Outsourcing Deals Need Prenups

Regardless of who is right or wrong in Sears' courtroom battle with Computer Sciences Corp., the case shows why a solid prenuptial agreement is necessary when crafting an outsourcing deal.To review the facts: Sears abruptly canceled its ten-year, $1.6 billion services contract with CSC last week for what it, in an SEC filing, says is CSC's "failure to perform certain of its obligations." In its own filing, CSC says Sears' allegations are "contrived" and that Sears just wanted to end the deal due to its merger with Kmart. CSC asked a judge to block Sears from shredding the contract but the request was denied. That the two companies are now openly maligning each other, and taking big PR hits in the process, shows the parties did not have all the right mechanisms in place to peacefully disengage. As Cutter Consortium analyst Jeff Kaplan told me last week, "You need to know who is going to be responsible for what [in the event a deal ends prematurely] if you don't want to end up spending a lot of time and money in court."

CSC and Sears are discovering another downside to the courtroom. The case has gone to the Seventh Circuit of the United States Court of Appeals, in Illinois, and many of the related documents may enter the public domain. So a lot of information that businesses like to keep private-how much they pay for services, what their contracts stipulate, technology strategies, and the like-could be available for perusal by inquiring minds. The moral? There are a host of reasons why an outsourcing deal can end early. Smoothly moving IT operations from the vendor back to an in-house operation depends on having a detailed transition plan in place that's mutually agreed upon. The courts should be a last resort.