Strategic Use of Outsourcing Arrangements: Current Outsourcing Challenges Richard Austin (DWW)

1. Strategic Use of Outsourcing Arrangements: Current Outsourcing Challenges Richard Austin (DWW) Richard Corley (Goodmans) Peter Miscevich (Bell) The Eighteenth Annual Canadian IT Law Association Conference Montreal - October 20-21, 2014

2. Outsourcing: Not a New Concept “Specialization on the basis of one’s relative strengths (i.e. sustainable competitive advantage) leads to higher productivity and more value creation” Adam Smith, The Wealth of Nations

3. Quotations: From the Trenches • “After all, how hard can it really be?” • “My job is to get the signed contract. Your job is to deliver it.” • “It has to be signed today if we’re to get it into this quarter.” • “If I’d known the contract said that, I never would have agreed to do that change order for that price.” • “Who’s the idiot who agreed to that?” • “There’s no way I can deliver what you have committed us to in the time we have to do it/for the price you have negotiated.”

4. Broad Outsourcing Trends • 80% of major enterprises intend to increase their use of outsourcing “2013 State of Outsourcing” KPMG • 25% of outsourcing deals fail within two years and 50% fail over the initial term • Outsourcing transactions and relationships are becoming more complex and challenging

5. IT Outsourcing Trends for 2014 • Hybrid offshoring heats up • An increase in insourcing • Service integration comes home • The Cloud gets grounded • Contracts compel inter-provider cooperation • Big deals get smaller… Small deals get bigger • Governance gets harder Seven of the top ten IT outsourcing trends identified by Stephanie Overby of CIO.com, January 17, 2014

6. Implications for Outsourcing Strategy • Greater: • diversity and complexity in delivery options, models, venues and service providers • diversity in business goals and objectives • complexity in the governance and management of multiple outsourcings • focus on flexibility, adaptability and business agility

7. Topics for Discussion • Cyber-Security • Service Disaggregation • The Changing face of Contract Management • Business Process Outsourcing • Multi-sourcing • Transition In and Transition Out/Termination Services • Audit Rights • Use of the Cloud • Pricing Controls and Principles

8. Cybersecurity

9. Service Disaggregation Definition: the use of different service providers to deliver services previously provided by a single service provider under a multi-tower outsourcing agreement An Implication of Ubiquitous High-Speed Data Communication • Cloud, service as software (SAS) • Application service provider (ASP) • Infrastructure as service (IAS) • Virtualization of desktop / server / applications Consequences • Responsibility for interfaces is increasingly critical • Facilitates multi-sourcing

10. The Changing Face of Contract Management “Gee we didn't realize we had/could to do that in contract...” • Passive/reactive CM is becoming a thing of the past • Proactive CM is essential to meet/enforce obligations • The “business relationship” is not CM • Rigorous governance requirements demand better CM • poor CM eats into the economics of the deal “It is a contract after all so I guess we have to read it...” • “Playbooks” are critical for Day 2 business teams • Draft provisions like you had to manage the contract

11. Business Process Outsourcing

12. Multi-Sourcing (Multi-Vendor Contracts) Definition: can refer to: • Use of different vendors to perform adjacent services, each having the capacity to perform some or all of the services of the others; facilitate a competitive procurement and ongoing flexibility • Use of multiple vendors to provide the same types of service; facilitate competition on an ongoing basis (for large customers) Issues • Clarifying scope of responsibility • Governance challenges • Impacts of termination • Cost-benefit analysis • Integration – customer as integrator of last resort

13. Transition / Termination Services “Sure we’ll help you when you want to move to our competitor...” • Back in the day motherhood statements ruled • Customers held hostage and terrified of switching suppliers • Suppliers motivated to keep customers in the dark “After you write our RFP so we can replace you, we’d like 24 months of transition services...” • Customer expectations and demands are high • Suppliers wary of sharing “secret sauce” with competitors • Negotiated outcomes are complete and detailed

14. Audits and Certifications • The evolving Outsourcing industry: • Maturing transactions, customers and suppliers • Increasing emphasis on privacy and security • Well-publicized breakdowns of internal controls • Strengthening governance requirements • Increased emphasis on audits and certifications: • More extensive rights for customer audits/investigations • Increased regulatory requirements: • OSFI B-10 Guideline Outsourcing of Business Activities, Functions and Processes, s. 7.2.1 h) • OSFI Memorandum “New technology-based outsourcing arrangements”, February 29, 2012 • Third Party Audits: • CPA Canada, Auditing and Assurance Standards Board, Canadian Standard on Assurance Engagements, Reporting on Controls at a Service Organization (CSAE 3416)

15. Use of Cloud Computing Definition: the practice of using a network of remote servers hosted on the Internet to store, manage, and process data Range of Options • No charge, consumer / mass-market applications (e.g. Hotmail) • Enterprise scale, private cloud implementations Issues • Security and control of data • Disconnect between (low) cost and (high) risk • Properly define requirements (need for due diligence) • Security and access for discovery / litigation • Compliance with regulatory requirements

16. Pricing Controls and Principles “We’ll have the Benchmarking, Most Favoured Customer, Pricing Principles and Termination for Convenience without fee...” • Many tools for customer to ensure fair pricing • Does anyone other than the benchmarkers like benchmarking? • “Apples to apples” comparison critical for suppliers • Are any two complex agreements “substantially similar”? • What’s fair pricing for changes to services? • Capex recovery vs. termination for convenience

17. Strategic Use of Outsourcing Arrangements:Current Outsourcing Challenges Richard Austin (DWW) Richard Corley (Goodmans) Peter Miscevich (Bell) The Eighteenth Annual Canadian IT Law Association Conference Montreal - October 20-21, 2014