IT-Outsourcing (German Edition)

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Incentives if service levels are exceeded.

English-German Dictionary

Typical service levels may include, depending on the type of service:. The maximum time allowed for an interruption to services within one reporting period. The maximum time allowed for change requests. Service levels measure the supplier's performance over a certain period of time, such as one month the reporting period. They should enable the customer to measure the quality and quantity of the services provided by the supplier in a clear, objective and reliable manner.

Therefore, the parties have to agree on a mechanism for the measuring process. Service levels can be structured as service credit schemes, which are very common in outsourcing contracts. The customer receives a service credit if the supplier fails to achieve the contractually owed performance standard for a service level.

There are different types of service credit schemes that can be used. Their purpose is to motivate the supplier to meet the contractual service levels and keep the focus on the most important aspects of the required services. Legally, a service level credit can either be a penalty, compensation for damages or price adjustment.

Therefore, it is essential to clearly indicate in the contract which type of credit the parties want and how the service credit should be granted. Flexibility in volumes purchased What level of flexibility is allowed to adjust the volumes customers purchase? The parties are free to determine any volume to be purchased. They can fix volumes through different means, including:. A cap on the purchased volume, where the customer can place orders with suppliers to provide a certain volume of services up to an appointed cap. A change in the cap is recognised as a change of contractual provision and can be agreed on by the parties.

However, the provision of orders with different volumes does not require any additional actions and therefore allows some degree of flexibility. Such a provision may be included both in contracts and in specifications. A definite volume, where the customer is entitled to receive a certain volume of services. A change in volume is achieved by amending the contractual provisions. A corridor of services, which is common in IT outsourcing, where the parties agree on a certain range of quantities and services which have to be provided.

An absence of a detailed volume in the contract. This is where the contract includes a provision to provide services, for instance based on the customer's orders, and the volume to be supplied is specified in separate documents such as orders or additional agreements. Charging methods and key terms What charging methods are commonly used on an outsourcing?

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German law does not strictly prescribe specific kinds of charging methods for outsourcing. There are a great variety of charging methods that are commonly used on an outsourcing. These can roughly be divided into charging methods using a fixed price and variable charging methods. In practice, these two methods can also be combined into a fixed and variable pricing structure. The parties are free to choose whatever charging methods they want as long as the agreement does not contradict good faith. According to latest practice, the following charging methods are commonly used in outsourcing:.

The customer only pays for what they have actually used within a certain specified timeframe. The customer pays for a fixed capacity of services, regardless of actual usage. This charging method refers to the actual costs the supplier had, including the profit margin the supplier wants to make. This charging method refers to the financial benefit the customer accrued within a certain timeframe.

Financial benefit can either be an increase in turnover or a decrease of costs. The price will be charged according to a benchmarking system. The customer has to pay a price that is common in the market for comparable services. This refers to foreseeable changes of costs during the duration of the contract.

The service provider charges the price in accordance with foreseeable changes, such as inflation, to minimise their economic risks. What other key terms are used in relation to costs, including auditing and benchmarking mechanisms? Mechanisms such as auditing are commonly used to control costs and ensure compliance with the contract and the quality of services.

Due to their time consuming nature, audits are normally limited to once a year and in case where there are serious doubts about the suppliers' compliance with the outsourcing contract. When it comes to auditing, it is common for the supplier to pay for its own expenses up to a certain reasonable effort, whereas the customer pays for the auditor.

If the auditing proves necessary because the supplier breached its obligations, the supplier will have to bear the costs for the auditor too. Usually, the supplier will request certain confidentiality protection with regard to the audit to ensure that its business secrets are not revealed to the customer or any third party. Benchmarking is often requested by the customer in the outsourcing contract to ensure that, in a long-term contract and after two or three years have passed, the pricing in the contract will still be in accordance with the current market environment.

Increasingly, such benchmarking exercises are done by specialised consultant companies, such as Gartner or ISG. Discovering that prices are above other market suppliers is a frequent source of dispute between parties in contract negotiations. Suppliers will often refuse the customer's request for an automatic price reduction to avoid making losses with a service for a longer period of time.

Other than that, additional mechanisms can be agreed on, such as: Outsourcing contracts can include controlling procedures for the customer so that they can actually track the expenses arising. The parties may also agree on an obligation to prove the time spent working on the project if the parties have agreed on an hourly rate of payment.

The parties can also agree on flexibility mechanisms to adjust the contract and payment to suit changing circumstances so called "major change clauses". It is common for such clauses to only apply in extreme situations, whereas in the normal course of events, the contract will remain unchanged.

Customer remedies and protections If the supplier fails to perform its obligations, what remedies and relief are available to the customer under general law? There are a range of remedies which are available to the customer under general law.

Specific performance of the contract. The applicable remedies and relief depend on the type of contractual agreement the parties concluded, in particular if they agreed on a service contract according to sections et seqq of the German Civil Code BGB or a contract for works and services according to sections et seqq of the BGB see Question 5, Legal structures.

Outsourcing: Germany overview

The service contract obliges the service provider to perform the promised services and the customer to provide the agreed remuneration. The service provider does not owe any specific result, but the mere effort to achieve success. Damages and compensation can be claimed only if the supplier did not make any efforts to provide the services which is a high hurdle sections et seqq, BGB.

Termination of the contract is governed by section of the BGB ordinary termination and section of the BGB extraordinary termination. The contract for works and services, governed by sections et seqq of the BGB, is a relationship in which the manufacturer of the work contractor undertakes to produce a deliverable requested by the customer, and the customer to pay the agreed remuneration.

In contrast to the service contract, a certain success is owed, and remuneration is only due once the defined success is achieved, and the deliverable is accepted by the customer. Sections et seqq of the BGB contain particular provisions concerning remedies and relief. The customer has the following options if the supplier does not achieve the success owed after a reasonable grace period section , BGB:. Still claim fulfilment ie specific performance of the contract. To lower the agreed price and keep the unfinished deliverable. To perform its own repairs at the supplier's cost.

To withdraw from the contract, return the unfinished deliverable and claim back all payments made. What customer protections are typically included in the contract documentation to supplement relief available under general law? The content of a contract depends on the specific agreement between the parties.

Generally, all kinds of provisions may be included in the contract as long as they do not contradict with the principle of good faith. For the customer it is vital to have control over the performance of the supplier and to know whether or not the service provider meets the required service levels.

In practice, that can be difficult, since the service provider is not part of the working organisation of the customer. Therefore the parties must ensure that the customer stays informed about the provided services. Without knowledge of the services provided, the customer would have no basis for any claim. Supplementary relief may therefore include: Documentation obligations for the supplier.

Reporting obligations for the supplier. Auditing rights for the customer. The customer has the right to review the monitoring and reporting obligations of the supplier. As the supplier himself is usually required to undertake both monitoring and reporting himself, the customer on the other hand must have the right to check if the supplier complies with these duties. In addition to the statutory rights given which are often repeated in the outsourcing contract see Question 16 , further customer protections are common, such as:. Penalties for non-compliance with project milestones or service levels.

Termination rights in case of severe service level breaches. Termination for convenience options often against payment of a termination fee. Warranties and indemnities As the outsourcing contract is a combination of different contract types, different regulations may be applicable depending on the specific breach of contract.

In particular, sections et seqq of the BGB govern the warranty in a purchase contract, sections et seqq govern the warranty in a contract for works and services and sections et seqq. Since the codified warranties in German law already cover many cases of warranty, documenting additional warranties in a contract is not necessary and therefore not common.

One common exception is an IP warranty combined with an indemnity from claims resulting from infringements of IP rights.

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What limitations are imposed by national or local law on fitness for purpose and quality of service, or similar warranties? The parties can agree on basically any terms concerning fitness for purpose and quality of service, provided they do not contradict the mandatory rules of law or good faith. The rules are stricter for general terms and conditions, in accordance with sections et seqq of the German Civil Code BGB , in which provisions which pose an "unreasonable disadvantage" to the other contracting party are considered invalid. What other provisions may be included in the contractual documentation to protect the customer or supplier regarding any liabilities and obligations arising in connection with outsourcing?

Other than the regulations on damages and compensation and termination of contract, the parties can agree to include third parties to protect the customer or supplier, including through:. By agreeing to include insurance, both parties can pay financial compensation if the partner does not fulfil its obligations. Although insurance is the most common way to secure rights when involving a third party, the pledge allows the supplier or customer to refer to the third party when the contract partner cannot fulfil its duties or compensate for the resulting damage.

When the supplier is part of a group of companies, it is common for the customer to request a parental guarantee by a group entity with a strong financial backing such as the holding or parent company. The supplier has a vital interest in limiting its liability as much as is legally possible. The customer, on the other hand, has an opposing interest, so the parties must agree on the liability of the service provider. Any liability limitation clause will have to meet the requirements stated by law. In a nutshell, this means that in an individually negotiated contract, most liability except for intentional breach can be excluded.

A commonly used limitation clause in an outsourcing contract concerns the limitation of claims to a certain amount of damages per case, per year. It should be noted that in standard contracts which have not been individually negotiated, such flexibility is strictly limited. What types of insurance are available in your jurisdiction concerning outsourcing, and to what extent are they available?

German law does not provide or exclude certain types of insurance. The types of insurance available depend on the specific commercial situation in the outsourcing contract. Types of insurance include:. Personal insurance covering insurance for employees performing services under outsourcing arrangements. Additionally there are specific types of insurance such as cyber- or IT-insurance, covering loss of profit due to system defaults. Term and notice period Does national or local law impose any maximum or minimum term on an outsourcing? If so, can the parties vary this by agreement?

Generally, there are no restrictions concerning the maximum or minimum term on an outsourcing. Outsourcing contracts are usually concluded for a fixed long term, because the supplier has to compensate for investments made which are often very high at the beginning of the transaction. The customer, on the other hand, also has an interest in a long term agreement as they often want to have, for example, a long-term and reliable functioning IT-infrastructure. Does national or local law regulate the length of notice period required maximum or minimum? It is very common for the parties to agree on any applicable notice periods in the outsourcing contract.

There are statutory provisions on notice periods such as in sections c, a and of the German Civil Code BGB , but these are rarely relevant due to the prevailing agreement of the parties. Termination and termination consequences Events justifying termination. What events justify termination of an outsourcing without giving rise to a claim in damages against the terminating party?

Reasons for the termination of the outsourcing by one of the parties can be determined both by law and contract. There are a few options under German law to terminate the contract before the agreed end of term. Fundamental breach of contract The outsourcing contract can be terminated if one of the parties commits a fundamental breach of contract, which allows the other party to instantly end the contract according to section paragraph 1 of the German Civil Code BGB or section , BGB for service contracts. In addition to sections and of the BGB, the parties commonly specify within the outsourcing contract itself what should constitute a fundamental breach of contract in their specific relationship, as this term leaves a lot of room for interpretation.

The parties may also include further reasons for termination within the outsourcing contract. Essential change of circumstances If the substance of the contract is changed in such a fundamental manner that at least one party would not have entered the contract, or would have structured it differently had they known the change of circumstances before, that party can ask for a change in the contract or, if a change is not possible, termination of the contract section , BGB. The same applies if circumstances that were relevant for the execution of the contract prove to have changed or did not exist.

Frequently, the parties choose to integrate the statutory provision of section by including a major change clause in the outsourcing contract. Other reasons established by law or contract The German Civil Code provides further reasons for the termination of the contract. In particular, a contract for works and services or purchase contract can be rescinded if one of the parties does not perform its contractual duties or the performance does not meet the contracted standard, and the other party unsuccessfully requested performance within a certain period of time section paragraph 1, BGB.

Regulation and requirements

A termination or rescission of the contract in accordance with section of the BGB does not affect the right to claim damages section , BGB. In what circumstances can the parties exclude or agree additional termination rights? Generally the parties can agree on any termination rights if they do not contradict mandatory law. The potential causes for termination which the parties may agree on in particular are:.

One party not fulfilling their duty on time, even after a reasonable grace period has been granted. One party repeatedly not fulfilling their obligations. One party breaching a non-disclosure agreement. One party inflicts significant damage on the other party. There is no specific regulation on whether the party must immediately terminate the contract after the agreed reason has arisen.

IT Outsourcing in Germany

If the party continues the contract for a significant amount of time without executing its termination right, it might lose its right of termination on the basis of good faith principles section , BGB. What remedies are available to the contracting parties? An outsourcing contract can contain any provisions in addition to general law remedies. Outsourcing contracts may in particular include the following conditions:.

Provisions on additional penalties. Parties are free to specify circumstances where they may make indemnity claims. Talk to Gartner now and learn the benefits of becoming a Gartner client. Gartner delivers the technology-related insight you need to make the right decisions, every day. We use cookies to deliver the best possible experience on our website. To learn more, visit our Privacy Policy. By continuing to use this site, or closing this box, you consent to our use of cookies. Already have a Gartner account? Sign in to view this research document.

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