If you’re going to outsource, do it right


It’s a word that for better or worse has definite value judgments attached to it. It conjures up images of call centres in remote corners of the world, and of jobs leaving for sunnier (and cheaper) climes.  RBC got itself a whole heap of bad publicity and angry customers last week, when word got out it was outsourcing a number of its IT roles to Indian firm iGate.
The federal government has since announced it will be looking into RBC’s arrangements with iGate to determine if any immigration and employment laws and policies have been violated, and the bank is scrambling to assure displaced Canadian employees it will be finding “other positions” for them within the organization.

I’m definitely not an immigration lawyer and I won’t even attempt to comment here on whether or not the can of worms RBC has opened up with iGate is legal, ethical, or good business practice. But I am an IT lawyer, and many of my clients either engage in, or deliver, outsourcing of some kind or another. And it would be nice to dispel some of the negative connotations that immediately arise when someone dares to mention the word “outsource.”

At the end of the day, what is outsourcing, really? It’s the contracting of an internal business process to a third party that can deliver the service more efficiently (read: more economically), whether that third party is located down the hall, across the city, or halfway around the world.  Outsourcing does not always mean redundancies, displaced employees, or jobs leaving the country. It’s an essential tool for modern businesses, and frankly, it gets a bum rap.

Outsourcing arrangements are probably some of the most complicated contracts I draft on a regular basis.  Good outsourcing agreements need to address every aspect of the outsourced business process in (sometimes excruciating) detail. That means yes, even the lawyer has to roll up her sleeves, get in there, and understand who’s doing what, when, and how.

If your client decides it’s time to outsource some of their business processes, here are some of the absolute basics that need to be covered in a good outsourcing agreement:

Scope of services: It’s critical to help your client define with as much granularity as possible the scope of the services to be outsourced, and also note what is out-of-scope, in other words, the services that will remain in-house. This sounds like the most obvious thing in the world, but the amount of times I’ve had clients anxious to sign a deal decide to work this (and pricing!) out at a later date would boggle your mind.

Let’s face it, post-contract negotiations regarding scope never go well. As the outsourcer, you’ve given away any negotiating leverage you might have had. So while it may be painful, take the time at the start to decide exactly what responsibilities will be given to the service provider. You save yourself and your client a world of trouble.
Service levels: Once you’ve (finally) agreed the scope of services to be delegated to the outside service provider, your client and the service provider need to agree on formal targets for delivery. These might be quantitative or qualitative. Decide on how service levels will be measured, and how (and how often) they will be reported.

Also decide on what the penalties will be if the service provider doesn’t meet those targets. Will it provide rebates in the form of service credits? Will there be some liquidated damage penalties it pays? Will your client have a right to terminate the agreement and walk away? You may want to look at some combination of all of these mechanisms.

Fees: This seems like a no-brainer, but the fee schedule for services should be well drafted and form part of the outsourcing agreement. From a client point of view, you will also want to build in cost-control mechanisms, such as caps on annual increases in fees, and establish how and when the service provider is paid.

Is payment linked to delivery of certain key deliverables or services, or are invoices being issued monthly or quarterly? Is the client paying certain costs up-front, while the services are being transitioned to the service provider (such as costs for the service provider’s staff to attend at the client’s offices to shadow current service providers and learn the ropes, or payment for infrastructure the service provider needs to set up on the client’s behalf)? Get it in writing.

Change control: If the scope of services needs to change, or there’s a change in cost with regards to an existing in-scope service, how does that work? Both parties should agree on changes that are chargeable or not chargeable, and the approval process for any changes, as well as a timeline — if a change is needed, it probably needs to happen pretty quickly, so work those details out now.

Intellectual property ownership: If the client is paying for intellectual property to be created by the service provider, who owns it? The obvious answer is not always the client. The client may not have the resources or expertise to be able to maintain that IP and only requires a broad enough licence to use it.  Also, the service provider may wish to use generic, non-client specific IP in connection with other clients, or may contribute pre-existing IP to the business arrangement.

Make sure the scope of any licence rights are broad enough to cover off all the client’s business needs, including considering whether any licences should survive termination.

Liability: The liability provisions need to anticipate the types of losses that might be suffered by either the client or the service provider in the event of a breach, and will likely need to incorporate monetary caps that are appropriate measures of the potential risks to each party. Consider whether you want to agree on liquidated damages, which estimate the potential loss in advance.
Termination/exit: If you are acting for the service provider, you may want to go beyond permitting termination for a material breach of the agreement (which is so broad) and actually define the types of breaches that trigger a termination right for either party, to ensure some stability and transparency. Typical termination rights might include consistent failure to meet service levels.

From a client’s point of view, it’s not so much the “when” of termination that’s important to address, but the “what happens next.” Is there some knowledge transfer that will happen, either back to the client or to a new service provider? Will the service provider continue to provide services in some transitional capacity for a period following termination? It’s essential to get this post-termination co-operation in writing before things go awry, and should form part of any well-managed organization’s business continuity plans.

Governance and audit: Once the service provider is up and running, how will the relationship between client and service provider work? How will reporting or discussion about the services happen? How often? Is there a method for resolving disputes informally? Does the client have some right to audit the service provider’s processes to ensure value for money? You may also want to consider whether the client has a right to approve key personnel who are appointed by the service provider.

At the end of the day, the decision to outsource is a big one for a business — so as their lawyer, make sure they do it right. Advise your client to devote sufficient time and resources to negotiate the agreement and to hammer out the business terms of the deal. They may whine about the time and money, but they’ll thank you in the end.

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