Outsourcing is a major strategic tool for businesses. What was once seen as primarily a cost saving exercise is now perceived as a powerful way to improve productivity and competitiveness and as essential for growth in many sectors.
From a strategic perspective, outsourcing can provide clear benefits within a simple framework but, as ever, the devil is in the detail. The contractual approach must be managed carefully in order to set the relationship up correctly and meet the expectations of both parties.
Cost savings and efficiency gains will only be realised if an outsourcing project is carried out successfully and this is not guaranteed.
Preparing to Outsource
Once the economic case for outsourcing a non core function of the business has been made it should be borne in mind that the transaction required can be complex. This can apply all the way through from the tendering process to the negotiation of the contract itself, the commercial nature of the transaction and the delivery of the services through the life of the contract.
After due diligence has been carried out and an outsourcing service provider selected through the tendering process, the master service contract will need to be negotiated. The structure of the deal will depend upon a number of factors including tax considerations, the services required and the key deliverables that will be expected.
Legal issues that are likely to be encountered during contract negotiations include governance, planning and reporting provisions. HR provisions might apply if part of the workforce is being transferred to the outsourcing company. Intellectual property and data protection issues will also need to be managed.
Service level criteria go right to the heart of the contract and these must be carefully designed to ensure that the service is delivered smoothly and that problems can be managed proportionately.
Managing Service Levels
Claiming damages or ending a contract for minor breaches may be an overly draconian response to service performance issues that can occur during the life of an outsourcing contract. It is therefore appropriate to have alternative measures that can be triggered if service levels fall below expectations.
Incorporating these types of measures into outsourcing contracts is complex and requires a more pro-active approach to managing potential service issues. However, anticipating these problems and creating effective remedies can avoid the uncertainty and greater disruption that arises if a series of minor breaches results in contract termination.
In terms of the contract, managing service levels in this way requires the construction of mechanisms for identifying and formalising issues, identification of trigger events and the creation of appropriate remedies.