07.15.08
Develop Your Risk Profile In Advance
One of the major sticking points in most outsourcing and services deals is risk allocation. If the supplier is presenting the paper, risk will generally allocated entirely to the customer. If the customer is presenting the paper, risk will be allocated entirely to the supplier. Then, after the business terms are agreed upon, long, drawn-out discussions surrounding warranties, indemnities and limitations of liability ensue. This occurs in nearly every deal - and those of us in the practice have our “canned” reasons why our position is proper and important.
While this approach is good for legal fee generation, it does not facilitate dealmaking, nor does it engender trust in the upcoming relationship. All too often, clauses are simply swapped wholesale - a process that can go on for several cycles until the parties develop a compromise.
With that compromise, both parties walk away partially bloodied and partially triumphant. Lawyers, when they compare notes, talk about the great limitation of liability provision they got with X supplier or Y customer. They retain defenses against the potential malpractice suit - “I recommended X, but the client settled for Y.” But oftentimes, little actual thought is put into these.
It is, perhaps, time to take a more nuanced approach to risk allocation. Instead of walking in with extreme positions (whether or not identified as “reasonable”), the parties should commit to developing commercially reasonable risk allocation profiles prior to negotiation - instead of just reacting to extreme langauge. There are a million ways to accomplish this goal, but doing so would reduce the transactions cost involved in significant outsourcing and services deals.
