Myth # 7: If an outsourcing provider performs poorly, terminating the provider is usually a simple process. Companies need a clear right to exit from the relationship should it go sour. And that right should extend not only to circumstances where the company has “cause” to terminate the contract, but also to circumstances where the company may wish to terminate “without cause.” A contract that requires a company to prove “cause” before it can exit is often inadequate because “cause” is open to interpretation and has frequently been the source of protracted legal battles between the parties.
Nonetheless, while “without cause” provisions are desirable, it is also important that the contract include some “cause” provisions for termination. To avoid a legal dispute over whether “cause” exists for the termination, the termination provisions should be detailed and specific, directed to the performance standards that reflect the expectations of the hospital.
Poor performance by the outsourcing provider calls for quick intervention. Unfortunately, most companies wait until problems reach a crisis level. As with personnel issues, diligent documentation of problems can go a long way to avoiding litigation if termination becomes necessary.
Suggestions: Bargain for the right to terminate “without cause” upon notice (90 days or less if possible). Negotiate the right to terminate immediately with “cause” in the event of a material adverse event, such as a threat to patient safety or the cancellation of the outsourcing company’s insurance, or on very short notice in the event of other specified breaches by the outsourcing provider. Track the company’s performance and document instances where it falls short of performance expectations.
Myth # 8: When a contract with an outsourcing provider must be terminated, the company can easily provide the services itself or retain another outsourcing provider. It is not always a simple matter for a company to line up staff and systems to immediately replace those that had been provided by a terminated outsourcing company. In some instances, staff may have noncompete obligations that run in favor of the outsourcing company. Thus, the company would have to pay the outsourcing provider for the right to hire the individuals after termination.
Also, without clearly defined termination rights and specific performance standards, a company could run into a double-obligation dilemma. Such a dilemma arises when a company is in a fight with the current outsourcing company about whether “cause” exists to terminate the company for a breach, and the company retains a new provider before the dispute is resolved. If the company loses the dispute with the current provider, it will have contracts with two different providers for the same services.
Suggestions: If necessary, negotiate at the outset of the contract for the right to hire staff and license technology from the outsourcing company at specific prices despite the noncompetes, rather than allowing this matter to wait until after termination of the contract, when you might be desperate. If an individual worked for your company before the outsourcing company entered the picture, make sure you do not have to pay a fee to hire the person back later. Also, despite your best efforts, you may find yourself in a legal dispute over your right to terminate the contract with “cause.” Have a contingency plan in place for such circumstances to provide the services on a temporary basis until the dispute has been resolved.