LawFlash

Outsourcing and Managed Services Agreements During COVID-19: Our Perspective

March 30, 2020

As the coronavirus (COVID-19) continues to spread around the world, this remains an unprecedented time for global industry. The same is true for outsourcing and managed services arrangements: both service providers and customers find themselves under unique pressures and in unchartered circumstances testing the parameters and strengths of their solutions and business continuity plans.

Morgan Lewis’s COVID-19 Task Force and Corovavirus COVID-19 resource page have been established to address the variety of legal issues impacting companies at this time. In coordination with the Morgan Lewis COVID-19 teams across practices and geographies, Morgan Lewis’s outsourcing team is spearheading our efforts to support clients in their response to the COVID-19 challenges as they relate to outsourcing and managed services agreements.

Below, we provide a high-level look at the effect of this disruption on key outsourcing and managed service agreements.

Unprecedented Impact

“Disaster” events are anticipated by outsourcing service providers and sophisticated service agreements: suppliers have in place business continuity and disaster recovery plans (BCPs) and strategies, and almost all agreements will require the supplier to invoke either its own business and service continuity plan and/or a plan specific to the relevant agreement. For transactions that involve critical operations, the parties will consider all levels of disruption – at the local, regional, and global level.

However, while a pandemic on the scale of COVID-19 may have been one of the test cases for building a BCP, it is not a “disaster” that companies have had to actually deal with, and is testing the effectiveness of even the most sophisticated and risk-averse business continuity and disaster recovery plans. For large scale IT and business process outsourcing transaction, COVID-19 has created unprecedented impacts, including scenarios in which

  • all, or almost all, service delivery sites and personnel are significantly affected within an entire country or multiple countries;
  • the customer recipient of services is typically undergoing equivalent levels of disruption and unavailability (of resources and facilities) as the supplier;
  • multiple business lines and functions are being affected simultaneously, including IT, HR, Treasury etc., as are all the suppliers and advisors;
  • sectors and segments within sectors are being impacted in different ways: in some instances, both supply and demand are being adversely affected, whereas in others there is imbalance. With some exceptions (such as transportation and hospitality in certain regions) there has not been a complete shutdown of business, which might have reasonably been anticipated in a country-wide or global event;
  • there is a surge in demand for technical support and services generally relating to remote working models and online services;
  • geographies are being affected at different times; e.g., China was in lockdown in January and February, but at the time of writing in late March is starting to increase activity as Europe and North America go into lockdown;
  • there is significant uncertainty as to when normal operations can start to resume.

The Immediate Response

From what we have seen and experienced, affected corporates have spent the past few days and weeks getting their bearings and understanding the extent of the impact on their ability to function and continue operations.

In a short but very intensive period, the focus has been on keeping systems available and operating, with an inevitable emphasis on essential services, as working practices have transitioned to a highly virtualized model. At the same time, transition or transformation programs are becoming stressed or undeliverable to the planned timescales, and are being put on hold.

BCPs are being invoked, but as highlighted above the disruption from COVID-19 is such that in many cases the plans are not providing suppliers and customers with holistic procedures to manage the shift to this interim “business as unusual,” nor does anyone know when a return to true business-as-usual is likely to occur.

The disruption has resulted in corporates discovering in practice the true extent of their business continuity capabilities, and in many instances the COVID-19 crisis is creating insurmountable challenges for deployed solutions. Key issues have included remote working (not permitted in many transactions) and, if and when permitted, ensuring personnel have adequate technology to work on client accounts. The provisioning of devices has proven to be a major impact primarily due to a limited number of laptops issued to personnel in countries such as India, with some suppliers requesting from customers that personnel can utilize personal devices and perform services through Citrix and other remote working technologies. Contact centers in particular, and whether onshore or offshore, which rely on large numbers of on-site personnel working on dedicated infrastructure (including secure telecoms networks) are facing very significant challenges.

Impact on Contractual Compliance

COVID-19 is having an adverse effect on many, if not most, parties’ compliance with their obligations under their outsourced or managed service arrangements. It is a question of degree, but in certain instances the normal contractual standards are being so severely challenged that suppliers in particular of course are finding themselves in breach of key provisions.

In particular, these are service level performance (including all of availability requirements, response times, and volume capacity), and security and data protection provisions (including compliance with key security policy obligations such as restrictions on the locations, personnel, and technologies used to access and process customer data, including personal data).

Other areas affected include sub-outsourcing restrictions (if rapid changes of supply chain have been required), governance and reporting obligations, and availability of personnel (including key personnel).

While operational issues have taken priority, customers and suppliers are turning their attention to what their contracts say, and are engaging legal and commercial teams to consider either proactively or reactively how to address compliance issues. In particular, we are witnessing suppliers proactively communicating compliance challenges to customers, often in the form of requests for waivers of obligations. Inevitably these are typically prepared for a wide customer recipient list, and the request has been a trigger for a more nuanced discussion with specific customers about how certain areas can be prioritized.

Customer reactions are also varying, depending on issues such as the level of disruption faced by the customer, or the customer’s sector; e.g., regulated sectors will not want to see their compliance position materially affected – and even though there is some expectation that regulators will themselves take a lenient view on issues arising at this time, we have not yet seen specific regulatory guidance on regulated outsourcing arrangements.

Customers are also seeking to reserve their rights in respect of those compliance issues resulting in breaches of their contractual agreement, and in particular where there are third-party claims arising from those breaches. We are also aware of situations where customers are seeking to exercise their rights, including enhanced cooperation or step-in – these are very fact and scenario specific, and depend on issues such as the relative impact of the crisis on the supplier and the customer. Termination is also a consideration for customers, in particular as customers may well lose their right to terminate the agreement if they do not exercise it, however re-procuring or insourcing arrangements at this highly stressed time would be very challenging for complex arrangements.

Strategic Considerations and Conclusion

Understanding the long-term impact of COVID-19 while in the midst of the crisis is inevitably extremely challenging. Outsourcing, including off-shored outsourcing, should be as resilient to the impacts of COVID-19 as the business continuity strategies of integrated corporates, if not more so where outsourcing has provided a geographic and supplier leverage and spreading of risk.

In terms of the direction of the industry and changes that will arise, medium- to long-term we anticipate greater volumes of outsourcing in certain sectors that will require greater demand for support; e.g., healthcare and life sciences. IT flexibility will be another area of emphasis, with even more investment in cloud technologies, and application modernization.

Pertinently to existing outsourcing and managed service arrangements, the social and personal impact of COVID-19 and the highly unusual working environment that followed appears to be resulting in people, and by extension corporates, really thinking about, and perhaps appreciating, their relationships with friends, colleagues, and business partners. There is a strong desire to react to today’s challenges in a way that is supportive of society as a whole, and with a high degree of thought about the challenges faced by others – not just ourselves, or our businesses.

We think this is true of the outsourcing community as well. Now seems to be the time to think about how to work flexibly with strategic partners, including outsourcing suppliers and customers, and find innovative solutions to retain relationships, rather than break them. Clearly business imperatives are still of primary consideration, but even here the potential reputational and business downsides of moving out of step with the general response to COVID-19 has to be a factor. Communication and engagement are as key now as they ever have been for every major outsourced arrangement, and now is the time – for both customers and suppliers – to ensure that they are talking and understanding each other’s objectives and drivers, and finding ways to accommodate both.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Mike Pierides

New York/Philadelphia
Barbara Melby