Atos recently announced that it is studying separating into two publicly listed companies by spinning its cloud, cybersecurity and analytics business lines into a new publicly traded company called Evidian. The remaining portions of its business lines, the ITO and BPO portions, as well as the Atos brand, would remain with the legacy Atos business. If everything goes to plan, the separation would reportedly occur during the second half of 2023. Coinciding with the announcement of this separation was also the announcement that Atos’ new CEO, Rodolphe Belmer, will be leaving after only nine months with the company. News of these announcements was not well received by the market, with Atos shares plummeting by more than 25%. Atos will obviously face many operational challenges over the coming months, which could leave Atos’ existing and prospective customers feeling uncertain. In light of this uncertainty, we recommend that those customers who have existing contracts with Atos take the following immediate actions: (i) evaluate your exposure; (ii) review your options; and (iii) develop a response plan.
(I) Evaluate Your Exposure
As a threshold matter, an existing customer’s response to the separation will depend on (a) the scope and status of its agreements with Atos; (b) the importance of the services performed by Atos to the customer’s business; and (c) the sensitivity of those services to potential disruption. Of course, the details of the spin-off and the degree to which Atos will rely on services provided by Evidian may reveal more specific challenges—or provide significant comfort.
Naturally, a customer’s exposure is much different under a long-term BPO arrangement than it is under a short-term professional services contract. However, short-term contracts with relatively small value may still involve handling of highly sensitive customer data or support mission-critical applications, the disruption of which would cause harm disproportionate to the value of the contract. It is also not uncommon for relatively low-value contracts to expand through additional work orders—none of which may have passed through the customer’s legal department. Therefore, reviewing the complete contract file and enlisting technical and business resources to evaluate practical exposures will be critical.
(II) Review Your Options
First and foremost, and especially as the potential separation draws near, customers should engage their Atos account team, as they will be the best source of information on (a) the state of affairs at Atos and/or Evidian and (b) risk-management efforts and remediation options at either Atos and/or Evidian. An important first step would be to engage team leaders and, if necessary, Atos and/or Evidian management, in a frank discussion of the customer’s concerns and their ability to respond to those concerns.
The next step is for customers to review their contractual protections and remedies. Well-constructed agreements should offer a number of direct and indirect opportunities to manage risks. As a result of Atos’ announcement, many customers are likely focused on ensuring their services are not disrupted and achieving additional contractual protections to ensure a continuing, fruitful relationship. If there are concerns that the separation will create or worsen service delivery challenges, customers should review their contract file for the following contract rights:
- The ability to create new service levels. Customers should consider (a) adding service levels to address key uncovered areas, or reinforce areas of concern, and (b) expanding associated performance credits to provide objective metrics for key functions and rapid access to corrective measures. Because these provisions often require substantial advance notice, preemptive action may pay dividends as events unfold.
- Account team continuity requirements and workforce turnover limitations. Contractual commitments to maintain account team members in place and limit workforce turnover are important to maintain the team’s knowledge base and the quality of service, especially if there are concerns that a subcontractor-like relationship between Atos and Evidian could strain access to in-demand talent like cloud engineering and cybersecurity. Default on these commitments would be a key sign of trouble.
- Step-in rights. Many outsourcing agreements also allow for the customer, or a third party on behalf of the customer, to “step in” and take over the services for a period of time, when there has been or may be a disruption to services. Such rights could be triggered if the services begin to deteriorate.
- Credit support. Customers will want to understand the creditworthiness of their post-spin contract partners and consider whether third party credit support of some kind will be necessary. Of course, the cost of any credit support required will burden the deal and may challenge the economics for both sides. If so, the parties will want to consider whether there are other paths to managing increased credit risk.
If an agreement does not include some or all of these provisions, the separation, if it occurs, could be used as grounds for seeking protective amendments. This is where termination rights come into play. While termination usually makes sense only in the most extreme cases—due to the operational disruption that can occur, as well as the costs associated with re-sourcing the terminated services—the termination rights can be used as a lever for bringing the vendor to the table to negotiate additional protections in light of the changed circumstances. Well-constructed agreements generally offer multiple customer termination rights, including: (a) a right to terminate in the event of a change of control of the vendor, without payment of a fee; (b) a termination for convenience right, often upon payment of a fee; and (c) a termination right in the event of certain service level defaults.
But if termination is a real possibility in the future, the spin-off might also provide an opportunity to engage in a more comprehensive review of the customer’s exit rights, confirming or negotiating for:
- eights to acquire key equipment and facilities
- rights to acquire separate licenses for critical software
- step-in rights for critical functions
- rights to hire key vendor staff
- general termination assistance requirements for the period necessary to complete any re-sourcing
Of course, while the agreement is open, customers may also want to address other issues not directly related to the change of control, including scope and price.
In any case, customers should critically evaluate their restructured partner and their specific rights under their agreements. Some agreements may limit termination rights upon a change of control, requiring a more creative response. Importantly, Atos is likely to have allowed for some customer attrition in their decision to separate. While they are likely to make some accommodations to retain revenue, customers making overly aggressive demands may find themselves forced to find a new vendor.
(III) Develop a Response Plan
As the separation draws near, and especially after it has occurred, it will be critical for customers to closely monitor the real-time performance of Atos and/or Evidian. Customers should evaluate existing management and reporting mechanisms to be sure that they cover all key operational measures and that they are delivered with sufficient frequency.
Customers who feel especially at-risk may want to consider self-protection, as contractual protections that assume rational actors with long-term business strategies may prove ineffective in a worst-case scenario. Customers should consider positioning themselves to avoid the worst consequences by securing data, securing developed code and work-in-process, collecting any credits then due, managing payment streams to their best advantage, and developing a plan for complete substitution of services.