The Internet and electronic commerce are valuable tools. As the dust settles and companies are better positioned to evaluate the cost of these tools versus their benefits, some organizations are coming to the not-so-startling revelation that their core competency is not electronic commerce or the Internet, and that the costs associated with their forays into electronic commerce and the Internet are not sustainable. On the other hand, these same companies recognize that they must maintain a presence on the Internet, if for no other reason than to assure their customers that they have an online presence.
One solution is to outsource the implementation, operation, support, and maintenance of their online presence to suppliers that have a core competency in the Internet and electronic commerce.
This article focuses on five key legal issues a company faces when it decides to outsource a company’s eCommerce offering or Internet presence. They are:
- How will the supplier use and protect the buyer’s intellectual property in the outsourced relationship?
- What existing obligations does the buyer have to its customers and vendors and how should those obligations be observed or unwound?
- What performance obligations will the supplier have to meet and what are the consequences of failing to meet those obligations?
- What privacy, tax, and regulatory issues may be raised by moving to an outsourced solution that are not present when the eCommerce offering is operated in-house?
- What happens upon termination — whether anticipated or not?
The Internet, if nothing else, is a direct connection to a company’s customers. Web sites convey explicit and implicit messages about a company to the public. It is therefore imperative that the company exercise some degree of control over the presentation and appearance of the eCommerce offering. At a minimum, if a company chooses to outsource its eCommerce offering, it must take precautions to protect the goodwill associated with its brands, trademarks and corporate identity. Any goodwill associated with the use of such should unambiguously accrue to the benefit of the company.
The outsourcing agreement should include limitations on how and where the trademarks and brands can be used. Moreover, there should be definitive guidelines specifying how the site will look and feel to users. If there is a “look and feel” or atmosphere to the company that is distinguishable in the marketplace and which is reproduced or extended through the Web site, the company should retain ownership over that look and feel. On the other hand, if the supplier dictates the look and feel, the company may not be able to claim ownership of the site structure, and the supplier will need to take appropriate steps to protect its own rights in the solution.
Typically, the parties will agree that the resolution of this issue lies somewhere in the middle. Each party may license the right to use that portion of the site owned by it to the other for purposes of creating and operating the eCommerce offering. This clarifies the terms under which the supplier can use this look and feel. It also helps build a fence around either party’s right to reuse intellectual property owned by the other party for other purposes. Where the solution is kept in-house, allocating these rights is easy. Where another party is providing the solution, a correct allocation of rights may require careful thinking.
A company considering an outsourcing solution should review and consider how to address any current obligations related to its existing eCommerce offering that may be affected by implementing an outsourced solution. This may include obligations to customers, vendors and strategic partners. Prior to implementing an outsourced solution, a company may want to inventory these obligations. Certain obligations may be contractual and easy to identify. Other obligations may be relational and less easy to identify.
For example, suppose a company considering an outsourced solution has an obligation to honor gift cards sold through its retail outlets for payment on purchases made through its Web site. In an outsourced solution, will the supplier fulfill this obligation? If not, how will failure to honor gift cards affect the company choosing to outsource its eCommerce presence? While there may be a technical solution that enables the supplier to honor such cards, which party will bear the cost of implementing this technology? Identifying and resolving these types of obligations early in the outsourcing process increases the likelihood that the outsourced solution will be successful.
What will the solution provider’s responsibilities be with respect to performance? This issue is the clearest example of the balance between cost and control. In an eCommerce outsourcing arrangement, it is not uncommon for parties to specify performance obligations with great particularity. Buyers can specify service levels for site availability, response time, order fulfillment, help desk support, security protections, bandwidth requirements, and even disaster recovery. The greater the detail of the performance obligations, the more control the company can retain over the solution.
The public nature of the eCommerce offering promotes the use of service level commitments as a proxy for control. On the other hand, service level obligations inevitably carry a cost and reduce the flexibility of the performing party. Therefore, buyers must balance these obligations.
The performance obligations are only as good as the methodology used to track them. They are only as significant as the consequences that arise from failure to meet them. Typically, the outsourcing arrangement will include credits, rebates, or other forms of liquidated damages in the event that the supplier misses the service level commitments. Parties also may agree to add incentives to reward the supplier for meeting or exceeding the service level commitments. There also may be procedures for escalating decisions related to service level failures through both organizations, which ultimately are intended to focus control back to the company choosing to outsource.
Privacy, Tax and Regulatory Issues
The privacy, tax and regulatory issues raised by eCommerce offerings are the subject of other articles. When the offering is being outsourced, however, the nature of the solution itself raises some particularly interesting questions. In the outsourced solution, a third party is inserted into the relationship between the company and its customers. This third party may need access to, may process, and may collect information about the company’s customers. Any time such a situation arises, there are privacy issues and potentially other regulatory issues related to the outsourced offering.
With respect to privacy, how does the company exchange its customer information with the supplier? Are any special consents necessary to transfer customer names to the outsourcer? How does the company get this information back? Often, at least in the U.S., the answers to these questions depend on the company’s privacy policies and past practices used to generate customer lists and obtain customer information. However, privacy issues may also be affected by the jurisdiction in which the company and the supplier are located or by the nature of the eCommerce offering itself.
With respect to taxation, the outsourcing transaction may raise state and local sales tax concerns. If this is an eCommerce transaction, what obligation does the solution supplier have to charge sales tax? Which party will bear the sales tax risk if no such tax is being charged? This issue may be particularly interesting where the company has a physical presence in many different jurisdictions but the supplier does not. In that case, the parties may have different opinions regarding tax liability and will need to allocate the risk of liability in an appropriate manner between themselves. If the outsourcing relationship involves jurisdictions outside the Untied States, other tax issues may be raised.
While not the foremost thought on people’s minds when considering entering into an outsourcing relationship, the company should consider how to extricate itself from the relationship and how to protect its interests if the relationship terminates for anticipated or unanticipated reasons. It’s important to consider these issues early in order to protect the company in the event that the supplier goes away. Again, the eCommerce offering is a public face of the company and the company cannot afford to overlook the consequences of termination. On the other hand, the supplier must guard its own investment in the solution and protect its investment against the company’s decision to transfer or eliminate the outsourced solution.
Given the public nature of the Internet and the immediacy of a company’s eCommerce offering to its clients, it is important to think about these issues early in the decision to outsource an company’s eCommerce offering.
Lessons from the Outsourcing Journal:
- There are five key considerations buyers need to be cognizant of when outsourcing eCommerce transactions. They include:
- Intellectual property.
- Existing obligations.
- Service level agreements.
- Privacy, tax and regulatory issues.
- Focusing on these areas at the outset of the relationship translates into greater success later.
Attorney Michael Mensik is an International Partner and the Global Co-Coordinator of Baker & McKenzie’s Global Information Technology/ eCommerce Law practice. Based in Chicago, he can be reached at [email protected]. Attorney Peter George is an Associate in the Global Information Technology/ eCommerce Law practice at Baker & McKenzie in Chicago. He can be reached at [email protected].