Do you have an exit plan?
Typically in a tender, I ask for an exit plan upfront. It’s important that you have one.
Contracts can end because:
1) Contract has expired
2) Termination for convenience.
3) Termination because of default by either party.
These are normally covered in a standard terms and conditions. However you should consider how services should continue after the contract ends, for whatever reason, there should be a provision in the contract for an exit plan.
The draft contract that accompanies the tender document should include any specific clauses that relate to the continuation of service after termination. Best practice is for the contract to include an agreed process by which the agreed strategy can be documented in an Exit Plan that is regularly updated.
Think about whether if you have an existing contract exit strategy which is known and understood by the business?
Who owns what at the end of the contract?
What information will be provided by the existing contractor and are they even obliged to assist, is this contractual or goodwill?
What access to procedures, systems and people will be allowed by the existing contractor to the company or to a potential new contractor and when?
What support will be provided by the existing contractor through any transition to a new supplier?
How long the transition period/support requirement will be? Is there any cost involved
It is far easier to get your supplier to agree to an exit plan as part of their tender submission and before the contract is signed.
Preparing for exit
Your contract will come to an end at some time. Either it will finish on the last day of the agreed contractual period, or it will terminate early – possibly due to performance problems on the part of the contractor; possibly due to a change of policy .
A workable exit strategy is an essential feature of any contract. Without it you risk becoming locked-in to your supplier and/or you risk disrupting service delivery.
An exit strategy needs to:-
- Identify barriers to exit and minimise those barriers;
- Allow for different exit routes (eg end of service; new supplier; transfer back in-house);
- Be a practical plan which will work under all circumstances, not only during a planned ending, but also when you may be in dispute with your supplier and need to terminate early.
Exit barriers
Build a Risk Register to identify barriers and how to manage those risks. This is not an exhaustive list, but such barriers may include:-
- Lack of expertise (the incumbent supplier may have all the knowledge);
- Dependence on the supplier’s systems and processes;
- Service disruption during transition to a new supplier;
- Issues of ownership (of physical assets and intellectual property rights);
- The potential additional costs of changing supplier (eg professional legal fees; capital infrastructure investment).
How those barriers can be overcome will clearly vary depending on the nature and the circumstances of each individual contract. But some things to consider…
- Ensure that your supplier is required, by contract, to let you have access to everything you will need to manage closure or transition, including information, people, systems, procedures;
- Similarly, ensure that your supplier is required to let potential new suppliers have access to whatever is necessary to apply “due diligence” tests;
- Set out in the contract precisely who owns all assets (physical and IPR including what is background, foreground, sideway IPR and those which the supplier acquires during the course of the contract;
- Agree a reasonable (to both parties) period for transition during which the supplier will have to “support” the transition/termination process and define what you mean by “support”;
- Set out precisely what costs the supplier is expected to bear and what will fall to the company (eg who will pay for the suppliers staff time in “supporting” any transition? What mechanism is there to establish costs of assets owned by the supplier which may be required by the company or a new supplier?);
- What about third party (sub contracting) arrangements? Set out controls over those arrangements (at least) during the transition/termination period. Get the agreement of the sub contractors to those arrangements if necessary;
- Are there any financial penalties, or licence fees paid a year in advance, what are the consequences if we choose to terminate the contract early? Make sure that everyone’s obligations are understood;
- What contingency arrangements in place in case of non-compliance or early termination of the contract – ensure that you have identified how service will be continued. And ensure that the contractor is reasonably able to deliver on their commitments to properly manage termination even if service fails dramatically;
- Think about any expert advice you may need and build the resource into your plans.