight and management of the service provider’s personnel. These issues will likely have operational and financial impact, and will require input and coordination with internal human resources (HR) teams.
Set forth below is a high-level overview of some key concepts and considerations to keep in mind when strategizing on how to address personnel-related issues.
Initial HR Considerations
Rebadging and Retention of Personnel
Will there be rebadging? “Rebadging” generally refers to the process of transferring or transitioning personnel from the customer to the service provider, and then engaging those same personnel to provide the services to the customer as employees of the service provider. Rebadging is especially critical when there is a desire to maintain a continuity of knowledge and skills with respect to the outsourced services.
In addition, when evaluating any potential rebadging scenarios, customers should consult their internal HR teams to consider their compliance obligations, including in connection with internal policies and applicable laws. Ultimately, any rebadging scenario will be unique to the customer and the specific transaction. There will likely be numerous complex and interrelated issues to evaluate, such as retention requirements and incentives and other HR-related terms. As such, customers should get ahead of these issues and questions to ensure the impact is captured in the business case.
Onshore Requirements and Decoupling
Are the services moving to an offshore location? The process of “decoupling” generally involves moving the performance of services from an “onshore” location to an “offshore” or “nearshore” location (i.e., to a different country). Most deals include some form of decoupling as a key driver to achieve the business case. Depending on the customer’s business and the impacted services, the decoupling process may require specific terms addressing issues such as (1) the roles and activities to be decoupled, (2) minimum onshore requirements (e.g., to satisfy the customer’s contractual commitments to its own clients, or to comply with applicable laws or regulations), (3) knowledge transfer and training requirements, (4) timing requirements and associated checkpoints or tollgates, and (5) any associated acceptance criteria in connection with the completion of the decoupling process.
Right to Hire or Rehire
What are the customer’s rights to hire or rehire? At the end and/or during the term of services, a customer may have the right to hire (or rehire), either directly or through a third party, certain personnel of the service provider, including any previously rebadged personnel and other personnel providing the services. Similar to rebadging as part of the initial transition to a service provider, this type of contractual right to hire is important to enable customers to maintain continuity of services and operations on any exit from the agreement.
Additional Requirements for Service Provider Personnel
Key Personnel
Who are the key personnel, and what does that signify? Key personnel terms are common in outsourcing transactions to ensure important roles and skills are filled with qualified people and that those people are retained for a minimum period on the customer account. Designated key personnel may include engagement or relationship sponsors and managers and key individuals managing and providing the day-to-day services.
Examples of key personnel positions include executive sponsors, account managers, delivery team leaders, transition leads, transformation directors, highly skilled developers or testers, and senior engineers or architects. The business and operational teams should take a close look at key personnel requirements to ensure that the right roles and skills are covered for the impacted services.
Turnover Rates
What is an acceptable turnover rate for service provider personnel? Turnover rate requirements serve the purpose of tracking the turnover of personnel providing the services. Some level of turnover is to be expected. However, high turnover rates may lead to an adverse impact on the services. Therefore, contractual provisions that track and report turnover rates, with threshold limits and associated remediation plans, will help give both sides clarity on what is reasonable and acceptable, while providing a mechanism in the contract to help mitigate and resolve unacceptable levels of turnover.
How We Can Help
If you have any questions or would like to discuss the impact of personnel requirements and the processes that impact an overall outsourcing transaction, reach out to the authors of this blog or another member of the Morgan Lewis technology, outsourcing, and commercial contracts team.