Outsourcing Agreements

Outsourcing Agreements are contractual arrangements in which an organisation contracts with a service provider to execute functions that are currently performed in-house or by an existing third-party supplier. Instead of this, the outsourcing provider will carry out such services utilising their own staff and, frequently, facilities. In this article, outsourcing agreements, we take a look at the process and mechanism involved.

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What are the three most Commonly encountered types of Outsourcing Agreements?

1. Contract for Time and Materials

This contract, one of the most common outsourcing agreements, specifies how much you owe the outsourced team for their time and materials. In this context, time refers to the agreed-upon hourly wage for each team member, while materials allude to resources such as specialised software equipment. You should choose this outsourcing contract if you are working on a long-term project that requires a high degree of flexibility.

The contract is concluded when the goods/services are delivered in accordance with the specifications. As a result, it is critical to establish realistic milestones and to conduct routine analysis of progress reports.

2. Contract with a Fixed Price

This contract, which is typically included in an RFP (Request for Proposal) describes the project’s scope.

An RFP is a formal document that describes the project in detail and invites bidders to submit bids outlining how they intend to achieve these objectives through a competitive bidding procedure.

Once you approve the outsourcing company’s bid and agree on a predetermined fee, the contract begins. This contract, which is frequently used in IT outsourcing, does not allow for much flexibility because both parties’ expectations are established in advance. However, if the scope of the project changes, you must create a change order. Once both parties agree on a new effective date and compensation, the new contract should be incorporated into the previous one.

3. Contract for Dedicated Team

In this case, you engage a dedicated remote crew to work alongside your in-house team. They work entirely on your projects and are capable of juggling many jobs concurrently. Rather than pure give-and-take, it emphasises company development and the establishment of a long-term outsourcing relationship. This contract is generally used for projects that require constant collaboration, such as web development, and does not include an exit strategy or clause.

Due to the varied schedules and resource requirements, a contract for call centre outsourcing, for example, will be somewhat different from a contract for software development outsourcing. Certain provisions and components, on the other hand, are typically included in every outsourcing contract.

What are the typical terms of an outsourcing agreement?

If you are outsourcing a business function, the term of the agreement should be carefully considered because you may anticipate a change in business requirements or technological advancements that would enable you to move the function to an overseas supplier with enhanced cost savings or digitisation, thereby negating the need for outsourcing.

From the perspective of the business owner, if the outsourcing agreement includes the ability to terminate on notice to the third party prior to the expiration of the specified contractual term, this provides the business with the flexibility it requires, provided that notice can be served even if the third party has committed no fault or breach of contractual obligations. This type of termination clause may need to be negotiated because if the third party outsourcer has acquired some of the business’s assets and employees, it will want assurances that it will not incur significant setup costs only to find itself with business assets it no longer requires and transferred employees it must redeploy in the event of the outsourcing agreement’s cancellation.

To reconcile the competing interests of the business owner and the third-party supplier, one solution is to agree on a sliding scale of termination charges if the business provides notice without fault on the side of the third party. Thus, the provider is compensated for the losses incurred if the contract is terminated before the contract’s expiration date. Even paying termination fees may be more cost effective for the business owner if, for example, the business’s direction changes (and the outsourced function is no longer required) or outsourcing overseas results in significant cost savings.

While a business owner may desire flexibility, he or she will also require clarity on the provision of outsourced services. As a result, the outsourcing agreement may contain a minimum contract duration but provide for rolling notice at the end of the specified term. After conducting their due diligence on their outsourcing requirements and on their desired supplier, the majority of organisations may prefer rolling notice provision.

What is typically specified in an outsourcing agreement?

• The contractual outsourced services – they should be clearly defined in the contract or in a separate schedule to ensure that there is no space for disagreement if the firm alleges that the supplier did not provide all contracted outsourced services.
• The implementation and transition period with milestone dates, specifying what the contractual consequences are if the supplier does not achieve the milestone dates.
• The key performance indicators for successful service delivery – it is critical that service levels are clearly specified, as failing to fulfil agreed service levels may result in service credits or, if merited due to poor service delivery, contract termination.
• Redress for outsourced service failures – Depending on the severity of the issues, contractual redress may range from service credits to monetary damages to early contract termination.
• Responsibilities of the business or client – an outsourcing arrangement typically requires the supplier to rely on the business completing certain steps (for example, providing data by certain deadlines) in order for the supplier to meet its agreed service levels.
• Reviews and modifications — An outsourcing agreement should include provisions for review and modification. This can be accomplished through a change request process that ensures modifications can be implemented. While it is impossible to anticipate every change, consideration should be given to anticipated changes in industry-specific regulations or legislation, as well as the practical impact of Brexit (for example, on supply delivery or cost), as well as an increase or decrease in demand for the outsourced service.
• Specifying if the supplier may use subcontractors and, if so, whether the identity of the subcontractor company must be approved in advance by the business (for example, due to worries about potential reputational damage from issues with unvetted subcontractors).

How to terminate an outsourcing agreement

Termination rights are critical for a firm if the outsourcing contract does not work out and the business’s overall performance suffers as a result.

Terminating an outsourcing contract early enables a business to reintroduce the function in-house, reopen the outsourcing tendering process, or offer the outsourced function to a second preferred supplier. It is vital that the contract’s termination clauses and rights are properly designed to account for any industry-specific difficulties, such as the consequence of the supplier losing professional or industry-related certification.

On a practical level, outsourcing cannot usually be terminated immediately, which is why it is critical that the outsourcing agreement includes an exit strategy. This way, the outsourced function can be terminated in a timely manner with minimal impact on the organisation. The exit management strategy should address the Return of any equipment or assets and transferring the outsourced function back to in-house provision or to a new supplier, as well as maintaining continuity.

How we can help

We have a proven track-record of helping clients with their outsourcing agreements. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

How to Contact our Corporate Solicitors

It is important for you to be well informed about the issues and obstacles you are facing. However, expert legal support is crucial in terms of saving you money and ensuring you achieve a positive outcome.

To speak to a member of our new enquiries team today, simply call us on 0345 9401 045  or click here to make a free enquiry . We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in Corporate, News Tagged as

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