information technology outsourcing transactions process strategies and contracts 2nd ed phần 1 ppt

INFORMATION TECHNOLOGY
O
UTSOURCING TRANSACTIONS
PROCESS, STRATEGIES, AND CONTRACTS
2ND EDITION
JOHN K. HALVEY
BARBARA M. MELBY
JOHN WILEY & SONS, INC.
Halvey.book Page iii Tuesday, August 9, 2005 8:58 AM
INFORMATION TECHNOLOGY
O
UTSOURCING TRANSACTIONS
Halvey.book Page i Tuesday, August 9, 2005 8:58 AM
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Halvey.book Page ii Tuesday, August 9, 2005 8:58 AM
INFORMATION TECHNOLOGY
O
UTSOURCING TRANSACTIONS
PROCESS, STRATEGIES, AND CONTRACTS
2ND EDITION
JOHN K. HALVEY
BARBARA M. MELBY

JOHN WILEY & SONS, INC.
Halvey.book Page iii Tuesday, August 9, 2005 8:58 AM
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Library of Congress Cataloging-in-Publication Data:
Halvey, John K.
Information technology outsourcing transactions: process, strategies, and contracts / John K.
Halvey, Barbara M. Melby 2nd ed.
p. cm.
Includes index.
ISBN-13 978-0-471-45949-1 (cloth)
ISBN-10 0-471-45949-6 (cloth)
1. Information technology. 2. Contracting out. I. Melby, Barbara Murphy. II. Title.
T58.5.H35 2006
004’.068’4 dc22
2005045981
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
Halvey.book Page iv Tuesday, August 9, 2005 8:58 AM
To Meghan and for Harry W., who covered
my retreat.
JKH
Thanks again to my parents, the 3 Gs
and (of course) FF.
BMM
Halvey.book Page v Tuesday, August 9, 2005 8:58 AM
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vii
CONTENTS
About the Authors xvii
About the Web Site xviii
Preface xix
Chapter 1 Overview of the IT Outsourcing Industry 1

1.1 Background 1
1.2 IT Outsourcing Industry 2
1.3 IT Outsourcing Deals 6
Chapter 2 Considering Outsourcing: The Request for Proposal
and Vendor Selection 43
2.1 The Directive 43
2.2 Obtaining Support and Forming the Outsourcing Team 44
2.3 Guidelines and Internal Evaluation 45
2.4 Preparing a Timetable 47
2.5 Internal Communications 48
2.6 Defining the Scope of the Transaction 51
(a) Defining the General Scope 51
(b) Understanding Your Existing IT Resources 53
(c) Developing a Long-Range Plan 55
2.7 Selecting a Group of Potential Vendors 56
(a) Making the First Move 56
(b) Vendor Experience and Resources 56
(c) Narrowing the Vendor Group 58
2.8 Request for Proposal 58
(a) Single Bid vs. Multiple Bids 58
(b) Single Vendor vs. Multiple Vendors 59
(c) Preparing the Request for Proposal 60
2.9 Evaluating the Proposals 65
(a) Evaluation Criteria 65
(b) The Respondents 69
(c) Scoring 69
(d) Weighting the Criteria 69
(e) Tallying the Ballots 70
(f) Final Selection Process 70
2.10 Notifying the Preferred Vendor(s) 71

(a) Making the Announcement 71
(b) Commitment and Costs 71
(c) Letters of Intent 72
(d) Communication Strategy 72
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viii Contents
Chapter 3 Negotiations: Strategy and Process 119
3.1 Introduction 119
3.2 Negotiating Process 121
3.3 Exposure Analysis 125
3.4 People Negotiate, Not Companies 126
3.5 Negotiating Strategy 127
Chapter 4 Outsourcing Contract 133
4.1 Overview 133
4.2 Use of Attorneys 135
4.3 Key Contract Issues 136
(a) Structure of the IT Outsourcing Agreement 137
(b) Scope of Services 137
(c) Term 138
(d) Transition 138
(e) Integration 138
(f) Measuring Performance 139
(g) Currency Compliance 140
(h) Legal and Regulatory Compliance 140
(i) Transfer of Employees 141
(j) Staffing 142
(k) Transfer of Assets 142
(l) Management and Control 142
(m) Customer Responsibilities 142
(n) Intellectual Property 143

(o) Reports and Documentation 145
(p) Ownership and Return of Data 145
(q) Confidential Information 146
(r) Business Recovery 147
(s) Pricing/Fees 147
(t) Payments 147
(u) Taxes 148
(v) Dealing with Business Variability 148
(w) Audit 149
(x) Representations and Warranties 149
(y) Liability 150
(z) Liquidated Damages 150
(aa) Termination 150
(ab) Effect of Termination 151
(ac) Termination Assistance 152
(ad) Dispute Resolution 152
(ae) Indemnities 152
(af) International Issues 152
(ag) Assignment 152
(ah) Governing Law and Venue 153
(ai) Key Miscellaneous Provisions 153
4.4 Retaining Strategic Control 155
(a) Technical Architecture and Product Standards 155
(b) Identifying Customer Responsibilities 155
(c) In-House Capabilities 156
(d) Rights of Approval 156
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Contents ix
(e) Vendor Concerns 156
4.5 Assembling the Team 157

Chapter 5 Exhibits 293
5.1 Critical Part of the Outsourcing Contract 293
(a) What Should Be Included in the Exhibits? 293
(b) Don’t Leave the Exhibits Until the End! 293
(c) Delegate Responsibility 294
(d) Business and Legal Reviews 294
5.2 Exhibit Listings 295
5.3 Checklists 300
Chapter 6 Financial Considerations 321
6.1 Introduction 321
6.2 Base Case 322
(a) Architecture 322
(b) Financial Concepts 325
(c) Time Frame 335
6.3 Retained Costs 336
(a) In Proposal Comparison 337
(b) In Financial Planning 338
6.4 Unit vs. Total Cost 338
(a) Identifying the Units in Unit Cost 338
(b) Cost Trends 339
(c) Using Cost Trends 341
6.5 Pricing Options 341
(a) Pricing Structure 341
(i) Fixed Fee 341
(ii) Rate-Based Pricing 341
(iii) Fixed-Fee and Rate-Based Pricing 342
(iv) Resource Pool 342
(v) Cost-Plus Pricing 342
(vi) Time and Materials 342
(vii) Pass-Through Expenses 342

(viii) Lump-Sum Payment for Assets 343
(ix) Spending Commitments 343
(x) Other Cost Considerations 343
(b) Payment Terms 343
(c) No Customer’s Business Remains Static over the Term of the
Outsourcing Agreement 343
(d) Ongoing Price Reductions 344
(i) May Depend on Pricing Structure 344
(ii) Productivity Improvements 344
(iii) Market Comparisons 344
(e) Cost-of-Living Adjustments 345
6.6 Other Financial Charges 345
(a) Taxes 345
(b) Insurance 346
(c) Expenses 346
(d) Exchange Rate 347
(e) Audit Rights and Requirements 347
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x Contents
6.7 Financial Impact of Change 348
(a) Transfer Finances 348
(b) Transformation Finances 349
(c) Transfer and Transformation Funding 349
6.8 Payments 351
(a) Timing 351
(b) Late Charges 351
(c) Disputes 351
6.9 Chargeback 352
(a) Paying for Chargeback Services 352
(b) Outsourcing an Existing Chargeback Process 353

(c) Chargeback vs. Charging 354
Chapter 7 Human Resources 357
7.1 Transitioning Employees to the Vendor 357
7.2 Due Diligence 359
(a) Employees Affected by Transition 359
(b) Compensation and Benefits Analysis 363
(c) Review of Severance/Redundancy Policies 363
(d) Outplacement Benefits 364
(e) Laws and Regulations 364
(f) Due Diligence Checklist 365
7.3 The Employment Offer 367
(a) Employees to Be Transitioned 367
(b) Vendor vs. Subcontractor Hiring 368
(c) Start Date 368
(d) Hiring Requirements 368
(e) Vendor Employment Agreement 369
(f) Base Salary 369
(g) Positions 369
(h) Minimum Employment Period 370
(i) Health Care Benefits 370
(j) Deductible/Co-payment Reimbursement 370
(k) Vacation 370
(l) Savings Plans 371
(m) Pension Plans 371
(n) Retiree Medical Benefits 371
(o) Severance/Redundancy 371
(p) Service Credit 372
(q) Tuition Aid 372
(r) Location 372
(s) Miscellaneous Benefits 373

(t) Work Hours 373
(u) Dress Code 373
(v) Performance Appraisals 373
(w) Replacements 373
(x) Human Resources Representative 373
(y) Administrative and Financial Responsibility 374
7.4 Communication and Transition Plan 374
7.5 Contract-Related Issues 375
(a) Representations and Warranties 375
(b) Indemnities 375
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Contents xi
(c) Rights upon Termination of the Outsourcing Contract 375
7.6 Stay Incentives 376
Chapter 8 Information Privacy and Security Issues 383
8.1 Introduction 384
8.2 Selected Information Privacy Laws 385
(a) Background 385
(b) Services to the Financial Industry 386
(c) Services to the Health Care Industry 389
(i) HIPAA Privacy Rule 390
(ii) HIPAA Security Rule 392
(iii) HIPAA Penalties 394
(iv) HIPAA Business Associates Agreements
and Outsourcing Issues 395
(d) Web Sites Collecting Information about Children 395
(e) Outsourcing Human Resource Functions 397
(f) Marketing and Customer Relations 399
(g) Monitoring Electronic Communications 400
8.3 Selected Information Security Laws 402

(a) Sarbanes-Oxley Act 402
(b) Required Security Practices: California Information
Security Law 402
(c) Breach of Security: California’s Identity Theft Law 403
8.4 Company Privacy Policies 405
(a) Complying with Published Policies 405
(b) Restrictions to Transfer of Databases 406
(c) Federal Trade Commission and State Attorney
General Offices 408
8.5 Outsourcing and Global Companies 409
(a) European Union and European Economic Area 410
(b) Restrictions to the Transfer of Databases 411
(c) Model Contracts: U.S. Safe Harbor 412
(i) Model Contracts 413
(ii) Safe Harbor as an Alternative to Use
of Model Clauses 413
(iii) Binding Corporate Rules 414
(d) Information Privacy and Security Outside the EU and the EEA 414
8.6 Offshore Outsourcing 415
8.7 Practice Tips 417
(a) Evaluate the Needs and Potential Legal Liabilities 417
(b) Draft Appropriate Agreement 418
(c) Monitor Legal Developments 418
Chapter 9 Measuring Performance 419
9.1 Overview 419
9.2 Service Levels 419
(a) Objectives for Using Service Levels 420
(b) Establishing Service Levels 421
(c) Service-Level Agreements 422
(d) Excused Performance 423

(e) Innovative Service Levels 423
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xii Contents
(f) Reporting 423
(g) Adjustment of Service Levels 423
(h) Remedies 424
9.3 Benchmarking 425
(a) Scope of Benchmark 425
(b) Organizations Used for Comparison 426
(c) Benchmarker 427
(d) The Process 429
(i) Timing 429
(ii) Underlying Data 429
(iii) The Results 429
(iv) Reports 429
(v) Dispute Resolution 429
(e) Alternatives to Benchmarking 430
(i) Technology/Price Indexing 430
(ii) Most-Favored-Customer Provision 430
(iii) Notification of New Technologies 430
(iv) Right to Competitively Bid 430
9.4 Customer Satisfaction 431
9.5 Gainsharing 431
Chapter 10 Transformational Outsourcing 441
10.1 Moving from A to C 441
10.2 Internal Considerations 443
10.3 Project Definition 445
10.4 Maintaining Multiple Environments 447
10.5 Using Subcontractors 447
10.6 Contract Terms 449

(a) Project Definition 449
(b) Project Plan 449
(c) Customer Responsibilities 449
(d) Implementation Schedule 450
(e) Right to Reprioritize or Delay 450
(f) Change Orders 452
(g) Installation 452
(h) Risk of Loss 452
(i) Cutover/Parallel Environments 453
(j) Acceptance Testing 453
(k) Failure to Pass Acceptance Tests 454
(l) Incentives 454
(m) Staffing 456
(n) Project Management 456
(o) Progress Meetings and Reports 456
(p) Hardware and Software 457
(q) Software and Data Conversion 457
(r) Documentation 457
(s) Training 457
(t) Payment 458
(u) Warranties 458
(v) Indemnities 458
(w) Proprietary Rights 458
(x) Third-Party Licenses 459
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Contents xiii
(y) Right to Compete 459
(z) Marketing Arrangements 460
(aa) Additional Units 460
Chapter 11 Global Transactions 461

11.1 Overview 461
11.2 Contract and Legal Issues 464
(a) Preparing the Contract 464
(i) Contract Structure 464
(ii) Defining the Scope of Services 464
(iii) Identifying Service Locations 465
(iv) The Effective Date 465
(v) Liability 465
(b) Contract Governance and Approval Procedures 465
(i) Customer Governance 465
(ii) Vendor Governance 466
(iii) Approvals 466
(iv) Uniform Policies and Procedures 466
(c) Transfer of Employees 466
(d) Laws and Regulations 468
(i) Industry-Specific Regulations 468
(ii) Transborder Data Flow 470
(iii) Data Privacy Regulations 470
(iv) Import/Export Controls 470
(v) Relocation of Data Centers 471
(vi) Third-Party Processing 471
(vii) Changes in Laws and Regulations 471
(viii) Ownership Issues 471
(e) Audit Requirements 471
(f) New Environments 471
(g) Monitoring Performance 472
(i) Performance Standards 472
(ii) Benchmarking 472
(iii) Technology Review and Indexing 472
(h) Pricing-Related Issues 472

(i) Pricing 472
(ii) Currency Risks 473
(iii) Cost-of-Living Adjustments (COLA) 473
(iv) Taxes 473
(v) Asset Sales 473
(i) Retained Responsibilities 473
(j) Termination 474
(k) Continuation of Services 474
Chapter 12 Business Process Outsourcing 511
12.1 The Emerging Market 511
12.2 What Is BPO? 512
12.3 Areas Targeted for BPO 513
(a) General Categories 513
(b) Administration 513
(c) Asset and Property Management 514
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xiv Contents
(d) Finance 514
(e) Human Resources 515
(f) Miscellaneous 516
(g) Procurement/Logistics 516
(h) Call Center 517
(i) Claims Processing 518
(j) Data Management 518
12.4 Reasons for Outsourcing Business Processes 518
12.5 Integration: Making BPO Fit 519
12.6 BPO Vendors 519
Chapter 13 Internet-Enabled Outsourcing: The Virtual Frontier 521
13.1 Introduction 521
13.2 Potential Problems and Issues 521

Chapter 14 Post-Negotiation Activities 561
14.1 Contract Signing 561
14.2 The Press Release 562
14.3 The Autopsy 563
14.4 Risk Analysis 564
14.5 Contract Administration 566
14.6 Implementing the Transition Plan 566
14.7 Notifying Third Parties 567
Chapter 15 Renegotiation and Termination 569
15.1 Overview 569
15.2 Renegotiation/Termination Process 571
15.3 What Does the Contract Say? 571
(a) Term of Agreement 573
(b) Right to Renegotiate/Terminate 573
(i) Renegotiation 573
(ii) Termination 573
(c) Termination Fees 573
(d) Data 573
(e) Intellectual Property 574
(f) Equipment/Facilities 574
(g) Third-Party Service Contracts 575
(h) Service Levels 575
(i) Customer Satisfaction 575
(j) Deliverables or Milestones 575
(k) Fees 576
(l) Benchmarking 576
(m) Gainsharing 577
(n) Damages 577
(o) Confidential Information 577
(p) Dispute Resolution 577

(q) Continued Performance 577
(r) Termination or Transition Assistance 578
(s) Rights to Resource/Insource 578
(t) Assignment 578
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Contents xv
(u) Employee Issues 578
(v) Strategic Alliance or Joint Venture 579
(w) Ancillary Agreements 579
15.4 Additional Issues to Consider 579
(a) Internal Politics 579
(b) Publicity 580
(c) Termination/Transition Costs 580
(d) Transition Time Frame 580
(e) Assessing In-House Capabilities 580
(f) Other Service Providers 580
15.5 Termination Plan 580
Appendices
Appendix 1.1 Outsourcing in the Pharmaceutical Industry 37
Appendix 2.1 Nondisclosure Agreement (Mutual Protection) 73
Appendix 2.2 Request for Information 76
Appendix 2.3 Request for Proposal 79
Appendix 2.4 Customer Reference Questions: Sample 98
Appendix 2.5 Vendor Proposals Relating to the Provision
of Information Technology Services Evaluation 100
Appendix 2.6 Assessing Legal Resources Required
(Customer Form): Questionnaire 106
Appendix 2.7 Due Diligence Agreement 109
Appendix 2.8 Letter of Intent (Customer Form) 113
Appendix 2.9 Letter of Intent (Vendor Form) 115

Appendix 2.10 Consent Letter (Management of Third-Party
Products/Services) 118
Appendix 3.1 Model Term Sheet 129
Appendix 4.1 Key Issues in Outsourcing Agreements 158
Appendix 4.2 Key Issues in Offshore Outsourcing Agreements 172
Appendix 4.3 Key Issues in a Data Center Outsourcing Transaction 186
Appendix 4.4 Information Technology Outsourcing Agreement
(Customer Form) 195
Appendix 4.5 Information Technology Outsourcing Agreement (Vendor Form) 246
Appendix 4.6 Proprietary Rights Rider (Vendor Form) 275
Appendix 4.7 Teaming Agreement 281
Appendix 5.1 Employee Confidentiality Agreement 310
Appendix 5.2 Customer Satisfaction Survey Checklist 312
Appendix 5.3 General Assignment and Bill of Sale Agreement 316
Appendix 5.4 Example of Joint Management Procedures 318
Appendix 6.1 Cost-of-Living Adjustment (COLA) Provisions Checklist 355
Appendix 7.1 Stay Incentives 377
Appendix 7.2 Issues to Consider When Selecting Retained Employees 381
Appendix 9.1 Gainsharing in Outsourcing Transactions: Overview 432
Appendix 9.2 Checklist of Issues to Consider When Establishing
Service Level Methodologies 437
Appendix 11.1 International Transactions Key Issues Checklist 475
Appendix 11.2 Global Master Services Agreement (Vendor Form) 481
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xvi Contents
Appendix 11.3 Example of Local Counsel Questionnaire
for International Outsourcing Transactions 506
Appendix 13.1 Key Legal Issues to Consider When Negotiating Contracts
for the Provision of Application Services 523
Appendix 13.2 Legal Checklist for ASPs 537

Appendix 13.3 Legal Due Diligence Checklist for Companies Transacting
with ASPs 539
Appendix 13.4 Application Services (Vendor Sample Form) Agreement 543
Appendix 13.5 Business Continuity Issues for Customers to Consider
When Evaluating an Application Service Provider 558
Appendix 15.1 Checklist for Renegotiating/Terminating
Information Technology Outsourcing Transactions 583
Appendix 15.2 Due Diligence Checklist for Customers
Considering Termination 594
Appendix 15.3 Termination Assistance Services Agreement Outline 600
Appendix 15.4 Termination Agreement between Customer and Vendor 605
Index 613
IMPORTANT NOTE:
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Halvey.book Page xvi Tuesday, August 9, 2005 8:58 AM
xvii
ABOUT THE AUTHORS
John K. Halvey is a partner in the New York office of the international law firm of Mil-
bank, Tweed, Hadley & McCloy, LLP and the founder of the Technology & Strategic
Sourcing Group. He practices in all areas of technology and sourcing law, with particular
emphasis on information technology and business process outsourcing and private
equity transactions involving technology or sourcing companies. Mr. Halvey has repre-
sented companies in many of the largest technology, telecommunications, and business

process outsourcing transactions, including Deutsche Bank, BellSouth, Panasonic,
DuPont, AT&T, Alcatel, Xerox, Boeing, Bombardier, General Atlantic, and the Com-
monwealth Bank of Australia.
His work in these areas has been the subject of articles in Forbes, Information Week,
ComputerWorld, CIO Magazine, The Daily Deal, and Venture Capital Journal. Mr.
Halvey has for many years been ranked by Chambers and Partners as one of the world’s
leading IT and outsourcing lawyers and in 2005 was the only lawyer in the United States
to be ranked a “Star Performer” in the outsourcing industry.
In 1995, Crain's named Mr. Halvey on its list of the 40 most successful people under
40 in New York City. He is also listed in The Best Lawyers in America. He has published
three other books: Business Process Outsourcing Transactions: Process, Strategies and
Contracts; Data Processing Contracts, and Computer Law and Related Transactions.
Mr. Halvey is a magna cum laude graduate of Tufts University, Emory University
School of Business, and Emory University School of Law, where he was an executive
editor of the Law Review.
Barbara M. Melby is a partner in the Global Outsourcing Group. Ms. Melby's practice
focuses primarily on outsourcing transactions, including information technology and
business process outsourcing, as well as other technology-related transactions, including
development agreements, system implementation agreements, licensing and hosting
agreements, technology services, joint ventures, and strategic alliances. Ms. Melby rep-
resents a large and diverse client base and has led or participated in nearly 100 major
outsourcing transactions. Most recently she has completed a large offshore outsourcing
transaction for a major insurance company, a global IT outsourcing (ITO) transaction for
a leading international media company, a multi-tower outsourcing transaction for a
major global pharmaceutical company, and a human resources outsourcing (HRO) trans-
action for large services provider. In addition to this book, Ms. Melby has co-authored
Business Process Outsourcing: Process, Strategies, and Contracts (John Wiley& Sons,
2000). She also has written numerous articles in and has been widely quoted in a wide
variety of publications to include CIO Magazine, ITWorld, The Metropolitan Corporate
Counsel, and The Pennsylvania Lawyer. Ms. Melby is also a frequent speaker on out-

sourcing and technology transactions at various business, legal, and professional confer-
ences. She is a graduate of Vassar College and received her law degree from Boston
University, magna cum laude. While at Boston University, she served as an editor on the
Boston University Law Review and was a Distinguished Scholar.
Halvey.book Page xvii Tuesday, August 9, 2005 8:58 AM
xviii
ABOUT THE WEB SITE
As a purchaser of this book, Information Technology Outsourcing Transactions:
Process, Strategies, and Contracts, 2nd Edition, you have access to the support-
ing Web site:
www.wiley.com/go/information2e
The Web site contains files for the appendices that appear in this book (see Con-
tents). These appendices are provided in Word format.
The password to enter this site is: outsourcing
Halvey.book Page xviii Tuesday, August 9, 2005 8:58 AM
xix
PREFACE
Amid an unsteady economic recovery, outsourcing has become both a corporate
buzzword and a galvanizing issue for many interest groups since the first publi-
cation of this book in 1994. Hardly a day goes by without national and interna-
tional publications like The Wall Street Journal, The New York Times, Business
Week, Time, and The Economist discussing the issue of outsourcing from a stra-
tegic, legal, and geopolitical point of view. While CNN’s Lou Dobbs maintains a
running list of American companies exporting jobs overseas,
1
no less than a
dozen federal bills and resolutions meant to curb offshore outsourcing have been
proposed,
2
and a majority of states have introduced antioutsourcing legislation

of one type or another.
3
Yet, despite outsourcing’s role as a lightning rod for
campaign rhetoric, companies in a wide array of markets increasingly view out-
sourcing as a means to achieve cost or operational goals and as a tool for opera-
tional and cultural transformation.
4
As these companies embrace increasingly
diverse outsourcing solutions, there has been an attendant need for increasingly
sophisticated transaction structures, which, in turn, has brought outsourcing
directly within the purview of corporate development groups.
The decision about what will or will not be outsourced has traditionally been
one of determining what is strategically so important to the core competency of
the business that it cannot be handed over to a third party. However, as the recent
boom-bust economic cycle has demonstrated, business strategy is an evolving
process, and the line of what is now deemed too critical to a company’s opera-
tions to outsource has moved closer to the corporate offices of most organiza-
tions. Functions like HR, finance, marketing, project management, customer
care, and customer acquisition—once viewed as too core to be handled by an
1. “Lou Dobbs Tonight” Web site, at />2. The list of proposed federal antioutsourcing legislation includes, among other measures, bans on off-
shoring federal contract work; reporting requirements for companies considering offshoring jobs;
consumers’ “right to know” measures for offshore call centers; restrictions on outsourcing-related
work visas for foreign nationals; and ending the tax deferral for American companies’ overseas prof-
its. Global Sourcing Information: Table Tracking State and Federal Global Sourcing Legislation, Na-
tional Foundation for American Policy Web site, at />globalsourcing/appendix.aspx.
3. The list of proposed state antioutsourcing legislation includes, among dozens of other measures, bans
on offshoring state contract work; restrictions on consumer information being sent offshore;
consumers’ “right to know” measures for offshore call centers; extending insurance benefits to work-
ers who have been displaced through outsourcing; and advance notice to employees before their jobs
can be sent offshore. Global Sourcing Information: Table Tracking State and Federal Global Sourcing

Legislation, National Foundation for American Policy Web site, at />tivities/globalsourcing/appendix.aspx.
4. Patrick Thibodeau, “Forrester adjusts outsourcing numbers upward,” ComputerWorld, May 17,
2004, at />Halvey.book Page xix Tuesday, August 9, 2005 8:58 AM
xx Preface
outside party—are being outsourced with increasing frequency.
5
The confluence
of this increased corporate outsourcing activity, the current political scrutiny,
and the ever-developing sophistication of the outsourced solutions being offered
has created a greater need for innovative corporate approaches in the outsourc-
ing arena.
Although the outcome of any of the outsourcing regulatory proposals remains
far from certain, outsourcing customers and their deal teams have nonetheless
begun structuring (and restructuring) their outsourcing relationships in anticipa-
tion of a heightened regulatory environment. One such strategy involves how to
control the outsourced solution. The threat of tighter regulations will prompt
some companies to tighten the reins on the governance of the outsourced solu-
tion, ensuring that in the future the company can control its own compliance in a
changing regulatory environment. For other companies, adapting to yet-
unknown regulatory obstacles warrants becoming more hands off with the out-
sourced solution, easing the reins on the day-to-day mechanics of governance,
and making the service provider responsible for compliance with changing laws.
With either approach, the key to success is open dialogue between the company
and service providers.
Current and pending data security and consumer protection laws have
prompted some companies to seek firm assurances from their outsourcing ven-
dors that the vendors’ facilities, systems, and human resources policies have
adequate security measures in place. In the wake of the Sarbanes-Oxley Act, and
with new accounting rules being developed by the Securities and Exchange
Commission (SEC) and Public Company Accounting Oversight Board

(PCAOB), companies are seeking to bolster their rights to audit their outsourc-
ing vendors’ records, facilities, software, hardware, and security measures. With
increased regulatory scrutiny of offshore service locations (not to mention the
rise of global terrorism), the legal doctrine traditionally known as force majeure
has taken on an added meaning, with companies demanding more robust busi-
ness continuity and disaster recovery obligations on the part of the vendor. In
addition, customers are paying greater attention to the corporate entities that are
signatories to their outsourcing contracts so as to ensure that the customers are
not simply contracting with local holding companies but, rather, with firms that
have assets to stand behind the promises made in the contracts.
As these examples demonstrate, to successfully navigate an outsourcing trans-
action, and then manage the outsourcing relationship, in such dynamic times
requires a combination of both corporate strategy and transaction process. Com-
panies will continue to refine the focus on their core competencies (e.g., the sale
of specialized goods or services) and seek to efficiently outsource the noncore
elements of their business. As this decade unfolds, the competitive differentia-
tion for most global organizations will be the ability to effectively manage mul-
tiple outsourced relationships and the myriad of business and legal issues those
5. See, for example, Des Dearlove, “Hiring people to take care of your people,” The Financial Times,
June 8, 2004, at 29.
Halvey.book Page xx Tuesday, August 9, 2005 8:58 AM
Preface xxi
relationships entail. Managing an outsourced relationship involves having the
right contract governance and management procedures in place, using effective
communication, and dedicating the time, resources, energy, and commitment to
leveraging the most from the outsourced relationship. Only through this process
will companies realize the advantages of leveraging the outsourced model.
This new edition of Information Technology Outsourcing Transactions hopes
to bring the reader up to date with changes and developments in outsourcing
transactions and the process of doing outsourcing transactions in the past ten

years. During this time, outsourcing has evolved from the last hope of broken IT
departments to the solution of choice for the enhancement of an increasing num-
ber of business processes for an increasing number of Global 1000 companies.
The practice of outsourcing has evolved in step with this movement from back
office to front office and is now more complex, more challenging, and poten-
tially more rewarding for all those involved. As with the previous edition, this
book is not a substitute for legal, technical, financial, or accounting advice but,
instead, serves as a guideline to effectively manage an outsourcing transaction.
Halvey.book Page xxi Tuesday, August 9, 2005 8:58 AM
Halvey.book Page xxii Tuesday, August 9, 2005 8:58 AM
1
CHAPTER
1
OVERVIEW OF THE IT OUTSOURCING
INDUSTRY
1.1 BACKGROUND 1
1.2 IT OUTSOURCING INDUSTRY 2
1.3 IT OUTSOURCING DEALS 6
1.1 BACKGROUND
Outsourcing—the assumption of management and operational responsibility for
a noncore business function or functions by a third party—is at the forefront of
strategic considerations by corporate and government information technology
(IT) professionals. Virtually every Fortune 500 company in this country, and an
increasing number of companies throughout the world, outsource some signifi-
cant portion of their IT services. Meta Group, an analyst of the IT outsourcing
industry, estimates that 70 percent of companies outsource and that all compa-
nies will embrace the model by 2006.
1
It is easy to understand, therefore, how IT
outsourcing has become a $536 billion worldwide marketplace.

2

Whereas, a decade ago, most companies engaged in a “build and maintain
your own” strategy with respect to their IT infrastructure, corporate cost-cutting
and the ever-increasing pace of technological innovation has spawned a genera-
tion of IT managers who accept—if not embrace—the underlying principles of
outsourcing. The economies of scale that can be achieved by an outsourcing ven-
dor, coupled with the ability to financially engineer the fees associated with out-
sourcing to achieve a desired goal with respect to payments, have given
outsourcing an almost populist following.
Clearly, cost-cutting and financial engineering have been significant factors
in fueling the outsourcing fire. In recent years, however, companies are also
coming to view outsourcing as a means of transforming their IT operations with-
out losing step with their competitors on a day-to-day basis. Transformational
outsourcing is typically a two-step process—with the outsourcing vendor first
taking responsibility for the outsourcing customer’s existing (or legacy) systems
1. “We’ll All Be Outsourcing by 2006,” Computing, July 10, 2003.
2. Gartner Dataquest forecasts that the $536 billion worldwide IT services industry will grow through
2007 to reach $707 billion, with a compound annual growth rate of 5.7 percent. Worldwide IT Ser-
vices Market Forecast, 2002–2007 (Executive Summary).
Halvey.book Page 1 Tuesday, August 9, 2005 8:58 AM