Making network-services deals: Structuring the transaction

This article explores the key commercial terms and contract practices that are crucial for negotiating flexible and resilient managed-network-services arrangements given the outsourcing-industry challenges currently facing enterprises.

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  • Termination assistance – Managed service providers are often intertwined with internal processes and workflows, and integrated with the enterprise customer’s other critical service providers. Consequently, it can take considerable time, planning and coordination with many parties to extricate a provider from your environment.  In many managed service deals, service term, volume or revenue commitments may also limit the pace at which the customer can migrate services away from an incumbent provider.  To allow you to plan an effective exit, the managed-services agreement should include clear guidance and impose requirements on the provider to provide transition assistance for a period that extends beyond the expiration or termination of the agreement.  As part of the transition, the provider should continue to provide the base services at the same prices, terms and conditions, subject to a ramp-down established by the customer’s transition plan. As an input to the transition plan, the provider should also be obligated to provide information (e.g., inventory service elements, in-flight projects, incident and problem historical data), and provide other support to implement the transition to the successor provider.  Experienced providers will not proactively offer transition assistance, but will readily agree to provide it. The burden is, however, on the customer to set the transition period, transition service parameters, and differentiate which transition activities are within the base scope of work (i.e., no additional fees apply), from those that are separately chargeable.
  • Required personnel transfers - Companies continue to strike traditional outsourcing deals that include the transfer of employees to their providers. Direct transfers from customer to outsourcing provider present many legal and financial issues to contemplate, but it is an understood discipline with mature checklist processes designed to identify transfer candidates, set minimum post-transfer compensation, benefits and employment terms, and calculate the specific financial impact of the transfers.  Outside of the United States, particularly in EU countries, worker protection laws can give rise to mandatory transfers without regard to you or your new providers’ preferences. In EU member states, the Acquired Rights Directive (ARD), also known as the Transfer of Undertaking (Protection of Employees) regulations (TUPE) in the UK, establishes rights for employees to transfer their employment contracts from an existing employer to a new employer when the work they perform for their old employer moves to a new employer. 

ARD transfers can occur when the enterprise shifts an internal process to a managed network services provider.  In such cases, the customer must honor its employees’ right to transfer to the new provider following the particular processes in the regulation. ARD transfers can also arise when an enterprise customer terminates one managed network services provider and shifts services to a new provider.  Under this scenario, the customer is not directly subject to ARD regulations. The enterprise nevertheless has a stake in the process. A poorly executed transfer from incumbent provider to successor provider will adversely affect service continuity and could give rise to considerable unexpected costs.  And the new provider may attempt to pass on to the customer incremental liability or costs that the new provider incurs by taking on the legacy provider’s employees.  Although the statutory transfer obligations attach to the providers in this case, one or both of them may try to make the customer contractually accountable for facilitating the transfers between competing providers.  Some cooperation and assistance by the customer are reasonable, but the customer should avoid accepting liability for its new or old providers’ violations of ARD regulations.

Whether a direct transfer from customer to new provider or a secondary transfer between the incumbent provider and new provider is contemplated, customers with sites and operations in any EU country should add ARD transfer due diligence to its RFP planning process.  Shaped by the results of that due diligence, your managed services contract should establish clear outbound and inbound transfer rights and responsibilities for both you and your supplier. Inbound transfer provisions address the responsibilities and liabilities attributable to employee transfers to the new provider at the outset of the deal, and the outbound transfers cover employee transfers from the new provider at the expiration or termination of the agreement, or a material portion of work.

Outsourcing is a journey, not a destination

Outsourcing is rarely a completely smooth ride, and most managed network services contracts experience difficulties from time to time. Common challenges include contract interpretation disputes, service/pricing gaps (e.g. pricing for new network technologies that the customer starts to adopt partway through a contract) and service delivery shortcomings.  Customers typically have very high expectations for their managed service providers (not least based on all the promises they made during the sales process) and are rarely willing to tolerate teething troubles for more than the first few months of a new contract.  But in reality, it can take twelve months or so of service delivery for the managed services to “bed in”, which can be far longer than most customers expect. 

To help overcome the initial gap between customer expectation and actual provider performance, customers must anticipate and plan for problems that may arise. Strong governance processes and contract terms are crucial, as is a willingness from both the customer and the service provider to work collaboratively to mitigate the impact of issues and find mutually acceptable solutions to problems.  It also helps enormously if key resources from the sales and contract teams are retained through to the service delivery phase; when there is no continuity, issues and confusion arise far more frequently.

Managed network services will continue to evolve, and customers will continue to become increasingly sophisticated in their selection and use of managed services and managed services providers.  Sourcing strategies, RFP processes and contracts must adapt to keep up.

Ben Fox is a managing director at TC2, a global IT and networking consultancy. He can be reached at

Marc Lindsey is a partner at Levine, Blaszak, Block & Boothby, LLP (“LB3”), an IT and telecommunications law firm dedicated to advising enterprises clients on technology transactions and telecom regulations. He can be reached at


Copyright © 2018 IDG Communications, Inc.

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