IT Outsourcing: Legal Mistakes That Can Cost You Big

Attorneys sweat the small stuff, but no contract can address all possible contingencies in outsourcing

Good legal counsel can be worth every penny when putting together an outsourcing deal. But those legal fees can add up quickly if you're not careful. Worse yet, some common mistakes customers make when working with an outsourcing attorney can prove costly not only during contracting and negotiations but over the life of the deal.

To prevent you from falling into those traps, experienced outsourcing attorneys shared the biggest blunders IT services customers make and ways to avoid them.

1. Hiring the wrong attorney.

Not all outsourcing attorneys offer the same services or expertise. Take Edward J. Hansen, a partner in the business and finance practices at Morgan Lewis and Brockius, as an example. He tends to take a lead strategy role in negotiations. He says his strengths are leveling the playing field for clients with less outsourcing experience and keeping the parties focused on the big picture. He admits that he might not be a good fit for a deal being done by an experienced internal team with years of outsourcing experience, or for a contract requiring specific technical advice, such as foreign tax law.

"There is a perception in the marketplace that we all have fungible skill sets, and that is just not true," Hansen says. "It can be a very costly mistake to pick an attorney whose skill set does not match the deal philosophy of the client, or who doesn't have the skills or desire to properly counsel the client."

2. Calling too late.

Sure, attorneys' billable rates can take a bite out of your bottom line, but waiting too long before calling in counsel can cost you even more. That means you may want to hire a lawyer even before you send out an RFP.

"Waiting may be a false economy," says George Kimball, a lawyer in the San Diego office of Baker & McKenzie. "Consult counsel before making fundamental decisions that may be difficult or impractical to reverse," advises Kimball. "A little time spent on terms, structure and probable issues before may save time, money and grief later."

And be candid with your attorney. "Lawyers have to keep secrets, so share the whole story with them--goals, reasons, tensions, organizational quirks, the works," Kimball says.

If you find the attorney is not adding value in an early stage, adds Hansen, you may have the wrong lawyer. Likewise, if any other external advisors you've hired don't want counsel in the room, you may want to shop around for another consultant.

3. Focusing on the wrong terms.

Not everything is worth the fight. For example, some clients get hung up on limitation of liability--that line in the sand that says how much financial risk the vendor is willing to assume. While there may be no limitation of liability for serious offenses, like breach of confidentiality, limitation of liability is usually anywhere from one to three times the value of the contract on an annualized basis, says Jennifer Wolfe, founder of Cincinnati-based law firm Wolfe LPA.

What's more, vendors rarely yield in this area. If they do, it comes at a cost. "Vendors will typically price into the deal the amount of risk they are willing to shoulder," says Wolfe.

Time arguing over liability or other intractable issues is better spent on performance indicators or practical remedies for problems that may arise over the course of the deal.

"It's much better to use the time to ensure that there are clear policies, procedures and remedies in place to address problems rather than arguing about dollar limits," says Wolfe. "Most vendors are willing to talk about how problems are solved, steps to solve those problems and credits for failing to do so."

4. Contract complexity.

"Thoroughness is a virtue," says Kimball. "Complexity is another matter." You pay attorneys to sweat the small stuff, but no contract can address all possible contingencies in outsourcing. "When things go wrong and surprises occur, as they are bound to, good processes may be more useful than detailed prescriptions," Kimball says. "Unwieldy documents that clients barely comprehend--or worse, misunderstand--are not helpful."

Seek clarity and brevity. Shorter documents not only take less time to negotiate, they're easier to manage. "The goal is to use the contract as a roadmap for problem-solving once you are working with the vendor," says Wolfe.

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