Extraordinary Times, Extraordinary Measures

Under many BPO and IT outsourcing agreements, there is another effective and straight forward (though still potentially complex) avenue for reducing operating costs; that is, invoking the “Extraordinary Events” or “EV” clause.

What is an “Extraordinary Events” clause?

For an outsourcing customer that has an Extraordinary Events clause in its outsourcing agreement, now is the time to dust off the agreement, review those terms and consider whether (and how) it can be invoked. Although they vary by contract, the objective of the EV clause is to provide the outsourcing customer with a disciplined and objective contractual mechanism to equitably reset the services charges, upon the occurrence of a sustained (or expected sustained) change in business operations that impacts the scope, volume and/or solution features of a service.

How does it work?

Let’s quickly consider the typical terms, again subject to variation from one deal to the next. Care should be taken before invoking an EV clause to understand your rights (and potential constraints) under the contract and to devise a game plan for the way forward should you choose to invoke this clause.

1. The Event. Unlike a force majeure event, the trigger ordinarily need not be tied to an act or God, strike, civil disturbance or even an pandemic, nor does the event need to be unforeseen or unforeseeable. Instead, the trigger simply may be a change impacting service operation on some sustained basis. More customer-centric language may include planned events, which for example might be an acquisition, divestiture or addition or retirement of a business line.
2. Duration of Impact. The business change typically must be sustained, which is often defined as a consecutive three to six month period. The EV clause, therefore, would not be used for periodic service deviations, such as seasonal volume fluctuations.
3. Right to Invoke. Often (in more customer-centric transactions), though not always, the right to invoke the EV clause rests solely with the customer. In some cases, the supplier will have right to invoke the clause or request (perhaps through governance protocols) that the parties enter into good faith discussions for its use.
4. Methodology (Targeted Measures). An EV clause is intended to achieve a reasonably equitable, if not commensurate, adjustment to the charges based on the change that triggers its use. Common attributes include:

• Targeted Resource Reductions, which calibrates a reduction in the resources (personnel, software, facilities, etc.) required due to the EV.
• Targeted Cost Reductions, which calls for a reduction in costs associated with those reduced resources.
• Targeted Resource/Cost Additions, which applies the same approach for addressing increased costs and potentially increased charges due to increased volumes (above contractual levels) or additional of services.

5. Negotiation & Implementation. The contractual terms for this process range from simple (a brief set of ground rule terms) to elaborate (including detailed time lines, escalation protocols, dispute resolution processes and potentially exit provisions or remedies). Typically, the main features include, at minimum:

• Preparation of the plan—Customarily, the supplier is charged with preparing a first draft of the plan for achieving the “Targeted Resource Reductions” and “Targeted Cost Reductions” for the customer’s review.
• Deadline for reaching agreement on changes—EV clauses usually call on the parties to work in good faith to reach agreement on changes within a discrete period of time (e.g., 30, 60 or 90 days).
• Escalation & dispute resolution—If agreement on Targeted Resource Reductions and Targeted Cost Reductions is not reached within that time frame, the matter may be escalated to executive leadership for resolution through informal dispute resolution, or a formal dispute may be commenced.
• Deadline for implementing the change—Assuming an agreement is reached (and documented), the EV clause typically addresses when the Targeted Resource Reductions and Targeted Cost Reductions are to be implemented and put into effect.

How do I best pursue this options during the COVID-19 outbreak?

During a time where businesses are scrambling to conserve cash, achieving speed to savings (reduced operating costs) is paramount. However, overly aggressive, ill-planned or uninformed approaches could defeat this objective or result in a delay in implementing the intended benefits of the effort. Consider the following as you prepare for launching your EV effort:

1. Read the contract – Confer with your counsel and contract management team and ask that they prepare a summary of the key terms of your EV clause. This will set the foundation for what you may or may not be able to pursue, and the contractual constraints within which you will need to operate. For example:

• What are the conditions for invoking the clause and does the COVID-19 impact on your services qualify as a triggering event?
• What are the procedural formalities for invoking this right?
• What are the prescribed time lines (for preparation of the plan, agreement on the repricing terms and go-live of the new pricing)?

2. Develop a strategy—The strategy should be developed taking into account a number of the driving factors prompting this action and the potential constraints to its implementation. For example:

• What segment(s) of the services are the most impacted and offer the greatest opportunity for targeted reductions?
• Are any of the reduced volumes still within (and projected to stay within) volume dead bands (e.g., plus or minus % range from contractual baselines)? This may represent a hurdle to invoking the clause (or at least provide a basis for the supplier to contest it use).
• Recognizing that the duration of the downturn is speculative (given the uncertainties of the virus, its spread, severity and duration, and the downstream impact on business volumes), is there a reasonable projection of the duration and extent of the volume reduction? Note that the supplier could take the position that the volume impacts are temporary, and resist the EV assertion.
• How will operating model changes, if any, occasioned by work from home, shelter in place and similar developments impact the targeted reduction analysis?
  1. Does the solution (manner in which services are delivered) require adjustment?
  2. Are new or alternative services required (e.g., new or different features to accommodate a remote workforce)?
• Are impacts being borne differently by region (country, state)?
• Are there mission critical operations that should be “hands off” for this effort?
• Do you wish to phase in the change or have it implemented in it entirety by a date certain (and is that feasible)?

3. Draw up a game plan that ensures efficiency and mitigates risks—Part of this effort involves the customary best-practice attributes of project planning, while aspects need to be considered and tailored to overcome the challenges presented by COVID-19. An illustrative list of these elements might include:

• Engage a team—That is, designate a small “core team” of the impacted stakeholders and subject matter experts associated with the targeted services to lead the effort (e.g., finance, operations, IT, procurement, legal, comms, data collection, etc.)
• Establish a time line—Set the desired end date and, working backwards, the interim key milestones (e.g., notice to supplier, supplier plan deadline, commence discussions/negotiation, etc.)
• Prioritize—Based on the strategy, identify the “must-have” service targets and lower priority targets.
• Collect/Validate Data—While the relevant data (volumes, etc.) may be available through on-hand reports, data analytics or AI tools (and the supplier should be primarily responsible for data collection), the customer may need to assist in the data collection effort and should be prepared to scrub and validate the data.
• Communicate—Prepare a communication plan for impacted end user communities for purposes of budget alignment and potential changes in service delivery (and most importantly, to contain undesirable, unauthorized communications with your supplier that may impede progress or impair your leverage).
• COVID 19 Considerations—Office closures, shelter in place and similar government orders or guidelines (or simply humanitarian considerations) likely will impede face-to-face interactions with your project team and the supplier team. In addition, suppliers, which have their own cashflow and business concerns, may be resistant to EV initiatives (or seek to delay or slow down their implementation).

Be prepared to:

• Set up and engage in online, video and other forms of remote collaboration and discussion, but be mindful of enhanced security considerations for remote work force activities.
• Anticipate and be prepared to address obstacles and constraints, such as:
  • Where the change may result in furloughs or headcount reductions, there may be regulatory hurdles (e.g., recent COVID-19 legislation, notice requirements, particularly in Europe).
  • Supplier assertions that the EV clause is not applicable in a COVID-19 scenario (conditions are not met).
  • Supplier assertions of a “force majeure” defense in terms of its obligation to adhere to the EV regime due to COVID-19 impacts.
  • Other impacts on the process or timing arising from the activation of business continuity plans due to COVID-19.
• “Think out of the box” and explore potentially creative features (e.g., phased implementation or phase re-entry to the prior model as the crisis subsides).
• Institute a robust reporting protocol that documents all B2B discussions with the supplier, particularly given the remote interactions (to maintain a deal “audit trail”).

 Closing Thoughts

Although a cliché, extraordinary times indeed call for extraordinary measures and, if you had the foresight to include an Extraordinary Events clause in your outsourcing agreement, you may have a decisive contractual tool to reduce your service charges and help reduce your overall operating costs during the troubled times of COVID-19.