Outsourcing agreements

Outsourcing is an increasingly popular option for businesses wishing to cut their costs, make use of outside expertise, and focus on their core purpose.

Outsourcing is where a business function is contracted out to a third party for a substantial period of time. These business functions are typically IT help or IT systems, recruitment, bookkeeping or marketing, but can be any ancillary function.

The issues for businesses intending to outsource to a third party include: is the third party reliable; can they manage and monitor the outsourced function effectively; and how much will it cost?

Finding an outsourcing provider

The success of outsourcing very much depends on finding a reliable third party with whom you can have a mutually beneficial relationship. Outsourcing experts usually stress the importance of establishing a good working relationship at the beginning of the agreement, as this can pay dividends at a later stage. You should have a clear idea of their management approach, IT systems and quality monitoring systems. It is therefore a good idea to visit the provider on their home territory, and to research several providers in order to form a balanced picture of what’s available.

Some outsourcing providers will sub-contract the work. If this is the case, you should make sure you are satisfied with the quality of the sub-contractors.

When choosing the outsourcing provider, businesses are generally advised to consider the following: does the provider have a good track record of service; is it expanding; is it financially stable; how does it deal with problems; and does it monitor customer satisfaction? Businesses should investigate who the provider’s existing customers are, and whether they are satisfied with the level of service they have received. Businesses should also consider: who will be the point of contact within the provider, and what level of communication will the business have?

The agreement

The contract between the business and the outsourcing provider will cover all aspects of the agreement, including the provider’s responsibilities, the quality of provision required, the timetable for delivery, payment and costs, agreed methods for resolving disputes, compensation and penalties, and the conditions for terminating the contract.

Given the importance of this agreement, businesses should seek independent legal advice from a lawyer experienced in the area of outsourcing agreements.

Potential disadvantages

Outsourcing a business function means you no longer have direct control over it.

Consequently, there are potential disadvantages. The quality of service may be less than desired. The outsourcing provider may go out of business. There may be confidentiality and security issues. There may be friction between the main business and the outsourcing provider. There may be a loss of flexibility over how the business function is managed.

However, these can to some extent be guarded against by careful research into the provider and by making a watertight agreement. It is a good idea to have a back-up plan in case the provider falls short of expectation, for example, by having an alternative provider lined up or making arrangements in advance for bringing the outsourced functions back in-house.

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