2013 Year-End Strategic Sourcing and Technology Transactions Update

January 22, 2014

2013 proved to be another active year in the outsourcing and technology transactions marketplace.  We continued to see a steady flow of traditional information technology outsourcing transactions mixed with an ever expanding variety of business process outsourcing transactions.  We also saw an increase in the adoption of cloud-based solutions, including SaaS, IaaS and PaaS.  Outlined below are a few trends we have observed during the past year and some considerations for the future.             

Practice Observations on 2013 and Some Thoughts for 2014

  1. S. 744 – Immigration Reform:  The U.S. Senate’s proposed "Border Security, Economic Opportunity, and Immigration Modernization Act" (S. 744) H-1B visa reform provisions would have significantly affected the U.S. outsourcing industry and India-based service providers in particular.  Among other requirements, S. 744 capped the percentage of an entity’s U.S.-based workforce that could consist of H-1B visa holders, increased the cost of obtaining H-1B visas and prohibited the deployment of H-1B visa holders at customer locations by certain H-1B-dependent service providers.  While gridlock in Washington prevented the bill from proceeding through the House, we anticipate that immigration reform generally, and H-1B visa reform in particular, is one area that may be ripe for political compromise in 2014.
  2. Data Security:  Popular interest in governmental and private sector data collection practices, media attention to data breaches and the correspondingly large notification and remediation costs have raised the stakes for both service providers and customers.  In 2013, these factors drove heavy negotiation of provisions allocating responsibility and authority for resolving data breaches, with provisions becoming increasingly customized to particular situations.  This trend will likely continue into 2014, and may accelerate if regulators increase enforcement efforts or if the plaintiffs’ bar is able to overcome hurdles to class certification for claims by data subjects.
  3. EU Data Privacy:  Data protection reform continues to advance in the European Parliament, with proponents hoping to see their 2012 proposal for changes to the EU Data Protection Directive enacted in 2014.  The contemplated changes would offer some benefits for global outsourcing deals, such as increased uniformity and "one stop shopping" in the EU (enabling global enterprises to work with a single data protection authority in the EU instead of many).  The potential downsides include significantly increased sanctions for non-compliance and the new "right to be forgotten," which may require substantial changes to technology and re-examination of existing agreements to allocate responsibility for implementation.
  4. Cloud Computing:  The ease of administration and attractive economics of cloud computing have led to more deals with cloud computing components, as even businesses with highly sensitive data are testing the waters with providers and services geared towards their needs.  We expect use of cloud computing to further expand in 2014, as more providers work through how to meet the needs of regulated businesses and adopt approaches that address the security challenges faced by their customers.
  5. SaaS:  Although SaaS providers remain more resistant to negotiating terms and conditions than traditional outsourcing providers, in 2013 we were increasingly successful in negotiating key legal terms for our clients.  As more activities migrate towards the SaaS model, we are seeing increased customization of both the services offered and the legal agreements that can be negotiated, and we expect this trend to continue into 2014. 
  6. Negotiation Results:  The notion that there would be a convergence among service providers in the outsourcing marketplace regarding terms and conditions was debunked once again in 2013.  We observed a wide-ranging difference in the terms and conditions service providers were willing to accept.  Additionally, customers who raised key terms and conditions earlier in the negotiating process (e.g., pre-down select) were generally able to obtain more favorable terms and to move to closing in a more expeditious manner.
  7. Solution Mix:  In 2013, customers continued to deploy multi-service provider, multi-platform solutions.  Moving beyond "anchor" service providers, we observed many clients implementing task-based or process-specific solutions, often leveraging SaaS or other cloud-based offerings.  We expect this trend to continue as customers gain comfort with more complex governance and data security concerns associated with the cloud.
  8. Disputes:  Our outsourcing disputes practice remained active in 2013.  The dueling forces of increased focus on contract governance and cost savings by customers and the rapid expansion and margin squeeze experienced by service providers have led to disputes that we have helped resolve successfully through negotiated settlements and restructurings.  

Gibson Dunn’s Practice

Gibson Dunn’s Strategic Sourcing and Technology Transactions Practice in particular enjoyed one of its busiest years ever and represented clients on some of the largest and most complex transactions completed in 2013.  In addition, the practice’s team of attorneys continued its steady expansion, adding members at both the partner and associate levels.  Below are some highlights regarding the practice in 2013.

  • The practice was ranked by Chambers & Partners in Band 1 nationally.
  • We are very pleased that Shaalu Mehra, as a partner, and three lateral associates, joined the practice in 2013, deepening our expertise in both technology transactions and outsourcing.
  • In 2013, we advised on more than 50 significant strategic sourcing and technology transactions with a total contract value in excess of $2 billion.
  • Our clients came from a wide variety of industries, including Apparel, Automotive, Chemical, Consumer Products, Energy, Financial Services, Food, Government, Healthcare, Hospitality, Insurance, Life Sciences, Pharmaceutical, Publishing and Technology. 
  • Within the United States, we represented clients based in California, Colorado, Delaware, Georgia, Maryland, New Jersey, New York, Oregon, Tennessee, Texas, Washington and Wisconsin.  Looking outside the U.S., we represented clients based in Bahrain, Canada, Denmark, France, Germany, Ireland, Singapore, Switzerland and the United Kingdom and in several instances transactions that involved more than 65 countries. 
  • Consistent with past years, in 2013, we worked with a broad range of clients, from mature public companies (over 35% of our clients were in the Fortune 500), to middle market and emerging growth companies.

Last year marked one of our busiest years to date representing clients in technology transactions, including patent portfolio acquisitions, contract manufacturing, technology-related services arrangements and cloud-based services transactions.

Below are some of the more notable transactions that Gibson Dunn’s practice handled in 2013.

Information Technology Outsourcing Transactions

  • A Fortune 500 hospitality company in a series of global IT outsourcing transactions with Accenture, IBM, Mindtree, TCS and Xerox.
  • A Fortune 500 life sciences company in the renegotiation of a global application development and maintenance transaction with Accenture.
  • A Fortune 500 energy services company in an IT outsourcing transaction.
  • A global specialty chemicals company in a full scope IT outsourcing transaction with HCL.
  • A global financial services and communications company in an application development and maintenance transaction with TCS.
  • An international media company in a renegotiation of an IT infrastructure transaction with HCL.
  • A Fortune 500 IT distributor in multiple enterprise software distribution agreements and telecommunications hardware distribution agreements.
  • A Fortune 500 technology company in the outsourcing of certain application development and maintenance services to Capgemini.

Business Process Outsourcing Transactions

  • A Fortune 500 hospitality company in the sale of its captive shared services center and the outsourcing of its back-office support functions to Accenture.
  • A Fortune 500 consumer products company in the outsourcing of certain financial and accounting services to Capgemini.
  • A Fortune 500 insurance company in the outsourcing of certain claims processing services to Alliance-One Services (a subsidiary of CSC).
  • A Fortune 500 financial services company in the outsourcing of its print procurement functions to Williams Lea.
  • A hedge fund in the outsourcing of its back-office asset management services to SEI.
  • A publisher in the outsourcing of its supply chain to RR Donnelley.
  • A Fortune 500 company in the outsourcing of quality assurance services.

Cloud/SaaS Transactions

  • An international food distribution company in the implementation of a global cloud-based human resource information system with SuccessFactors Inc. (an SAP company).
  • A Fortune 500 chemicals company in a global, cloud-based enterprise human resources SaaS transaction with Workday.
  • A leading apparel retailer in connection with a cloud-based enterprise human resources SaaS transaction with Workday.
  • A Fortune 500 technology company in its outbound cloud services agreements.
  • A Fortune 500 technology company in a multinational telecommunications services agreement with British Telecom.

Other Significant Technology Transactions

  • An investment bank in a global asset management services agreement.
  • A Fortune 500 office technology company in the sale and licensing-back of certain patents and related know-how.
  • A manufacturer of high performance computing solutions in a contract manufacturing transaction with Jabil.
  • A Fortune 500 technology company in multiple enterprise-wide  software licenses.

 Gibson, Dunn & Crutcher LLP  

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding the outsourcing and technology transactions marketplace.  Please contact the Gibson Dunn lawyer with whom you usually work, or any of the following members of the Strategic Sourcing and Technology Transactions Practice Group: 

Daniel R. Mummery – Palo Alto (650-849-5318, dmummery@gibsondunn.com)
William J. Peters – Los Angeles (213-229-7515, wpeters@gibsondunn.com)
Stephen D. Nordahl – New York (212-351-2442, snordahl@gibsondunn.com)
Shaalu Mehra – Palo Alto (650-849-5282, smerhra@gibsondunn.com)    

© 2014 Gibson, Dunn & Crutcher LLP

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