Legal briefing | Commercial & Technology, IP & Technology | 21 Jun 2012

Outsourcing - Avoiding the pitfalls

Overview

With both the public and private sectors looking to cut costs and "do more with less", outsourcing is often seen as a solution. This briefing highlights how customers of outsourcing providers can avoid some of the major pitfalls.

Know your supplier

Due diligence on potential outsourcing suppliers often focuses on issues such as skills or track record. In our experience, the following issues can be overlooked:

  • How strong is the supplier's financial position? Consider obtaining third party guarantees e.g. from a parent company or investors.
  • Will subcontractors be used? The contract needs to give you sufficient control over their appointment and how they are used.

Define your services

It is surprising how often outsourcing contracts do not contain a clear description of what the outsourcing provider is required to do. The result can be disastrous - legally, the outsourcing provider may not be obliged to do what your business requires.

  • Work out exactly what is done at present. As a minimum, the outsourcing provider needs to be obliged to replicate this.
  • Oblige the service provider to carry out due diligence and scoping on your current processes – that will enable it to find out for itself what is required.
  • Produce a service description capable of being understood (and enforced) by a court or arbitration panel.
  • Avoid leaving key service descriptions to be agreed after the contract is signed.

Lack of a clear, detailed description of the services can be disastrous.

Plan for the worst

Parties rarely enter into contracts in the belief that they won't deliver what is expected. In our experience, it pays to think about what you would do if the outsourcing does not go as well as planned. In particular, devise a clear governance structure to address under-performance.

 

Contractual sanctions

Sanctions for poor performance can include:

  • Liquidated damages or service credits, entitling you to recover specified amounts for delays or poor performance; and/or

  • Step-in rights, allowing you to take over management of the service if things go seriously wrong.

Plan for the future

Over time, the needs of your business may change or the outsourcing provider may want to change how it provides the service. The contract should include a clear procedure for agreeing changes to the services (and resolving disputes – before they become litigious).

You may also want to consider retaining a veto over proposals from the supplier to dispose of assets or redeploy key staff originally used to provide the service in-house.

Guarding against problems on exit

Transfers to a new provider may be problematic if the outgoing services provider refuses to co-operate with the new provider:

  • Include an obligation on the service provider to assist you if you decide to take the service back in-house or hand it over to a new provider.

  • In some cases, it may be worth using a joint venture (JV) where all the necessary assets and staff are held by the JV company (and can more easily be transferred to the new provider).

Employment issues

Employees who work on the services being outsourced often transfer automatically by operation of law to the new service provider. To avoid losing key staff to the service provider, you may wish to consider redeploying them to other areas of the business.

The parties should also consider how other employment costs should be apportioned, e.g. the costs of the service provider making any surplus staff redundant. Employee consultation obligations may apply to both parties in cases where staff automatically transfer.

Other legal issues

Many outsourcing transactions will raise additional legal issues specific to the relevant sector. For example, a financial services outsourcing will have to comply with requirements imposed by the Financial Services Authority and (if the outsourcing involves customer data) the Data Protection Act 1998. Such requirements can have a significant impact on how certain aspects of the outsourced service are structured or managed.

How can we help

If you are weighing up options, we are always happy to talk informally about outsourcing and to act as a “sounding board”, before being formally instructed.

We have recently advised:

Metro Bank on its outsourcing and procurement arrangements (including business process, IT and network infrastructure outsourcing)

Turquoise Trading on its outsourcing of facilities, IT and administrative services to the London Stock Exchange

Safestore on a complex outsourcing arrangement with SpaceMaker, another self-storage business

Firstsource on Barclays Bank's outsourcing to it of the Barclaycard credit card and payment businesses

TSL Education (Times Educational) on the outsourcing of its printing arrangements and management of its core IT environment

For further information, please contact