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Tech & Sourcing @ Morgan Lewis

TECHNOLOGY, OUTSOURCING, AND COMMERCIAL TRANSACTIONS
NEWS FOR LAWYERS AND SOURCING PROFESSIONALS

Customers in outsourcing arrangements are coming to expect (or starting to demand) that their providers have the resources, technology, and know-how to leverage automation software—whether robotics desktop automation (RDA) or robotics process automation (RPA) software—to enhance the capabilities and efficiencies of IT and business processes. While the software promises big benefits, such as higher levels of accuracy, scalability, and cost-savings, as with the implementation of any new technology, there are new challenges to consider.

In this post we take a look at the top five issues to consider when contemplating the use of automation software in your outsourcing transaction.

1. The License: Standalone or Part of the General Tool License

A gating issue when introducing automation software into your environment as part of a larger outsourcing deal is whether you, the customer, want to have a direct license to the software outside of the outsourcing arrangement or license it as part of the general tool license in the outsourcing contract.

The benefit of licensing it directly (aside from the fact that the provider may require a standalone license for revenue recognition and liability purposes) is that you have the right to continue using the software if the outsourcing relationship ends. The downside is that you will need to consider how the license and maintenance fees are handled. We have seen these fees broken out in the standalone agreement (which is good because you will know that they are for additional entitlements and for ongoing maintenance), but then “baked into” the outsourcing fees for the term of the deal. Another downside could be a separate liability cap in the standalone agreement. A potential workaround is to ensure that the software is treated as provider software for the purposes of the representations, indemnities, and liability caps under the outsourcing agreement. In any event, the provider should be responsible for managing, operating, and maintaining the software as part of its obligations under the outsourcing contract.

The benefit of licensing as a “tool” under the outsourcing contract is that the costs for the license and maintenance are included, and the representations, indemnities, and liability caps treat the software like any other provider software. The downside is that if you want to use the software after termination of the contract, you will need to set out up front, or negotiate on the back end, the right to use the software and determine the associated costs.

2. Implementation

As part of contracting for automation software, the intended benefits and the impact on the existing scope should be documented, including whether there will there be a change in the scope and/or the manner in which the services are delivered. If there are more efficient or enhanced services (such as automated processing, enhanced monitoring, better self-help, and enhanced data and reporting), how will the commitment be documented?

Also it is critical that the customer have a solid understanding of the functionality of the automation software and ensure that it is fit for the particular purposes contemplated and will operate in the existing IT environment without major change up or down stream (or if there is, the change is understood). In order to test whether the automation software will be suitable for deployment in a particular environment or for the execution of a particular process, the parties may want to consider how the software will be deployed, including whether it will be implemented in phases and if pilot phases will be required.

The transition or transformation attachment to the contract or a standalone project schedule should outline a clear process for implementation and, depending on the scope, it may be appropriate for the parties to agree a detailed implementation plan with agreed milestones. As with any project implementation, the contract should also include a clear acceptance process with appropriate testing obligations and objective and clearly defined acceptance criteria.

3. Intellectual Property Rights

If the automation software is a “product”—either a provider product or a third-party product—then the customer will receive a license to the product in most cases. The scope, number of entitlements, and term of the license will need to be negotiated. If the automation software is developed or customized for the customer, the parties will need to address ownership, license, and potentially restricted reuse provisions (such as restrictions on the provider using such code when providing automation software to the customer’s competitors).

Automation tools—particularly ones with data analytics capabilities—generate data and reports regarding the customer’s environment. Who owns this output and what can it be used for? The customer will want to be sure to include clear rights on ownership and use of data in the outsourcing contract.

Other intellectual property considerations include the following:

  • Customer-specific process automations and learning methods
  • Configurations, use settings, preferences, and methods
  • General purpose and customer-specific algorithms
  • Third-party software and open-source software embedded in or necessary to use the automation software (and who is responsible for license compliance during and after the term)

4. Total Cost of Ownership

When considering an automation project, it is important to think through the one-time and ongoing incremental costs and balance those against anticipated efficiencies and benefits. Costs of automation may include the following:

  • Software licensing and maintenance: For proprietary products, as noted above, many vendors are licensing their automation software as a standalone offering with standalone pricing. There also may be third-party license and maintenance costs if the proprietary products require specific operating systems, Middleware, or application software to operate.
  • Software configuration, interfaces, and implementation
  • Incremental infrastructure and capacity
  • Impact on other software licenses: How are bots counted under other software licenses? You may be removing headcount but increasing usage through bots.

5. Liability

Benefits of automation software include the speed and scale at which it can execute routine processes. However, this also means that even a minor error can become widespread much more quickly than a human error. The customer will want to review the liability provisions to ensure that risk is appropriately allocated between the customer and the provider, including damages and costs of remediation.

Also one impact of automation may (or may not) be the reduction of required headcount. If there is a reduction in headcount because fewer people are needed to provide a service that is not “automated,” consider whether the fees should be adjusted. Also consider (1) whether the adjustment should occur regardless of whether the provider can actually reduce the headcount; and (2) including a requirement that headcount cannot be reduced until the vendor can demonstrate that the documented benefits have been realized.

So net net, when leveraging automation software as part of your outsourcing relationship, it is important to document what specific benefits will be realized and the impact on the overall transaction, and to consider the appropriate mechanisms to ensure that implementation, intellectual property, and exit rights are mitigated.