National Press Release

Automakers' Woes Create New Challenges for Outsourcing Providers Says Noted Pillsbury Attorney

NEW YORK, June 2 /PRNewswire/ -- General Motors' bankruptcy filing is the latest example of recession-driven retrenching across industries, a trend painting a bleak picture for outsourcing companies with large client bases in the hardest-hit industries, according to a Pillsbury attorney advising businesses on averting disruptions caused by service providers' potential insolvency.

"Depending on restructuring terms, outsourcing firms may be at risk to have large, long-term, ongoing revenue streams rejected in bankruptcy or terminated by the acquiring entity after a 'fire sale' acquisition," says Joshua B. Konvisser, a New York partner in Pillsbury's Global Sourcing practice and member of the firm's Outsourcing Technology & Insolvency Solutions team. "You only have to look at the lists of the top 50 creditors for each of GM and Chrysler to see recognizable outsourcing service providers with a great deal at stake."

Konvisser traces the beginning of the outsourcing sector's recent challenges to the financial services meltdown last year, as bankruptcies and sell-offs of leading financial services institutions began to jeopardize outsourcing providers' revenue from their customers. This was compounded by early termination of outsourcing agreements as the industry eliminated redundant service agreements in newly consolidated firms.

This was followed by the crisis in the auto manufacturing sector, typified by dramatic ownership changes and organizational revamps at Chrysler and GM.

From information technology services, transaction processing and customer service to parts delivery and facility management, each of these hard-hit industries relied extensively on outsourced services. "What we are seeing is a sort of domino effect, given the interdependence of other industries on both financial services and auto manufacturing, particularly sourcing vendors and other suppliers. Companies in the current environment would be well-advised to not only perform thorough due diligence on existing and potential suppliers and partners, but also to prepare contingency plans in the event access to key suppliers, distributors or business critical software suppliers is jeopardized," Konvisser says. "Managers turning to outsourcing to meet commercial and financial objectives should bear in mind the risks associated with outsourcing -- especially long term arrangements -- and should factor these risks into their decisions. They should also revise the thinking around certain contract terms that might be appropriate in light of the new economy."

Konvisser notes that many providers invest in technology, facilities and other assets early in long-term outsourcing contracts, expecting to recover these costs in later years -- a strategy vulnerable to contract interruptions where the ongoing revenue stream may be cut off in bankruptcy without allowing for a complete recovery of the early-term investments. He explains that while the largest and most-diversified outsourcing providers should make it through this downturn, smaller and mid-tier providers could face difficulties, even bankruptcy themselves, if revenues decline to levels triggering loan covenants or below the operating costs of supporting customers.

"The last six to twelve months have brought massive changes in the interdependent, global economy," Konvisser adds. "We recommend clients pay careful attention to new risks confronting the outsourcing industry at the same time they evaluate its ability to transform their business. This does not mean that companies should forego an outsourcing if there are significant commercial benefits. However, it does shift the cost-benefit analysis for outsourcing and demand an increased level of diligence and planning."

Pillsbury's Global Sourcing practice offers a unique integrated team of sourcing consultants and top-ranked legal advisors. With diverse backgrounds including leadership positions in a variety of industries, these advisors are organized along business functions, leveraging deep domain knowledge and experience across a wide range of areas, including the outsourcing of business processes, information technology, human resources, telecommunications and facilities management.

About Pillsbury

Pillsbury Winthrop Shaw Pittman LLP is a full-service law firm with market-leading strengths in the energy, financial services, real estate and technology sectors. With a presence in the world's major financial and technology centers, Pillsbury counsels clients on all aspects of global business and litigation. We work in multidisciplinary teams that allow us to anticipate trends and bring a 360-degree perspective to complex business and legal issues -- helping clients to take greater advantage of new opportunities and better mitigate risk. This collaborative work style helps produce the results our clients seek.

SOURCE Pillsbury Winthrop Shaw Pittman LLP