11 July 2017
Outsourcing your business functions: achieve success from the outset
Let’s start with the bad news. If your contract is not detailed enough, forward thinking enough or fails to consider what could go wrong, you could suffer from a financial, reputational or regulatory point of view. The devil really is in the detail and excellent communication is essential to remove any misunderstanding between both parties as to the type and level of service to be delivered.
An outsourcing contract should normally include:
- how and when the services will start and any initial set-up required;
- details of the services being outsourced and how they will be delivered;
- the standard of service expected, including KPIs and targets and what will happen if those standards are not met;
- the supplier's fee levels, whether and how they can be adjusted and the terms on which they are to be paid;
- the obligations and responsibilities of the parties, including the obligation to insure against relevant risks such as responsibility for loss or damage to property or injury to members of the public or staff;
- employment matters, including in relation to any automatic transfers of staff which might happen under legal rules;
- legal compliance matters, such as for data protection and other relevant laws;
- ownership and usage rights for relevant intellectual property rights, including responsibility for obtaining and maintaining any licences and assets required for the services to be provided;
- confidentiality and security;
- business continuity and disaster recovery planning;
- how the governance of the contract and the outsourced functions will be managed on an ongoing basis;
- whether you have a say in who your supplier can sub-contract any work to;
- the procedure for varying the contract and / or services; and
- how and when the contract and services will end and what happens then, including a process for migrating the services back to you or your new supplier.
Services and standards
Many businesses today have to meet certain regulatory or other criteria. If you are considering outsourcing, you need to be confident that the third party you use will be able to carry out the functions delegated to them in a way which ensures your required standards continue to be met.
Ensure your supplier has a good track record by auditing its expertise, customer references and internal policies (such as for data security) to check they match yours. It’s also important to ensure that the supplier has carried out proper due diligence checks to fully understand what they are taking on and won't try to recover additional costs later when realising the scope of the services required.
The contract should provide a means for service standards to be assessed and for the contract to be reviewed, and possibly terminated, if the expected standards are not met
It is also important that the contract provides a mechanism for changing the nature or scope of the services to be provided so it has the flexibility to react to any change in circumstances - a disaster recovery plan from your supplier is essential so that you are ready if the worst happens.
The contract needs to have a clear and comprehensive pricing provisions which set out how much the third-party provider will be paid, when payment will be made, and the circumstances in which payment may be reduced, increased or withheld. For example, you could negotiate credits for service failures and if the supplier makes efficiencies as time goes on, the contract could say that they must pass on a share of the resulting costing savings to you.
Obligations and responsibilities
The contract should set out the detail of your and the supplier's respective obligations and responsibilities. It is vital to agree these clearly, capturing all important requirements, to avoid misunderstandings and scope for dispute down the road.
The contract should be clear as to who is liable for what, what insurance should be in place and who should obtain it and the extent of any agreed exclusions and limitations of liability. Specific consideration needs to be given to risks for loss of business data, particularly where this has the potential to damage or hinder your business.
You will want to be clear around which of the supplier's staff will deliver the outsourced functions and consideration will need to be given to the applicable employment legislation. Depending on the circumstances, it is possible that certain legal rules could apply so as to transfer staff between you and the supplier and/or your legacy or incoming service providers. If that's the case then there are specific consultation and other procedures that need to be followed and it’s important to appreciate and allocate responsibility in the contract for the relevant risks and associated costs.
Where the third-party provider will be processing any personal data for the business, consideration will also have to be given to how continued compliance with the data protection requirements can be assured and who will be responsible for what in the event a breach occurs. It is usually the case that your business will remain legally responsible for ensuring that your relevant data is processed lawfully, in which case it will be appropriate to pass on compliance obligations to the supplier in the contract.
You should also detail the process for how any disputes which may arise should be dealt with.
Term of contract
You need to be clear about how long the outsourcing agreement will run for, whether, and in what circumstances it will be possible to end the contract early and whether and in what circumstances, it might be possible for the contract to be extended.
The contract needs to be clear about when the agreement will end and the process that needs to be followed when this happens. It should include an obligation on the business and third party to cooperate with each other to achieve an orderly transfer of the outsourced function, either to another third-party provider or back to the business itself. It should set out the steps each party will need to go through and specify a timetable.
Outsourcing agreements are complicated and require specialist advice. Alex and his team can guide you through the process. Call 01753 279022 or email email@example.com.