What if your outsourcer is acquired?

The recent controversy over the outsourcing of shipping facilities at six major U.S. ports has been interesting to watch. British shipping operations company Peninsular & Oriental Steam Navigation has been the outsourcing provider for port operations at commercial shipping terminals in New York, New Jersey, Baltimore, New Orleans, Miami and Philadelphia. However, Dubai Ports World, a United Arab Emirates state-owned company, is acquiring London-based Peninsular for $6.8 billion. This has raised concerns over the change in control of operations at these ports.

Whatever your opinion about the Bush Administration’s handling of this transaction, you should realize that any outsourcing deal can be at risk to having a major, unexpected and possibly negative change in who is ultimately controlling service delivery. This could be a sale to a competitor, to an outsourcing provider with which you have had a previous bad experience, or to a foreign owner that causes you concern. And don’t rule out a Dubai outsourcing provider, as its economic growth will likely include IT services.

Outsourcing providers are generally midsize to large corporations, and they may determine at any time that their shareholders’ interests are best served by selling the company. As a customer, your ability to control this situation was determined when you signed your contract. After that, you are just along for the ride. So the time to deal with this situation is before it happens and the mechanism is the assignment clause in your outsourcing contract.

I am not a lawyer, but I have negotiated outsourcing agreements on both sides of the equation…as a buyer and as a vendor. So while you will want to involve your lawyer in your negotiations, here is a business person’s view of assignments and how they can affect your outsourcing deal:

An assignment clause sets forth the terms under which a party to an agreement will be allowed to transfer rights or obligations under that agreement to a third party. Basically, can the customer or vendor give someone else the right to receive their benefits from the agreement, or can the customer or vendor give someone else the responsibility to provide for their obligations in the agreement.. Following is a basic example of assignment language (there are probably as many variations to this as there are lawyers):

“ASSIGNMENT/CHANGE OF CONTROL: Neither party may, without the prior written consent of the other party, assign this Agreement, in whole or in part, either voluntarily or by operation of law, and any attempt to assign this Agreement in violation of this Section shall be a default of the Agreement pursuant to Section XX above and such assignment shall be null and void. In the event the majority owner of a party becomes less than a 50% owner and/or the majority owner’s equity position drops below 35% of said party such events shall be deemed assignments for purposes hereof (‘Change of Control Events’).”

The above example favors the customer, with consent to assignment required under any circumstance. If the provider is being acquired, and you do not like the new owner, you can withhold your consent and effectively terminate the agreement. You will, of course, have to find a new provider and work out a timetable to convert to your new provider.

Vendors will sometimes look to modify this language to allow certain conditions where your consent is not required. For example, they may carve out the right to employ sub-contractors as long as they remain in control of the work and liable for performance. Smaller vendors that anticipate an acquisition in their future may add language that allows assignment without your consent to “a party acquiring all or substantially all of the assets” of the vendor. So your consent would be required if they just wanted to sell the contract to someone else, but not if they sold the entire company.

Ultimately you will have to decide how strongly you feel about requiring your consent to assign in all circumstances. Some vendors may stick to their guns on the assignment without your consent to a purchaser of their entire company. Most acquirers are buying a services business in large part for its customer base, therefore, continuing to provide you good service will be a high priority. However, if you want to be certain who your provider is for the life of your contract, you should ensure that your consent is required for the contract to be assigned under any circumstances.