AGA Legal Forum Key Legal Considerations for LDCs Considering Outsourcing Traditional Utility Functi

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AGA Legal ForumKey Legal Considerations for
LDCs Considering Outsourcing Traditional Utility
Functions
Barbara Melby July 2005

Morgan, Lewis Bockius LLP
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Overview

• Outsourcing Speak
• What Is Happening in the Energy Industry
• The Outsourcing Process
• Documentation
• Key Legal Considerations
• Success Drivers

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Outsourcing Speak

• ITO
• BPO
• HRO
• FAO
• Supply Chain
• Customer Care
• Multi-Tower Best of Breed
• Onshore Offshore Hybrid

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Recent Deals

• Nisource/IBM (June 2005)
• Duke Energy/Hewitt (May 2005)
• TXU/Cap Gemini (May 2004)
• Entergy/ADS (Nov 2004)
• Direct Energy/ADS (Nov 2004)
• Williams/IBM (June 2004)
• Southern Gas/Accenture (Aug 2003)

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The Outsourcing Process

• Targeting outsourcing as a corporate strategy
• Forming the Project Team
• Performing internal due diligence
• Outlining scope and requirements
• Establishing the process
• Preparing and evaluating the RFI/RFP
• Engaging in negotiations/Vendor due diligence
• Performing post-contract activities

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The Documentation

• Confidentiality Agreement
• RFI
• RFP
• Term Sheet
• Minimum Requirements
• MSA
• Schedules
• Big Three Scope, Service Levels and Fees
• Others Governance, Compliance, Transition Plan,
  Assets, HR Provisions, Policies, Key Personnel,
  Service Locations

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Key Legal Considerations

• Scope of Services
• Measuring Performance - SLAs
• Fees
• IP Issues
• Transition
• Employee Issues

• Compliance
• Confidentiality/Privacy
• Governance/Control
• Flexibility/Change
• Term and Termination
• Liability

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Defining Scope

• Detailed SOW
• Other Factors Used to Define Scope
• Services Currently Performed by
  In-Scope/Displaced Employees
• Services Not Described in SOW but Required for
  Proper Performance of the Services
• Changes to the Services that are not Material or
  Can Be Performed Using Existing Resources
• Services Necessary to Enable Continuous
  Improvement and Evolution of the Services without
  Increasing Price

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Measuring Performance

• Service Levels - Objective Measure
• Defining Objective Standards of Performance
• Service Level Credits
• Service Level Bonuses/Earnback Mechanisms
• Periodic Adjustments
• Reporting
• Customer Satisfaction - Subjective Measure
• Benchmarking - Industry Standards
• Comparing Services/Fees to Peers in the Industry

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Fees

• Fees for In-Scope Services
• Fees for New Services
• COLA
• Taxes
• Payment Schedule
• Audit

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IP Issues

• Rights to
• Customer Proprietary IP during Term and at
  Termination
• Customer Third Party IP during Term and at
  Termination
• Vendor Proprietary IP during Term and at
  Termination
• Vendor Third Party IP during Term and at
  Termination
• New Developments
• Procedures Manual/Other Work Product
• Rights to Customer Data

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Transition Into Relationship

• Employee Transfers
• Assets Transfers
• Assignment/Access Issues (Required Consents)
• Internal/External Communications
• Timing of Transition

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Employee Issues

• Many critical issues, both legal and practical
  (morale and productivity) - get expert advice.
• Identification of Employees to be transferred to
  Vendor. Timing. Compensation and benefit
  packages. Stay benefits for key employees.
• Allocate Responsibility for Costs and Claims.
• Allocate administrative and financial
  responsibility for obtaining and maintaining
  visas and other governmental approvals for Vendor
  personnel

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Compliance

• Allocating responsibility for compliance with
  laws
• Monitoring changes in laws
• Right to dictate how to comply
• Regulatory audits
• Right to adjust fees for new or changed
  regulatory compliance obligation
• Right to terminate for new or changed regulatory
  compliance obligation

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Confidentiality/Privacy

• High profile security breaches and losses of
  personal information identity thefts
• Protection of personal information, customer
  data, business data contractual provisions as
  well as process and system controls
• EU data privacy laws other international laws

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Governance/Control

• Relationship managers
• Vendor key personnel
• Subcontractors
• Committees
• Onsite presence by customer by vendor
• Frequency and locations of meetings
• Cost of travel to meetings
• Reports language
• Audit rights fees compliance regulatory

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Flexibility/Change

• Exclusivity
• Acquisitions
• Divestitures
• Downturn in business
• Adjustment of fees
• Minimum fees
• Compliance with new or modified laws

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Term and Termination Rights

• Term
• Types of Termination
• For Convenience (Notice Period, Fees)
• For Breach
• For Failure to Provide Critical Services
• For Change in Control
• Disaster/Force Majeure Event
• For Non-Payment
• For Material Change

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Unwinding the Relationship

• Termination Assistance (to Customer and its
  designees)
• Time Period
• Costs
• No degradation in Services
• Rights to
• Equipment
• Software
• Third Party Services
• Rights to Hire Vendor Personnel

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Allocating Risk and Liability

• Scope of Indemnities
• Infringement
• Employee Claims
• Personal Injury/Property Damage
• Breach of Confidentiality
• Damages
• Limiting Direct Damages
• Excluding Consequentials
• Exceptions from Limitations/Exclusions
• Insurance

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Success Drivers -- Before Negotiations

• Take the time upfront to
• Define success criteria
• Define requirements
• Perform due diligence
• Identify and gather the team define roles

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Success Drivers -- During Negotiations

• Ensure competition (even if against an inhouse
  model)
• Have a contingency plan in place (enforces
  leverage)
• Set realistic timelines
• Process Identify opportunity Contract
  signing
• Duration -- 30 days to 9 months (could be longer)

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Success Drivers -- During Negotiations

• Key time line drivers
• Due diligence
• Complexity (scope/geography)
• Multi vs. single sourcing
• First time vs. resourcing

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Success Drivers -- After Negotiations

• Governance/Contract management
• Tracking post-signing tasks
• Internal/external communications
• Notifying third parties
• Implementing transition
• Amendment process
• Align teams and objectives
• Accountability -- enforce the contract!

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Contact Us

• Barbara Melby
• Partner
• Global Outsourcing Group
• bmelby_at_morganlewis.com
• 215.963.5053

Morgan, Lewis Bockius LLP 1701 Market
Street Philadelphia, PA 19103-2921 www.morganlew
is.com