On October 25, the Morgan Lewis technology transactions, outsourcing, and commercial contracts team filled a room in New York with representatives from various industries who were looking to engage in interactive discussions with leaders in the field on the latest trends and top-of-mind issues impacting technology and outsourcing transactions.

Discussions were far-reaching and covered a broad range of topics, with key highlights including the following:

Ethics and Developments in AI

• Technology is just one part of the solution. Understand the problem at issue and create a holistic solution.
• Validation and supervision of models are critical, particularly in relation to ethical considerations. Models need to be sufficiently explainable.
• If lawyers are using AI in their practice, then they must have some understanding of how it works. Some automated/AI activities could be considered the practice of law.
• Business/pricing models (e.g., license fees per user) may change, given that models can run 24/7.
• In some ways, use of generative AI can be treated like use of open-source code. Drafting and negotiations can help determine the particular uses/concerns.

State of the Market & Strategies

• Companies are still looking at the outsourcing and managed service providers to provide a large part of their business. The anticipated drop in large deals has not been realized, with 2023 having the highest volume of mega-deals since 2014. These deals are required to help cost savings, as the suppliers need the scale to make the economics work.
• New technology and anything as a service (XaaS) are still prolific, but rather than run these technologies themselves, businesses are looking to managed service providers; there is a move away from, for example, service integration and management (SIAM).
• Expect a move away from service levels to service levers—moving the focus of services at certain times. Similarly, expect a shift from steady state operations to more continuous transformation and project management. This removes the need for long, fixed-term deals, allowing for a more fluid short-term auto-renewal structure.
• Hyperscalers will start to offer deals with more tangible benefits rather than just large discounts for unnecessary capacity.
• One key challenge is internal stakeholder conflict—different budgets, objectives, motivations, and concerns.
• Another key challenge is standardization. Look for specific AI use cases (e.g., fraud/compliance) that can scale.
• Look for new revenue streams that can be unlocked (e.g., data and analytics).
• Data governance will be crucial (and worth the investment).
• Consider new (or old) models, such as gainsharing.

Next Generation BPO

• The business process outsourcing (BPO) market continues to grow. While cost savings are still a key driver, businesses are also focusing on process optimization, digital innovation, and outcome-based models.
• BPOs are moving to technology-first transformation versus the classic full-time equivalent (FTE) model.
• BPO arrangements are becoming more complex, resulting in more complex contracting arrangements. Key areas of consideration include
  • ensuring that requirements and service descriptions accurately reflect the customer’s needs and supplier’s service delivery model;
  • dealing with multi-vendor supply chains/ecosystems;
  • migration to new technologies and decommissioning of old technologies without adversely affecting business operations;
  • managing complex data issues; and
  • liability allocation—traditional liability provisions may no longer be appropriate.

US Privacy Law

• There is a powerful multiplier effect when cyber breaches involve integrated systems.
• Breach notification can come from the service provider, provided that it makes it clear why the service provider had the data. In contracts involving personal data, consider stating (1) which party pays for security incident notification costs and (2) what the notification will say (e.g., use of a party’s name).
• File transfer solutions are a key target for threat actors.
• Privacy laws are spreading nationally.

Post COVID-19 Workplace and Personnel Issues

• Hybrid work policies that seem objective could have unequal effects that could lead to employee claims/issues. Hybrid/remote work environments should be based on clearly communicated policies; such policies should carefully consider license/technology rights, restrictions, and obligations.
• Consider including provisions in outsourcing agreements with respect to retention of resources (e.g., incentives).
• Even if there are term reductions in costs, there may still be many underlying employees that transfer at the end of the deal. Consider protections around this.