Outsourcing Agreements

An outsourcing agreement is a contractual arrangement between a company and a third-party service provider to delegate specific tasks, functions, expertise or processes. The agreement should outline the scope, responsibilities, expectations, pricing, and other key terms governing the relationship between the parties.

When would you use an outsourcing agreement?

An outsourcing arrangement is commonly used when a company wants to delegate certain non-core functions to external specialists. One reason for this could be to make cost savings -  the service provider may have economies of scale and specialised expertise, reducing operation expenses for the client. Outsourcing also enables the service provider to focus on core activities so that a company can focus its resources and efforts on its core business activities, hopefully leading to improved efficiency and competitiveness. This sort of arrangement also gives a company access to expertise and to tap into the specialist knowledge of the service provider that isn't necessarily available from its core team. It also gives a business flexibility to scale up or down quickly based on business needs. This in turn may allow for faster implementation of projects or services, which can also save time and effort on tasks that are not central to the core company mission and allow internal teams to focus on high-priority tasks. As an outsourced service team, this also reduces the level of oversight required from a management and administration perspective. In some circumstances, an outsourcing agreement might be used to mitigate risk -  using a specialist provider can help mitigate certain risks and may address compliance challenges associated with certain functions.

What to think about for these arrangements..

The variety and quality of services should be accurately defined. Depending on what’s being outsourced there could be implementation services, operational services, exit services, etc. This is important for both the outsourcer and service provider. From the latter's perspective, you should also ensure that you only commit to service levels which are achievable and ensure there is clarity on response times and action times and that any remedy for breach of service levels is meaningful.

As an outsourcer you will also want to think about acceptance testing. Customers’ usually insist on testing the suppliers’ relevant systems in line with test criteria. These should be carefully considered given passing of tests is often linked to payment of a large initial sum.

Payment is a huge part of your relationship and for an outsourcer you'll want to push for payment to be linked to completion of matters to your satisfaction, rather than being linked to invoice dates. This can help reduce the risk of invoice disputes but in the event that these disputes do happen, it's important to have a mechanism in place to resolve them. As a service provider, you'll want to make it clear that you have the right to charge interest on late payment and if you've not worked together before you may want to consider requesting fees for certain items in advance.

Liability can be a sticking point in these arrangements. As an outsourcer you'll want to ensure any mutual liability limits and exclusions are appropriate and reflect a fair allocation of risk. You'll also want to consider any limits on the service provider’s liability would still leave you with a meaningful remedy. A service provider will equally want to ensure mutual liability limits and exclusions are appropriate and reconcile with limits under any available relevant insurance. Where cover is reviewed annually, ensure liability limits and exclusions are reviewed against any changes to your policies to ensure that they still align with the project and arrangement. If your customer has a strong negotiating position they may demand proof of coverage and may even be asked to be named on your relevant policies. Both parties will also want to conduct due diligence on one another to understand levels of assets (and any insurance) available to satisfy a judgment debt/settlement in the event of a successful claim (e.g. a debt claim for non-payment of fees).

As an outsourcer you'll want your agreement to provider a clear mechanism for requesting changes under the contract, to ensure the services are scalable and adaptable with your evolving needs. You'll also want to make clear which relevant IP is owned by each party, and who will own any foreground IPR arising out of the contract. You should make sure that appropriate licences are granted to the service provider to enable them to perform the contract without inadvertently infringing your IPRs. It might be necessary for you to consider whether you want the right to audit and if so, its scope and frequency. Set out who pays what costs and expenses in relation to the audit and consequences if the service provider falls below agreed standards. If any of your equipment or assets (including contracts) are being transferred to the service provider as a result of outsourcing, you should provide appropriate provisions within the agreement to cover this. Given the length and complexity of many outsourcing contracts, consider working with the service provider to agree a clear remediation plan with clear channels of escalation to deal with issues.

As a service provider you will likely already have disaster recovery and business continuity processes and policies but do ensure that these are robust and tested frequently in case they are ever relied upon during your relationship.

Nobody wants to fall out but dispute resolution is so important to consider at the outset of a relationship. It's better to have it in advance than when it's too late. As a supplier you’ll be more likely to breach the contract causing the customer to suffer loss. You should consider your litigation strategy - a customer may angle for multi-tiered dispute resolution in a bid to try an agree a settlement for any breach more quickly, as opposed to proceeding through expensive and slow litigation. Many longer-term outsourcing agreements use this multi-tier dispute resolution approach which will usually include an internal escalation mechanism, followed by mediation and finally litigation through the English courts. If the agreement is cross-border, certain dispute procedures (e.g. arbitration) may be more favourable.

Both parties should consider the need for an exit assistance plan - as an outsourcer you should consider what transitional services you’d require from the service provider if the contract comes to an end. As a service provider, you should only commit to exit assistance which you can actually achieve, and ensure you charge for it. Depending on your negotiation power, consider requesting payment for any exit assistance fee up-front.

How can we help?

We specialise in providing cost-effective legal solutions clearing your path to success, which means our bread and butter lies in crafting, reviewing, and dissecting commercial contracts. From T&Cs to aaS agreements and commercial negotiations, we support the likes of Onfido, Multiverse, and Office & Dragons - ensuring they can build, break, or bolster their commercial relationships.

In need of support from commercial contract lawyers in the UK? Get in touch with our team.

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