Manage the mOVE
Some acquisitions entail a move to a new data center, which everyone agrees is disruptive. For instance, when two major automated teller machine service providers -- Concord EFS and Star Systems -- merged and consolidated data centers in 2001, "it threw a wrench into our development plans," says John Dick, CIO at Regions Financial.
The bank wasn't involved with the heavy lifting, but it did have to do extensive end-user testing, which meant pushing other strategic projects to the back burner. The conversion also required negotiating over who paid for what and whether the bank would be compensated for its extra efforts.
"It was like any big conversion, except we weren't at the helm of it," Dick says. "We've performed a lot of mergers, so we're used to managing ourselves, but there's a level of confidence you have in yourself that you don't have in a vendor."
Scheuble suggests trying to get the vendor to time the transition to your benefit. For instance, when Spyder moved from its first ASP to Fortrust, the new provider timed the data center move to coincide with an upgrade that Spyder needed anyway, and then it ran the systems in parallel until Spyder was comfortable with the new setup.
"I was dealing with the same people, and even though the hardware had to be moved to their facility, it was well organized, so there were no problems," Smith says.
Richards also endured an interstate data center move, but the new provider maintained the existing facility for a year and a half.
The most important thing for customers of acquired outsourcers to keep in mind, Scheuble says, is that they have a lot of room to negotiate. "They have more leverage than they think," he says. "If a company just went out and paid a premium for another company, it needs to retain those customers."
Preempting problems
When should you start worrying about your outsourcer being acquired? When you draw up the initial contract. Here are some suggestions for heading off acquisition woes at deal-signing time.
- Advance Notice of a Sale
Stipulate that the customer must get advance notice of the outsourcer's acquisition or merger plans, says Neil Hirshman, a partner at Kirkland & Ellis in Chicago. This gives your company time to perform due diligence on the buyer or to review other options, such as insourcing, choosing another provider or negotiating for contract modifications.
- Exit Provisions
This is the best time to think about how you're going to end the deal, Hirshman says. "The pain one feels transitioning into these arrangements is the same as one feels getting out of them," he says. Establish how you will extricate all the things you need, including tangible assets, software licensing agreements, employee knowledge and data -- especially if you need it in a particular format. Knowledge transfer is a huge challenge, Hirshman says, because a lot of institutional knowledge is tied up with the outsourcer's employees. "You have to think about what kind of access you need to the provider's employees, for how long, which employees and what kind of documentation has to be put together," he says.
Many contracts have nonsolicitation provisions that prohibit companies from hiring the outsourcer's employees for the length of the deal, he adds, so make sure there are exceptions to those provisions. "There might be certain employees you absolutely need to bring in-house or transfer to the new provider," Hirshman says.
- Intellectual Property
Intellectual property rights can become a big issue, Hirshman says, because some outsourcers use proprietary processes. For the customer to continue operating the way it did before, it might be necessary to transfer a license from the old provider to the new one. "You'd want to negotiate access and license rights in advance, or you might have to transform your processes all over again," he says.
- Termination Rights
Include change-of-control rights, which enable the customer to terminate the contract if ownership changes hands. The terms can vary from absolute termination rights to conditional rights, such as those that would come into play if the acquirer were a competitor of yours. Some outsourcers may require a fee upon termination. In that case, ask that the fee be reduced if insufficient notice is given.