What you need to think about when outsourcing business functions

Have you thought about outsourcing any of your business functions to a third-party provider? If so, you are not alone; many businesses have turned to outsourcing in recent years to achieve different business objectives, including:

• cutting costs;
• increasing capacity;
• boosting product development opportunities by tapping into external knowledge and expertise;
• enabling a business to focus on its core activities;
• driving up service standards; and
• aiding business development.
  

If done properly, outsourcing can offer significant benefits to a business. However, if done badly, it has the potential to cause irreparable damage. Robert Goddard, corporate and commercial solicitor with Thackray Williams explains more.

The key to ensuring successful outsourcing is to negotiate a comprehensive outsourcing contract before any business functions are delegated.

As a minimum, an outsourcing contract should cover:

• the service being outsourced;
• the standard of service expected;
• what will happen if standards are not met;
• the fees to be paid;
• the obligations and responsibilities of the parties, including the obligation to insure, responsibility for loss or damage to property or injury to members of the public or staff, and responsibility for employment and other legal matters;
• for how long the contract will last;
• whether it is possible to vary the contract and, if it is, the procedure for doing so; and
• what will happen when the contract ends.

Services and standards

The contract needs to be clear about the services that are being outsourced, how they will be provided, and any service standards that must be met.

Many businesses today operate in sectors that are either regulated or which have their own service standards that need to be adhered to. If you are considering outsourcing, you need to be confident that the third party you use will be able to carry out the function being delegated to them in a way which ensures any applicable standards continue to be met. This might be by stipulating the process the third party must go through to provide the service, or by restricting the type of person they can employ to deliver the service, so that, for example, they have any necessary skills, experience or qualifications.

There are also more general standards that all businesses need to ensure are maintained, such as good customer service.

The contract needs to 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.

Fees

The contract needs to have a clear and comprehensive pricing or fees policy which explains how much the third-party provider will be paid, when that payment will be made, and the circumstances in which payment may be reduced, increased or withheld.

Obligations and responsibilities

The contract needs to set out the respective obligations and responsibilities of the business and third party.

It needs to confirm who will be responsible for insuring what, how much insurance should be in place, the terms on which insurance should be obtained, and the extent of any acceptable exclusions and limitations. Specific consideration needs to be given to insurance for the loss of business data, particularly where this has the potential to damage or hinder the business.

It is usual practice for the contract to provide that the third party will be responsible for all acts and omissions on its part which lead to damage being caused to property or injury caused to persons. If this is the case, the business will normally ask the third party to indemnify it for any claims arising and for this to be backed by an appropriate insurance policy.

If staff will be employed by the third party to deliver the outsourced function – or staff from the business will be transferred to the third party – consideration will need to be given to who will be responsible for complying with any applicable employment legislation. Depending on the circumstances of the case, it is possible that the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) might apply, in which case there are specific procedures that need to be followed before a transfer can take place.

Where the third-party provider will be processing any personal data for the business, as defined in the Data Protection Act 1998, 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.

Length of contract

The contract needs to confirm how long the outsourcing agreement will run for. It also needs to confirm 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 length of the contract to be extended.

Termination

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. It should also detail how any disputes which may arise should be dealt with, both on termination and throughout the life of the agreement.

How your solicitor can help

Outsourcing agreements are complicated and require specialist advice. At Thackray Williams we have a team of experienced lawyers able to guide you through the process and ensure your position is protected. We can advise you at the pre-contract stage to help you identify a suitable partner. We can also advise you during contract negotiations to ensure you get the best deal possible, and again when the contract ends to ensure a smooth transition.

For a confidential discussion about outsourcing agreements, or any other corporate or commercial needs, please contact Robert.