Is your HRO marriage in trouble? Here’s a look at the reasons for a parting of the ways and the legal implications a divorce will have.
Successful contracting requires a solid understanding of the triggers governing the contract life cycle. As enterprise customers become more savvy in outsourcing processes, they can appreciate the flexibility that comes from a well-mapped vendor selection process, a complete and suitable contract, and a solid framework for relationship governance.
Nowhere is this balance more palpable than in the governance and termination provisions. The provisions set forth rights to terminate, while the governance framework deals with opportunities for repairing a business relationship under stress. Let’s consider the interplay among scope of obligations, termination rights, and governance. A balanced interplay provides a solid framework for mutual benefit with minimal risk of derailment.
No breach can exist without a failure to perform an agreed commitment to perform. The basic HRO agreement defines the scope of work in an exhibit that outlines the services delivered. In HRO, these may cover the spectrum from payroll processing to recruitment processing, training, performance assessment testing, relocation services, and many others.
Each process has measurable key performance indicators (KPIs) for driving success. Performance metrics are embodied in service level agreements (SLAs) and
typically address concerns for speed, accuracy, degree of completion, efficiency, cost containment, profit enhancement, and more.
But performance is much more than delivery of individual services under a “service tower.” It includes successful process mapping and redesign, knowledge development, completion of transition, contract administration, communications, reports, audits, meetings, compliance with changing laws, maintenance of insurance, and other processes. This requires the ability to deliver the services in a manner that does not threaten the customer’s business through untoward conflicts, churning of key personnel, or loss of competitive drive.
• Impressions. Given the range of what is expected, defining a breach becomes an exercise in precision and imprecision. Imprecision arises from concepts of “material” or “repeated” failures. These can be valuable talking points for improving performance that may be technically sufficient but still leaves the customer unhappy. Imprecision may impede termination rights.
• Breaches. Clear breaches occur for nonperformance of obligations. In the services industries, termination rights do not generally arise unless the breach goes to the heart of the services (a “material” breach). Outsourcing contracts do not permit termination unless the material breach is ongoing after notice and an opportunity to cure.
A breach cannot be cured if it leaves the customer with no opportunity to recover from continuing damage, even if the provider is working on restoring the service to “normal” service levels. Thus, violation of law might occur if the provider becomes ineligible to deliver the services to the particular customer. Such situations are remote. Breach of confidentiality covenants might fall in this class, depending on the contract wording.
It is far more likely the relationship will sputter when a service provider fails to deliver in a number of small ways. Where the failures relate to critical services, service level credits might be insufficient as a remedy. Thus, in a “death by a thousand cuts” termination clause, the customer may terminate for numerous or repeated breaches that impair the basic quality of service. In this situation, the definition of breach needs to relate to the essence of the contract.
• Confidentiality and Privacy. Virtually any HRO contract involves some disclosure of personally identifiable information, and perhaps personal health data, as well. Breach of confidentiality and privacy provisions is potentially one of the most volatile risks for each party. Termination may be justified without chance for a cure.
• No-fault Divorce. Outsourcing contracts may terminate for no fault. Depending on the duration and impact, events of force majeure may justify re-sourcing or insourcing for an agreed period, or permanently. Similarly, a change in the ownership or control of the service provider or the enterprise customer might justify termination. Likewise, depending on financial and operational impact, changes in law might make the deal uneconomic and require either renegotiation or adjustment. Changes in exchange rates result in either renegotiation or termination, or both. The parties might wish to address changes in basic assumptions such as business assets, liabilities, financial condition, operations, or business prospects of a party.