What is an outsourcing agreement?

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‘Outsourcing’ is a term that is loosely connected with a wide range of business or commercial relationships. However, outsourcing most commonly refers to the process of sub-contracting the performance of a service or function to third parties instead of performing them in-house. The underlying rational for outsourcing services is that experts – often in jurisdictions with a significantly lower salary rates compared to those in which the outsourcing company operates – can provide a higher standard of service at a much lower rate than would have been possible if that service were to be provided internally.
Outsourcing agreement

Outsourcing also provides companies with the benefit of achieving flexibility with the services they provide.  For example, businesses are particularly attracted to the idea of being able to increase, decrease or alter the scope of a service they provide at a very short notice. It also offers businesses the opportunity to reduce the amount of precious time and resources spent on its non-core activities without reducing their service offerings.

It should be noted, however, that businesses cannot outsource delegation of management or strategic responsibilities as outsourcing is primarily a mechanism by which businesses can achieve expertise and economies of scale. Whilst outsourcing allows businesses to pass over operational risk to the third party contractor, it cannot pass strategic risk which remains very much with the business.  An outsourcing agreement is therefore key to managing that risk and should be drafted in a manner so as to address the risks that may arise on the outsourcing of the contract.

What issues does an outsourcing agreement cover?

When a business considers outsourcing its services, it will be best practice to contemplate the issues that may arise as a result of the outsourcing exercise and take steps to minimise the risks to the business by having a well drafted outsourcing agreement that addresses to those issues. Some of the risks that may arise from outsourcing include, but are not limited to, poor quality of service delivered by the contractor, further costs which may not have been factored in at the outset, loss of critical assets and intellectual property, unauthorised disclosure of confidential data, disruption in the supply of services by the business and reputational damage.

The outsourcing party will also want to have a clear agreement at the very outset with the contractor (the party providing the outsourced service or function) as to how the outsourcing will play out in practice. In order to avoid disruption to the business, it is also prudent to iron out the details of how the actual outsourcing process will be transitioned from the business itself to the contractor, as well as agreeing on an exit strategy that allows the business to bring back the outsourced service in-house without causing any disruption to the service it provides and without causing any inconvenience to its end customers.

To ensure that any risk factors are adequately addressed the outsourcing party (the business that is outsourcing a service) should draw a list of its key concerns in relation to the outsourcing and engage in a process of discussions with the contractor with a view to reaching an agreement on each of the issues, which can then be stipulated in a robust outsourcing contract. There is no hard rule about who should draft the outsourcing contract and either party can take the initiative. However, it is best practice for businesses to treat contracts provided by the contractors with a degree of caution as the terms of such contracts tend to be implicitly more advantageous to the contractor. 

How to manage your outsourcing service or function?

Once outsourcing is agreed and the details are stipulated in a signed contract both the outsourcing party and the contractor will need to pay close attention to how their agreement will play out in practice and maintain clear communication channels to ensure that the agreement works as they had both hoped. Contract management and supplier relationship management require a great deal of communication, transparency and trust between the outsourcing party and the contractor. If the two parties genuinely understand each other’s positions, goals and limitations and are committed to making the arrangement work, then the outsourcing exercise has every chance of succeeding.

One way to manage the outsourcing contract is to assign staff with a high level of management skills and preferably with experience in outsourced contract management to the task of overseeing the process of initial transition. To ensure proper management of the outsourcing contract it is imperative to have in place people who are dedicated to the task and with the ability to identify any issues of concern at the outset and address them head on minimising the risk to the business.

It is also instructive to take the time to get to know the contractor, understand their business goals and aspirations. More often than not, this will help the outsourcing party find common grounds with the contractor when issues of potential conflict arise. Moreover, being sensitive to the contractors aspirations – contractors have their own business ambitions and strategy – can help pave the way for more mutually beneficial partnerships between the parties leading to a smoother and more effective collaborations both in respect of the existing outsourcing agreement and any potential future agreements.

By Jahed Morad at Gulbekian Andonian Solicitors

 

Jahed is an experienced lawyer whose practice comprises of immigration, employment, and commercial law. Jahed is also an avid writer who enjoys sharing insights and tactical know-how relating to his areas of expertise.

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