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In the Headlines
In the Headlines: Fast growth in hard times

Insights
A Seasoned Buyer Shares His Tips: How to Select an Outsourcing Consultant

Focus On Costs
Know Your ABCs: Using Activity Based Costing at CIBC

Global View
The New Sodexho Alliance: An International Exchange of Innovative Outsourcing Ideas

Government Perspective
IT Takes a Seat: Provance Technologies’ Seat Management Solution Gives Outsourcers Advantage

Best Practice
Change Enhances Outsourcing Demand

Legal Perspective
Attorney Jim Wilkins: How to Preserve Outsourcing Relations in the Midst of a Merger

ASP FOCUS
ASP In The Headlines
Betting on a Winner: ASP Technology Lets The Internet Dial A Landline

ASP Legal
Opportunities, Pitfalls in an ASP Contract

When two companies merge, a flurry of negotiation begins. Often watching from the sidelines are clients whose outsourcing relationships can be hacked away in no time by the acquiring company's executive sword. How can you salvage outsourcing relationships in the midst of a merger?

"As a matter of principle, I don't believe in mergers of equals. One of the merger partners always comes out on top; but it sometimes takes a little longer to determine who," comments James Wilkins, former general counsel and chief financial officer of an outsourcing software provider who is now an outsourcing attorney at Shaw Pittman in Washington, D.C., recently gave a presentation at the Sourcing Interests Group Conference entitled "Outsourcing Considerations in a Merger Environment". He is a leader of Shaw Pittman's outsourcing practice, which delegates about 80 percent consulting and 20 percent lawyering to corporations and governments in its New York, Washington, and London offices.

In the Mind of the Acquirer

To understand the dynamics, step into the shoes of the acquiring company - Company X - and its business concerns in the midst of a merger. The acquirer will be planning for the costs necessary to purchase Company Y, along with the added costs of the transitions in company structure. The challenge is to add Company Y's work on a favorable basis.

There’s more to the deal than just adding incremental volume, points out Wilkins.

Company X will be asking many questions, including:

• Can we add Company Y and its similar scope to any of our deals in place?
• How much will it cost to transform the target operation and its management structure?
• What will be the incremental costs in taking on Company Y's volume of work on a favorable basis?

If Company X is in the middle of negotiating an outsourcing deal, it is in an awkward situation. It will want to take Company Y's volumes and operations into account, but it may not have the right information to thoroughly evaluate the addition. Thorough information on Company X may not be available pending regulatory approval for the merger. "The acquired company's people often do not want to be outsourced. Resistance is common and information is hard to get," adds Wilkins.

The Acquired Company's Risk of Loss

When a merger agreement is made, the knee jerk reaction of Company X is to force Company Y to get out of any existing deals and make them compatible with those of the acquirer. In this scenario, the functional outsourcing relationships of Company Y are severely disrupted and often lost completely.

The major reasons for this loss are:

• The management of Company X has a different philosophy about outsourcing.
• The management of Company X has had a bad relationship with Company Y's provider.
• The idea of outsourcing was not invented by Company X's management.
• Problems with the existing outsourcing agreement are exaggerated by the scrutiny of the merger.
• The existing outsourcing deal is not shown to have compelling value to the combined entity quickly enough, so no one will be its champion.

Initial Planning Can Prevent Problems Down the Road

How can companies protect long-standing outsourcing relationships in a merger? Wilkins recommends starting early. He says if companies think long-term, both outsourcing companies and their clients can breathe easier when an acquisition takes place.

Wilkins recommends:

• Negotiate provisions in the initial outsourcing agreement that are designed to deal with future mergers; e.g. pricing for the infrastructure information project, as well as pricing for the additional volumes of work.
• Secure a commitment from the outsourcing provider to use competitive pricing for the addition of merger volumes.
• Try to follow a disciplined process.
• Anticipate and plan around problems related to the lack of information and lack of cooperation.

Often Company Y does not want to release all of its contract information until the deal is final, and by that time it may be too late to defend jeopardized outsourcing deals. He stresses the need to get better information about the target's operations early "so it is easier to determine what to do about existing sourcing relationships. The typical due diligence tends to minimize the importance of those things."

Saving Outsourcing Deals in the Midst of A Merger

A customer and its provider invest a lot of time and energy into their relationship. In a merger, Company X will want to protect its established outsourcing contracts. Even more urgent may be any pending contracts, in which case Company X must represent its buyer.

How do the acquired company and its outsourcing vendor move to save their existing deals in a merger negotiation?

Wilkins outlines three steps:

1. Move quickly. Show the importance of your deal with compelling facts. Your audience is tough.
2. Aim high to get the attention of the acquirer's executive ranks. Otherwise, your efforts will be futile.
3. Show that the existing outsourcing agreements are valuable in terms of quality, price, and compatibility. If Company Y’s existing outsourcing status matches the direction of Company X, the acquirer can take advantage of that value.

With the above mantra, Wilkins again places a great emphasis on getting high-ranking attention to serve as an outsourcing champion. If no executive voice is willing to fight for Company Y's outsourcing deals, pressure can burst out in various places, and hard-earned client relationships can be lost in the merger transition.

Wilkins concludes, "If you don't have a high-ranking executive who is a proponent of the sourcing and who takes on the responsibility of making sourcing relationships successful, there's an awful lot of pressure on Company X to say, 'We're smart enough to do this ourselves.'" The customer, the provider, and their champion must all pull together to prove their success and save their existence.

Lessons from the Outsourcing Primer:

• When beginning a new outsourcing relationship, plan ahead to include the possibility of a merger in the contract.
• As the acquirer in a merger, try to obtain as much information about your target operation's involvements before the actual acquisition.
• Take advantage of the acquired company's infrastructure. Similar objectives can result in effective collaboration of resources.
• If you are being acquired, move quickly to prove the value of previously established outsourcing relationships to acquiring executives.

Publish Date: July 2001

Copyright © 2001 - Everest Partners, L.P.

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