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C&W US Clients Face Uncertain Future

October 9, 2009 by Bierce & Kenerson, P.C.

By Ed Agar, primesourcingadvisors.com

October 27, 2003 – The drama surrounding Cable and Wireless’ US hosting business remains an unresolved story for its approximately 1,500 clients. Since declaring its intention to exit the U.S. market in early summer, C&W has yet to deliver a clear update with regard to its business direction. C&W seems to be avoiding the inevitable.

Fundamentally, C&W was viewed to have two alternatives: sell the assets and existing contracts to an interested suitor, or declare bankruptcy. Andrew Schroepfer, founder and President of IT Infrastructure research firm Tier 1 Research (tier1research.com), says there may be a third hybrid option on the table. “We believe there is a buyer at the table for some of the marginally profitable data centers and the customer base where C&W would pay the costs to close down some of the other sites. Such an option would save C&W from the bankruptcy issues and save it several hundred millions of dollars from the option to pay to merely close the entire business.”

Most customers of the firm appear to have remained loyal thus far, which confuses Danny E. Stroud, former CEO of managed hosting firm AppliedTheory. “I don’t understand why CIOs, COOs and in-house counsel are not heads-down working on alternative service strategies – why executives are subjecting their valuable IT assets to significant risk exposure is irrational,” he says. “Since the financial shakedown of the last couple of years, there are now many quality providers. Further, with the availability of hosting vendor rankings like the PrimeSourcing Index there is a multitude of data to help buyers make informed decisions.”

The ‘wait and see’ attitude of C&W customers may be attributed to two factors: 1) customers have remained loyal due to renegotiated flexible terms and distressed pricing offers, and 2) transition efforts to a new provider are time consuming, costly, and rife with execution risks for resource-strapped IT departments.

Outsourcing lawyer Bill Bierce of Bierce&Kenerson PC and publisher of outsourcing-law.com (outsourcing-law.com), thinks current customer indifference is a highly risky approach. He recommends that CIOs review their agreements for termination and transition rights in case of bankruptcy. Should C&W opt for bankruptcy and the sheriff padlock the front doors, customers may be facing some nasty surprises:

• Assets could be locked down, forcing customers to petition the court to move their assets out. It would be expected that IT assets would be frozen a period from several days to several weeks, which is longer than the period of the typical disaster recovery service contingency plan.
• Bankruptcy could deprive C&W of the flexibility to service its customers in compliance with service level agreements. For managed services, the bankruptcy courts have the right to terminate executory contracts and not pay damages for wrongful termination.
• Customers may need to get a license to continue to use software licensed by C&W. The US Bankruptcy Code allows the bankrupt service provider to terminate a service but does not require it to allow the user to get access to any software that was used in providing the service.
• Where a bankrupt managed service provider abuses its credit lines with its own suppliers, paying customers have no assurances that funds will flow downstream to subcontracted suppliers or even if subcontractors will be retained by the bankruptcy courts. As the cash cycle stops, the services may stop, too.

How C&W will respond to its obligations will be played out in the coming months. The experience of Exdous, Intel Online Services, WiTel, MFN, PSInet, Genuity, Northpoint, Rhythms, Network Plus, Winstar and others exiting the data center market has been mixed. In some situations, there have been documented examples of looting, destruction of property, stranded customers, and total withdrawal of services accompanying a dark data center. “Some customers were forced to take extraordinary steps under duress to insure service continuity, while other customers sustained revenue loss and productivity hits,” Stroud says. “Further, costs and performance degradation during a hasty transition to a new provider are generally significant.”

Stan Lepeak, VP of Meta Group Inc. (metagroup.com), a research firm, says the best hope for customers “is a prepackaged bankruptcy that allows the customer relationship to be bought by a ‘white knight’ with the court’s blessing. This process allows the shedding of liabilities.” There must be reasons why suitors have not already grabbed C&W’s US assets for pennies on the dollar. In simple terms, this would seem to indicate the business does not appear to be salvageable and that a clean buyout seems unlikely.

Given the above scenarios, it is recommended that prudent executives start to invoke contingency plans. According to Schroepfer, “aside from acknowledging that avoiding a migration is a good thing, we would move our own operations out of C&W if we were there.”

It is recommended that exit strategies be planned with the assistance of independent hosting consultants and specialized attorneys. Such trusted advisors are needed to understand the ramifications of outsourcing contracts. A critical element that hosting advisors are now assessing in selecting new providers is the vendors’ implementation of quality initiatives like ISO 9001, IT Service Management or Carnegie Mellon’s e-Sourcing Capability Model.

As a next step, Global 2000 firms should identify their degree of risk exposure to their internal audit committees in order to determine applicability for disclosure in SEC filing as part of Management’s Discussion and Analysis forms in compliance with the Sarbanes Oxley Act.

C&W is due to report its mid-year financial results in November, and it is also expected that they will communicate their future direction and intentions at that time. One can anticipate that the competition will feature attractive incentives and deeper price discounting in order to woo prospective C&W clients.

As an observer, it will be interesting to see if C&W clients will be enticed by price incentives or if there will be a ‘flight to quality’. Time alone will tell.

About the author

Ed Agar is co-founder and Principal of PrimeSourcing Advisors, an IT advisory firm. For more information, visit primesourcingadvisors.com.

Document Retention, Document Management and Data Warehousing in Outsourcing

October 9, 2009 by Bierce & Kenerson, P.C.

Business enterprises must comply with a multitude of laws and rules governing the retention of business records.  Destruction or loss of business records could cause serious loss to the enterprise and its trading partners.  Fines might be levied under regulatory audits.   Documents supporting novelty, originality or date of reduction to practice might result in a loss of a business process patent.   In litigation, the enterprise might be unable to present evidence or rebut contradictory evidence.  Recognizing the need for electronic storage, legislatures and courts worldwide have adopted various “electronic signature” and “electronic documentation” statutes and rules allowing, as probative evidence, documents stored solely in electronic form, provided that certain notarial protections such as immutability (non-changeability), provenance and other customary factors for attesting to the origin and custody of the record are satisfied.  Records may also incriminate, so routine destruction of old records is advisable where no law or rule requires continued retention.

In response to such needs, service providers in logistics, storage, warehousing and data warehousing have developed an industry for the “life cycle management” of documents.  The life cycle includes document creation, gathering of related records, organization of directories and data bases under organizing principles, record storage, distribution, document retention, retrieval, accessibility, destruction and reporting and record keeping of the life cycle itself.  Such services involve different methods, cost structures and risks to the customer.

Recent jurisprudence establishes new rules governing “electronic discovery” under the Federal Rules of Civil Procedure.  The impact of such rules on document retention, document management and data warehousing in outsourcing should be clearly understood by both outsourcing customers and services providers.  Prudence dictates a number of “best practices” in records management in outsourcing.

Records Retention Policies and Procedures.

This article does not intend to list all laws that might require temporary or permanent document retention.  Rather, it is critical that each enterprise adopt policies and implement procedures for compliance with record keeping and record destruction requirements of law.

Right of Access to Records in Criminal Proceedings.

This article does not intend to discuss the right of the criminal defendant to obtain information, or the right of the prosecutor to obtain evidence through police investigations.  However, criminal negligence for corporate misdeeds is punishable under certain public statutes.  Accordingly, maintenance of “best practices” in records management could make a difference in outcomes for both the enterprise and its managers.

Right of Access to Records in Civil Dispute Resolution.

Right of Access to Records in Mediation.

Most business managers might agree to mediation if it is not onerous and does involve detailed is closures of business records.

Right of Access to Records in Arbitration.

In general, arbitrators have no mandate to compel adverse parties to engage in any disclosure or discovery phase for the identification of records that might have a relevance or probative value in dispute resolution.   The rules of arbitration of most common arbitral administration organizations generally do not require any such compulsory disclosure.

Right of Access to Records in Litigation.

Mandatory Discovery.
The U.S. Federal Rules of Civil Procedure 26 through 37 govern discovery in civil actions of any nature that may be adjudicated by U.S. federal courts.  These rules permit the giving of notice, formulation of legal and factual issues and revelation of facts through pre-trial procedures including depositions and discovery.    Rule 26(b)(1) defines very broadly the scope of mandatory disclosures by an adverse party in response to a request for discovery:

Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter.   For good cause, the court may order discovery of any matter relevant to the subject matter, involved in the action.  Relevant information need not be admissible at trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.

In general, confidential business information may be discoverable and subject to a protective order so that the requesting party does not publicize it.

Scope of Discovery Must be Proportional to the Benefit.
Rule 26(b)(2) imposes general limits on discovery under a “proportionality” test.  A federal court may limit the frequency or extent of use of “discovery” methods if the court determines:

• the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenience, less burdensome or less expensive;
• the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or
• the burden or expense of the proposed discovery outweighs the likely benefit, taking into account the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues.

Payment for Cost of Disclosing Records and Information.
Normally, the courts presume that the cost of researching and producing the requested records and information in the discovery process must be paid by the responding party.  However, under Rule 26(c), the court may shift the cost to the requesting party to avoid “undue burden or expense.”  Oppenheimer Funds, Inc. v. Sanders, 437 U.S. 340, 358 (1978).

Common Law Approach to Equitable Determination of Cost Allocation and Cost-Shifting for Discovery of Records, including Electronic Records.
Different courts have adopted different standards and tests for balancing the costs and likely benefits.   The most influential response to the problem of cost-shifting in the discovery of electronic records was the eight-factor list adopted by U.S. Magistrate Judge James C. Francis IV in Rowe Entertainment, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 429 (S.D.N.Y. 2002).   More recently, District Judge Shira Scheindlin of the same district court adopted a different rule to tailor the Rowe Entertainment principles to add one new factor and omit two unnecessary factors.   Zubulake v. UBS Warburg LLC, __ F.3d __, NYLJ May 19, 2003, p. 37, cols. 1-6, p. 28, cols. 1-5 (S.D.N.Y. March 2003) (claim for alleged wrongful discharge due to claimed sex discrimination in employment).   The Zubulake court reasoned that the factors should be weighted and that they should be not be predisposed, or “slanted,” as the Rowe Entertainment rules might do, in favor of shifting the costs of production from the responding party to the party requesting the electronic records.

The following table compares the two decisions:

Types of Storage of Electronic Records.
Retention of documents in electronic form allows cheaper and faster access, with easier determination whether a document is protected from the discovery process by some form of evidentiary privilege (e.g., attorney-client communication, attorney work product, husband-wife spousal privilege, etc.).   Judge Scheindlin’s opinion in Zubulake toured the types of methods for record keeping, with reference to accessibility and ease of production.

Whether electronic data is accessible or inaccessible turns largely on the media in which it is stored. Five categories of data, listed in order from most accessible to least accessible, are described in the literature on electronic data storage:

1. Active, online data:
“Online storage is generally provided by magnetic disk. It is used in the very active stages of an electronic records [sic] life – when it is being created or received and processed, as well as when the access frequency is high and the required speed of access is very fast, i.e., milliseconds.” Examples of online data include hard drives.

2. Near-line data:
“This typically consists of a robotic storage device (robotic library) that houses removable media, uses robotic arms to access the media, and uses multiple read/write devices to store and retrieve records. Access speeds can range from as low as milliseconds if the media is already in a read device, up to 10-30 seconds for optical disk technology, and between 20-120 seconds for sequentially searched media, such as magnetic tape.” Examples include optical disks.

3. Offline storage/archives:
“This is removable optical disk or magnetic tape media, which can be labeled and stored in a shelf or rack. Off-line storage of electronic records is traditionally used for making disaster copies of records and also for records considered ‘archival’ in that their likelihood of retrieval is minimal. Accessibility to off-line media involves manual intervention and is much slower than on-line or near-line storage. Access speed may be minutes, hours, or even days, depending on the access-effectiveness of the storage facility.” The principled difference between nearline data and offline data is that offline data lacks “the coordinated control of an intelligent disk subsystem,” and is, in the lingo, JBOD (“Just a bunch of disks”).

4. Backup tapes:
“A device, like a tape recorder, that reads data from and writes it onto a tape. Tape drives have data capacities of anywhere from a few hundred kilobytes to several gigabytes. Their transfer speeds also vary considerably.The disadvantage of tape drives is that they are sequential-access devices, which means that to read any particular block of data, you need to read all the preceding blocks.” As a result, “[t]he data on a backup tape are not organized for retrieval of individual documents or files [because] .the organization of the data mirrors the computer’s structure, not the human records management structure.” Backup tapes also typically employ some sort of data compression, permitting more data to be stored on each tape, but also making restoration more time-consuming and expensive, especially given the lack of uniform standard governing data compression.

5. Erased, fragmented or damaged data:
“When a file is first created and saved, it is laid down on the [storage media] in contiguous clusters. As files are erased, their clusters are made available again as free space. Eventually, some newly created files become larger than the remaining contiguous free space. These files are then broken up and randomly placed throughout the disk.” Such broken-up files are said to be “fragmented,” and along with damaged and erased data can only be accessed after significant processing.

Of these, the first three categories are typically identified as accessible, and the latter two as inaccessible. The difference between the two classes is easy to appreciate. Information deemed “accessible” is stored in a readily usable format. Although the time it takes to actually access the data ranges from milliseconds to days, the data does not need to be restored or otherwise manipulated to be usable. “Inaccessible” data, on the other hand, is not readily usable. Backup tapes must be restored using a process similar to that previously described, fragmented data must be de-fragmented, and erased data must be reconstructed, all before the data is usable. That makes such data inaccessible.  Zubulake v. UBS Warburg LLC, __ F.3d __, NYLJ May 19, 2003, at cols. 5-6 (S.D.N.Y. March 2003).

The Bottom Line: Who Should Pay for Producing Copies of “Accessible” Records and for “Inaccessible” Records.
In Zubulake, the court ordered the defendant, employer UBS Warburg LLC, to pay the cost of producing e-mails stored in active use or on archived optical disks.   The court remanded to a magistrate judge the allocation, in accordance with the Zubulake court’s seven-factor test, the costs of producing e-mails stored on backup tapes.   Production of records from the backup tapes and from archived optical disks was estimated to cost were estimated at  $300,000.   In this case, the terminated employee had been earning $500,000 a year in compensation, and the employer was a major international investment bank.

In the final analysis, this raises issues for enterprises (and their records management service providers) in connection with litigation strategy.

Best Practices in Records Management in Outsourcing.

In the era of electronic signatures, electronic litigation discovery and mandatory reporting procedures for publicly traded companies, certain “best practices” are emerging.

Service Level Agreements and Standards of Care.

Records management services agreements have generally defined the service provider’s standard of care both in legal terms (degree of negligence) and in technological and business terms (specified business procedures whose inputs and outputs are objectively measurable as service level agreements).

Business Purposes and Risks in Rapid Accessibility to Business Records.
Enterprises might wish to think twice before storing all e-mails on easily accessible storage means, such as Storage Area Networks, network attached storage and other “online” or “near-online” technologies.  If the enterprise is defending against a claim of unfair employment termination, it might be advantageous not to spend the additional cost for the more rapid method of access.   However, if the enterprise is considering use of historical e-mails for development of a knowledge basis using semiotic, robotic knowledge generation tools, the shareholders will probably reap great economic benefit from the “online” and “near-online” technologies.

Service Level Agreements.
All documents are not created equal.   The customer’s records retention policy must be clear.  The customer may need the right to change the SLA’s in response to newly mandated record keeping requirements, ranging from a longer statute of limitations to more detailed accounting reports under the Sarbanes-Oxley Act of 2002 (more related links at end of article).

International Records Management.
Records management generally should be maintained in the country where the records originate.   As enterprises globalize, internationalization of records management follows.   As a result, the peculiar legal issues relating to international business transactions should be identified and resolved as part of any international records management service contract.

Data Warehousing.
This phrase “data warehousing” describes the consolidation of disparate forms and types of data under “one roof,” that is, in a manner accessible from one program.   As digital information becomes more easily accessible to the data masters, so it may be more easily accessible to those, acting in litigation, seeking to obtain copies of that information.

Limitation on Liability.

An enterprise customer’s loss due to “poor” records management can come from any one of several sources, including:

• loss of business records required to comply with contractual, statutory, regulatory or judicial obligations.
• loss of goodwill.
• fines and penalties from failure to maintain records, or to file official declarations and “returns” that are based on such records.
• adverse evidentiary presumption in case of proven spoliation of evidence.
• loss of rights in a trade secret.
• loss of rights in a patent or patent application.
• compulsory disclosure of business records that constitute an admission against interest in litigation.

Before agreeing to limitations on liability, the enterprise customer should consider each of these business risks and evaluate the likely impact on the enterprise.   Alternatively, the solution might lie in an enhanced SLA or more detailed statement of work.

Insurance and Other Risk Mitigation.

The enterprise and its corporate officers, directors and even shareholders may become directly or vicariously liable for the negligence or willful misconduct of its external service providers that provide records management services.    The corporate risk manager should review the company’s and the service providers’ insurance policies for errors and omissions, directors’ and officers’ liability insurance and coverages for valuable papers and business continuity.

Securities Law Compliance.

Record keeping is now a strict obligation under the U.S. federal and state securities laws.  The Sarbanes-Oxley Act of 2002 amended the federal securities laws to require that the CEO and the CFO certify that the financial reporting systems are adequate.    Service providers in the field of records management and document management should determine how much risk they are willing to assume in relation to liability arising out of:

Insurance and Other Risk Mitigation.

• erroneous document retention policies of the enterprise customer;
• negligence or gross negligence by the records manager; and
• faulty procedures in any transfer or storage of data, including commitments of complete redundancy, data mirroring and disaster recovery.

Periodic Inspections and Verifications.

Trust depends on continued reliability.  Audit and inspection are a normal part of the outsourcing processes.  In the field of records management, the preparations for the date change in the year 2000 launched a global business process of disaster recovery testing.  Normal records management should have periodic inspections and verifications to ensure the processes continue as promised and, more important, as may be required to comply with emerging applicable law.

Deal Structure: Countertrade – Transformational Outsourcing — Call Centers — Customer Care

October 9, 2009 by Bierce & Kenerson, P.C.

Outsourcing Service Provider as Distributor for Customer’s Core Services

In early February 2004, IBM and Sprint Corp. prepared to announce a major outsourcing agreement for IBM to assume the responsibility for customer services for Sprint wireless PCS telecom services.   The deal affects 5,000 to 6,000 jobs at Sprint.   According to news reports, the value of the deal is estimated at $2 billion to $3 billion, which equals the total amount that Sprint forecasts in its own savings.

Scope; Metrics.

The arrangement appears designed to restructure existing call center operations, some of which had already been outsourced, to integrate call centers with technology-enabled data management on customer demand, customer satisfaction and market conditions in real time.  IBM will be seeking to dramatically improve Sprint’s customer satisfaction through better customer segmentation, more efficient call routing, reduced average call handle times and a higher rate of first call resolution.   IBM will provide customer self-service tools via the Internet and web-based services.   IBM will also provide ongoing consulting services to Sprint to continually improve customer satisfaction.  IBM will take over management of Sprint’s existing vendor-operated call centers (moving from one outsourcer to another) as well as a Sprint-owned call center in Nashville, Tennessee.  IBM claims that in such outsourcing arrangements, “IBM is transforming, integrating and managing key business processes for [its customers] to become more flexible in adapting to market and customer variables in real-time.”

Countertrade: “Counter-Distribution Services.”

The transaction makes IBM one of Sprint’s largest distributors.   In the joint press release, the two companies said the relationship will include “a long-term business alliance that designates Sprint as a key IBM vendor for wireless and wireline services and enables IBM to incorporate Sprint’s national PCS wireless services and its IT and data products and services into customized on-demand solutions for IBM’s customers.”   Thus, IBM is expected to market Sprint’s core services — wireless and land-line voice and data services — to IBM’s other customers.

By appointing the outsourcing services provider as a distributor, this multinational outsourcing customer barters its purchasing power for marketing and sales, particularly with a global sales organization with easy access to the technical procurement executives in multinational enterprises.   And as service provider IBM incurs risks of the failure of its customer Sprint to deliver promised services to IBM’s other customers.   That results in a common effort that could be called a joint venture, but the parties did not call it more than a “business alliance.”

Countertrade: “Counter-purchase Agreements.”

The counter-distribution agreement has substantially lower risk of failure for the services provider than a simple counter-purchase by the service provider of its customer’s goods and services.   When WorldCom went bankrupt in 2002, EDS took a substantial charge to its revenues, since the balance of trade was negative.  EDS owed money to WorldCom for WorldCom’s services, but WorldCom was able to reduce its payments to EDS by reason of the bankruptcy protection for WorldCom’s operations.  (Later, WorldCom changed its name to MCI).  But if Sprint fails to deliver its services to IBM’s customers, IBM’s reputation will be tarnished, which could cause greater harm to IBM.

Outsourcing as a Tool for Business Process Transformation.

This deal contemplates the transitioning of Sprint from delivering classic telephony services in a “stand-alone wireless and wireline network.”   Reading between the lines, IBM will probably help Sprint convert to Internet telephony, or “voice over Internet protocol” (“VOIP”).    Telephony will integrate into the desktop and computer network environments.

The press release suggested initially that the deal looked like simply a transfer of Sprint’s existing call center operations from its existing service providers (and some insourced call centers) to a new service provider. IBM’s commitment to improved service level agreements was heralded as a means of “dramatically” improving customer satisfaction.

But the joint press release suggested, without saying clearly, that the deal has much more strategic impact, by asking IBM to convert Sprint’s wireless and wireline telephone service to a network capable of Internet telephony (called “voice over Internet Protocol,” or “VOIP”) for IBM’s other corporate customers. To cushion the shock of cannibalizing its own classic telephony services, Sprint probably enlisted IBM to bundle Sprint’s services into IBM’s other IT-enabled outsourcing services. IBM became a reseller of Sprint telecom services. More significantly, Sprint’s business was to be transformed into an Internet-based service provider to IBM’s other customers.

The deal has the potential, therefore, to transform Sprint’s customer base, its method of service delivery, its revenue profile, and its marketing alliances in addition to hiring a service provider to improve service levels in call centers.

Lessons Learned.

The counter-distribution model offers substantial flexibility for both the service provider and its customer.

• Service Provider’s Perspective.
  For the service provider, credit risks (from a prospective bankruptcy of the customer) may be managed by financial management of the delivery of the customer’s goods or services.   Similarly, the service provider might not need to make any financial commitments to secure and retain the right to resell the customer’s goods or services.
• Enterprise Customer’s Perspective.
  For the enterprise customer, access to a global sales organization may serve as a scorecard criterion for selection of prospective service providers.   The customer might rightly conclude that a bigger, more global, more diversified service provider would assure a wider channel for the distribution of the customer’s own core business services.   For telecom companies, using an IT services provider to distribute telecom services is a logical extension of the service proposition in response to the convergence of the Internet, telephony and digital communications.  Reportedly, IBM will be selling Sprint  services to large corporations so that employees of Sprint customers may transfer data from their networked desktop or laptop computers to wireless devices such cell phones, Blackberry® and Palm® handheld mobile devices.
• Mutual Dependency, Mutual Risk.
  For each party in a countertrade transaction, however, the lessons of the past invite caution.   Once two parties are interdependent as customers or as marketers, the relationship requires a more complex management interaction.  The risks for each are increased.  If the customer wanted to fire the service provider for a breach of service level agreements, for example, the service provider might have the right to cancel the distribution rights (if unprofitable) or might seek to retain the distribution rights free of any “cross-default” clause.  The stakes are higher for potential “win-win” or potential “lose-lose” outcomes.
• Long-Term Impact.
  If a Sprint-IBM countertrade model for distribution of the customer’s services were to become the model for a long-term outsourcing contract, securities law and antitrust laws might come into play.
  • Securities Regulation.
    As to securities laws, the impact might be so important that investors might consider it “material” to decisions whether to buy, sell or hold the enterprise customer’s corporate securities.   Initially, such a distribution model does not appear likely to generate any “material” revenue streams for the enterprise customer.  Over time, the impact might grow particularly if the outsourcing has the goal or potential of restructuring the enterprise customer’s business model.

    At some stage, the disclosure required under applicable securities laws might become problematic, as information publicly disclosed could be used by competitors.  As a result, both enterprise customer and the services provider have some incentive not to enter into transactions that are not so important and material as to require disclosure under applicable securities laws.

    In reviewing the press release, one may question whether investors are adequately informed of the true nature of the risks of this transformation of the customer’s business, not from the standpoint of the risk of IBM’s nonperformance, but from the standpoint of Sprint’s ability to successfully transform its own service model by the counter-trade structure with IBM promoting VOIP to IBM’s other customers.

  • Competition Policy and Antitrust Laws.
    As to antitrust laws, reciprocal dealings by organizations in the same competitive arena could be unlawful as anti-competitive under U.S. federal antitrust laws and European Union competition policy.   Before entering into a countertrade transaction, the parties should consider the likely impact of the distribution or counterpurchase operations as to exclusivity, market size, concentration of suppliers and customers in the relevant market, and other factors that define structural anticompetitive activities.  As global customers hire global service providers to provide distribution services, the impact in any single country’s marketplace may be small compared to a similar business relationship between parties located only in one country or regional market.  Consequently, the antitrust risks are relatively small at the global level.
  • If IBM were to repeat this paradigm in other industries, though, IBM might gain market power in an important array of global non-IT services.  Further anti-trust reviews might be appropriate in such a scenario.

Outsourcing Tools for Insourcing

October 9, 2009 by Bierce & Kenerson, P.C.

Outsourcing Tools for Insourcing.

The typical outsourcer also provides a spectrum of support and consulting services compatible with a totally insourced environment. Thus, outsourcing is only one of the core service offerings. Enterprise customers now ask the question: why outsource when I can insource using the right tools? While there may be many reasons to outsource, there are equally many reasons not to outsource. The reasons relate to ERP, SCM, CRM and DRM solutions that can be used to keep customers loyal and flexibly prepared for a future outsourcing. Emerging BPM / business process management tools and software as a “service,” can likewise create opportunities for retention of functions in house.

Does your “outsourcer” also sell tools that facilitate insourcing? In this article, we take a quick look at one particular tool offered by the king of outsourcers for its enterprise customers’ data centers.

Panoply of Insourcing Tools.

Insourcing tools help a customer manage its technology and service delivery to its internal customers without dependence on a third party for design, maintenance and support. Let’s consider a few:

• Web-Enabled Self Service and the ASP Model.
  Under the “Applications Service Provider” model, the external services provider hosts its own proprietary software solution. The customer enters data into the provider’s software by remote control, either using web-enabled services or high-speed link.
• Web-Enablement of Customer’s Proprietary Software.
  Companies such as Citrix have developed tools to allow a customer to place its own proprietary software on a secure Intranet, thereby reducing access costs, particularly for end-users who are traveling, home-based employees, or in a large complex organization with multiple offices worldwide.
• Software Licensing Model.
  Software that helps customers perform their own “managed services” has developed over time. In the “early days,” data base software such as Oracle and DB2 organized data. More recently, enterprise resource planning software (“ERP”), supply-chain management (“SCM”), customer relationship (“CRM”) and device-relationship management (“DRM”) software have enabled enterprise customers to harness a uniform set of business process tools across large organizations. Such more robust software serve as tools for reducing complexity, enforcing business process rules and showing transparency of data. Such software also can plan, identify and manage for business continuity in case of disasters. As an emerging insourcing or outsourcing tool, new software tools facilitate provisioning of resources.
• External Benchmarking and Performance Metering Tools.
  Service level agreements (“SLA’s”) define the various performance parameters that define the essential services under any outsourcing agreement. Enterprise customers have tools that measure the same operational data that the external service providers see at the service provider’s facilities. Customers now are demanding access to benchmarking and performance metering tools.

Why Outsourcers Might Offer Insourcing Tools.

There are many reasons why outsourcing might not be a proper solution for a client. Currently, IBM, Hewlett-Packard and Sun Microsystems all offer some form of tool to enable an enterprise customer to automatically provision server workloads based on supply and demand and network traffic. The same “silicon switch” that enables a customer to manage insourced IT resources could thus be used to transform to a hybrid insourced-outsourced combination or externalize the business process virtually.

Transitional Tools for Eventual Outsourcing of Process or Infrastructure, or for Provisioning of Services “On Demand.”

In such cases, the outsourcer should consider providing tools that retain customer loyalty and, like a Trojan horse, enable the customer to become an outsourcing customer “on demand.” The customer becomes trained in the service provider’s software, and such training might inspire confidence that, by using such tools, the customer can place more trust in an outsourced solution, either temporarily or on a continuous outsourced basis. These tools face the challenge of maintaining user control and limiting access to software applications while demand surges or subsides across a network of servers and data centers.

Infrastructure Support.

In fact, among others, IBM has adopted this strategy to service customers who might need hosted infrastructure and rapidly deployable additional server capacity. Its Tivoli “Intelligent Orchestrator” software will allow customers to convert a data center into an IT utility, where provisioning of network capacity (bandwidth), server processing capacity, storage and other computing resources are allocated dynamically in response to defined parameters of supply and demand. This resembles a “utility” because the “grid” operator may now anticipate demand and plan for allocation and reallocation of resources. In emergencies, the “grid” (data center with Intelligent Orchestrator (or competitive equivalent) could redistribute computing resources globally. But the challenge of dynamic global provisioning will remain daunting.

Pricing Challenges.

Tools for insourcing present challenges for the vendor. If the price of the tool is too attractive, the tool will sell and the services will not. If the tool is too expensive, outsourced services might be preferred, but only where the customer has no alternative. And by promoting tools, the vendor might cannibalize revenue from services, and vice versa. Pricing could be in the form of per-seat, per user, global site license, or site license by some other “line of business” demarcation.

Legal Issues in Dynamic Provisioning of Computing and Telecom Resources.
When we look at dynamic, rules-based provisioning of resources across international boundaries, we must remember that data transfers across borders remain subject to local legal controls. These include:

• data protection laws.
• privacy laws.
• export controls on military data or “dual use” civilian-military processes.
• license restrictions on authorized use.
• infringement indemnifications that may be territorially restricted.
• force majeure risks.

Transitioning from Software Licensing to Outsourcing.

Generally, a contract for a software license does not change when the parties enter into an outsourcing relationship. But customers should consider what changes should be made when this occurs, and what risks and assumptions have changed by virtue of the transition. By gaining the customer’s trust through a software tool, the vendor can thereby convert the customer to an outsourcing customer quickly, almost immediately. “Just sign here.”

We believe, in such cases, there could be significant business issues that need to be reflected in an appropriate contractual document. We recommend that an outsourcing lawyer be consulted in such circumstances.

More Information.

Bierce & Kenerson, P.C. does not provide any of the tools described above. However, we may be able to identify or comment on legal and practical issues of tools that may be of interest to the IT and technology-enabled services community. Please let us know if you have any questions about our experiences with particular vendors.

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