A Step Up on Step-In Rights

by Pillsbury Global Sourcing Practice

Most outsourcing contracts that I see contain a step-in right for the customer. Generally, a step-in right allows the customer to take over the outsourced operations if the supplier cannot or does not perform, and then "step out" when the supplier demonstrates that it will meet its contractual obligations.

How realistic is it that a customer can ever exercise those rights, and are they worth the additional time and angst to negotiate?

Outsourcing contracts are not the only type of agreements in which you will find step-in rights. They are used in many other commercial agreements, including construction, project finance and development agreements. In those relationships, step-in rights are generally more straightforward and easier to exercise than in an outsourcing relationship, where it may be impossible to "step-in" and perform the supplier's obligations.

Outsourcing arrangements can be a mix of service models. The supplier may provide all services from a multi-client service center or, at the other extreme, may be operating and providing services only from the customer's premises, using the customer's equipment, tools and applications. Often, there is a mix of on-premise and remote services.

The model in which the supplier is on the customer's premises and operating the customer's systems is the one in which step-in rights could be most easily exercised. But even in that model are you, as the customer, equipped to step-in? Do you have the in-house resources who can take over the day to day activities that the supplier performs? Chances are, as a result of outsourcing, you have a much leaner organization, and probably don't have the resources or skill sets to take over the supplier's operations. The alternative is to engage a third party to step-in on your behalf. That will necessitate finding the right third party, negotiating an agreement with them, and (as the arrangement is likely to be for a limited period), paying a much higher price for those services which you may or may not be able to recover from your incumbent supplier. If you are experiencing the type of service failures that are causing you to consider exercising step-in rights, then it is unlikely that you could tolerate continuing failures during the time it would take to put a third party arrangement in place. 

If any or all of the services are provided from the supplier's shared service environment then it is unlikely that you will be able to exercise step-in rights. Other clients will not permit a third party to have access to an environment where their services are being performed, and understandably so. Even if your specific services are provided from a dedicated and isolated environment within the supplier's service center, the problems of having the necessary in-house resources, or finding a third party to take over the operations as discussed above could be prohibitive.

So, if they are difficult or impossible to exercise, is there a benefit to having a step-in right in your outsourcing contract? Absolutely. As the customer, you need to have every avenue available to you if the supplier is failing in its performance of the services. However, there may be similar rights that you could consider that will not only give you leverage in dealing with the supplier when it is in default, but also might provide you with solutions to help the supplier get back on track in service performance. Here are some examples:

  • Third party consultants who will work with the supplier to improve their performance. Consider requiring the supplier to engage a third party (that you approve) to help them turn around service performance. This could involve having the consultant analyze the performance, and the reasons for default, structure a turn-around plan and require the supplier to implement the turn-around plan in accordance with the consultant's recommendations. This may not provide a quick-fix for the problems you are facing, but may have the benefit of improving the services and relationship for the remaining term of the agreement.
  • Have your management team engage with the Supplier. If you have the resources, a right to have members of your management team working side-by-side with the supplier may also help turn around performance. Being under the constant scrutiny of customer management will cause the supplier to be on its best behavior, and that in itself may address the problem. Additionally, your team may be able to provide input on your business needs and environment that is not otherwise visible to the supplier, better aligning the services with your needs. Even if neither of these have an impact, both you and the supplier will have a better understanding of the challenges and frustrations the other is facing.
  • Obtain visibility into the supplier's staffing and HR challenges. Many suppliers will take the position that they supply a service, and don't guarantee the allocation of any specific number or type of resources to the performance of the services. Most customers agree that the supplier should have flexibility to staff the services as it thinks fit, as long as it meets the required service levels.  On the other hand, when faced with chronic problems, understanding the organizational structure of the service team, the number of resources, the time they are allocated to the services, the skill and experience levels of resources, and the turnover rate of staff may provide considerable insight into the reasons for poor performance. Having visibility is not, in itself, sufficient. You will also need the right to require the supplier to make changes to its staffing in order to remedy poor performance.

In many cases, righting the ship and seeing the contract through to the end of its term may be a less painful solution for the customer than terminating for breach. These three options provide a greater chance of success in achieving that goal.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Pillsbury Global Sourcing Practice | Attorney Advertising

Written by:

Pillsbury Global Sourcing Practice

Pillsbury Global Sourcing Practice on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.