7. Ending the IT Outsourcing Relationship – IT Outsourcing Contracts: A Legal and Practical Guide

Chapter 7. Ending the IT Outsourcing Relationship

Termination

All IT outsourcing arrangements will sooner or later come to an end. This chapter outlines how to manage the end of your IT outsourcing relationship, with as little disruption to your business as possible.

Chapter 4 described the two fundamental reasons for terminating an IT outsourcing contract (material breach of contract and insolvency of either party); and also outlined possible additional clauses that you, as the customer, may wish to negotiate into your agreement.

However, terminating your IT outsourcing contract could leave you facing some difficulties. For example, if you terminate the contract for material breach, and there is subsequently found to be a breach – but not one so serious as to qualify as a material breach, then the IT supplier may allege that you have terminated without justification. This means that your organisation itself is then in material breach of the contract. The IT supplier may then claim all the losses, costs and expenses that it might have suffered as a result of such unjustified termination[9].

There is usually a strong interdependency between your organisation and your IT supplier, especially where the contract has run for some time. Ending this relationship abruptly, can cause enormous disruption to both parties.

Ending an IT outsourcing relationship may mean that you need to engage a replacement IT supplier. This new IT supplier may see that your organisation is ‘in distress’, and use this to gain advantage. For example, they may seek to charge a premium for services; or disclaim liability for some services/quality standards provided, saying that their capacity to provide may be limited by the previous IT supplier’s legacy goods, for which the replacement supplier does not want to be responsible.

Nevertheless, if you are considering terminating an IT outsourcing contract and you do not have the in-house resources, you need to have the necessary plans in place to be able to receive IT goods and services (including the appointment of a replacement IT supplier on agreed contractual terms) in the future.

A good ending

Ending IT outsourcing contracts can always cause some business disruption. To minimise disruption, the IT outsourcing contract should include a well thought out exit plan.

The exit plan should be agreed in writing at the start of the IT contract, and form part of the contract. Your organisation’s bargaining position, and relationship with the IT supplier, are likely to be better at the start of the contract than at the end of the contract, when you are separating.

The exit plan should:

  • Explain the obligations of the parties, if and when, termination or expiry occurs.

  • Cover issues, such as the IT supplier doing all the work that you reasonably request to transfer the IT services back to your organisation, or to a replacement IT supplier nominated by you, within relevant timescales. This will require the IT supplier to:

    • Provide details of any existing projects, their current status and any further work that needs to be done on them.

    • Not start any new projects or incur any unnecessary costs or expenses on existing projects.

    • Co-operate with your organisation and provide relevant information and reasonable assistance to you and/or any replacement IT supplier (including in respect of public relations).

  • Be updated at regular intervals throughout the project by the IT supplier (outlining changes and new positions or systems), so that if termination occurs abruptly then you and your IT supplier have a relatively up-to-date exit plan to follow.

  • Be ‘fault neutral’. This means that the exit plan should include the provision that the IT supplier should be paid for this work – regardless of why the contract was terminated and/or whose fault this might have been. This is because implementation of the exit plan and any contractual breach should be treated as completely separate issues.

    This is for several reasons, including:

    • Even if the contract had gone to plan, the IT supplier would have been paid for work on the exit plan at expiry of the contract.

    • The importance of ensuring business as usual.

    • The fact that any action by you against the IT supplier for losses incurred, is likely to take longer than exiting the arrangement.

If you stay in an unworkable relationship with your IT supplier, until you have been paid for the impact of poor performance, this may have a detrimental effect on your business. It is often better to exit and find a new supplier; and pursue any action for damages as a separate process. However, if a replacement IT supplier is to take over, then it should be fully contracted to you to provide replacement IT services, before you terminate your old IT outsourcing contract.

Finally, the fees and/or charging agreement relating to your IT supplier’s implementation of the agreed exit plan, should also be agreed at the start of the IT outsourcing contract, as part of the key terms. This avoids you being charged additional, or higher, fees, if this is the last piece of business that you provide to your IT supplier.

Summary

The keys to a satisfactory contract end are both hard and soft. The soft side includes: ongoing communications and trying not to let things become personal. The hard side includes: having a clear exit plan in your IT outsourcing contract; giving fair notice; separating the process of exiting the contract from wider issues about possible compensation; contracting with a replacement IT supplier before ending your existing contract; and managing public relations. Finally, but of utmost importance, it is vital to seek advice before terminating your IT outsourcing contract, to ensure that you are fully aware of the legal and other consequences of doing so.



[9] This happened in the case of Peregrine Systems v Steria (2004) EWHC 275 (TCC).