‘While outsourcing key services can offer an efficient way for a business to grow, it is not without risks to your business and its hard-earned reputation,’ explains Jeremy Redfern, Partner, corporate and commercial services.
There are many key legal issues to consider when you draw up your request for proposals. Then, once you have found an ideal provider, you need to negotiate a commercial arrangement which provides you with the necessary protections if problems occur.
Your request for proposals will need to cover all your operational requirements so that potential providers are clear about what they will be expected to deliver. But this is also the point at which you can obtain vital information to help you assess the suitability of the company as a long-term business partner.
Some of the key issues that you will need information on include:
- Jurisdiction. Where is the service provider based? Will the agreement you sign with them be subject to English law? If not, you will need additional advice.
- Company structure and financial stability. It is prudent to undertake some due diligence on the company you have chosen as your outsourcing partner. Is there any risk it could collapse like Carillion did in 2018? Strong financial stability is key to ensuring the contract does not terminate unexpectedly and expose you to undue risks.
- Insurance. If you are subcontracting your own obligations out, you will remain liable to your customers. You will need recourse back to the outsourced service provider in case of a failure on their part, and you will need confirmation they have adequate insurance in place.
- Compliance with Modern Slavery Act, Bribery Act etc. Depending on the nature of the contract, you may need to see their policies on matters of compliance which affect the supply chain.
- Data protection. If you are relying on the service provider to assist you with any data management, then carrying out due diligence on their data protection protocols will be critical.
- IR35 and Managed Service Provider rules. Remember there are tax implications when using a freelancer, personal service provider, or IT service providers working through agencies. We would work alongside your Accountants regarding any IR35 compliant protocols.
If the value of the contract is substantial, then it is worth asking our solicitors for input even at this early stage.
Once you have selected a preferred delivery partner, then we will help you to negotiate the commercial arrangement. There is likely to be an extensive list of issues to consider, but some of the key ones are as follows:
- Right to subcontract. The service provider may want the right to subcontract out their obligations, but it is preferable to prevent this so that the buck stops with them, and you have a tight line of control.
- Key performance indicators (KPIs). Agreeing KPIs, expectations and deliverables will be an important negotiation, and these will vary depending on the service and how time-critical or performance-critical they are to your business. For example:
- for IT services, KPIs could relate to minimum amount of uptime, frequency of upgrades, or timely turnaround on maintenance support;
- for manufacturing services, your KPIs would likely focus on minimum order quantities, quality test results, compliance with specifications, production times etc; or
- a book-keeping service might need to be up to date with latest accounting principles and software, submit information or filings by certain dates.
Contractual reporting and reviews.
Often once contracts are signed, they are forgotten, and the course of business takes over. It is good housekeeping practice to audit your contracts frequently to ensure the other party is not acting in contravention of the terms, to ensure there are no changes in the relationship that needs to be documented within the contract and, most importantly, that any variations and agreements outside of the contract take place in writing, preferably always with reference back to the original contract.
Remedies for underperformance
One of the risks of outsourcing a service, is that it is not easy or quick to bring it back in-house if something goes wrong. Much as you hope this will not happen, it is important to be prepared and agree remedies in the event of failure or under-performance by your outsourced service provider. Some of the more common remedies that may be suitable to provide for in any service contract include:
- Credits. Should they credit you for downtime of service? Should there be a chargeback for delay in manufacturing or shortages in order quantities? Would a reduction in fees apply if certain KPIs are not met?
- The right to terminate. While being a standard contractual term in contracts, where KPIs or other obligations are of the essence, be sure to tie any failure to meet KPIs into your right to terminate. Not only will this incentivise better performance, but it also gives you an additional remedy specific to the risks you are most concerned about.
- Indemnity. If you are outsourcing the design of product packaging, intellectual property (IP) rights will come into play. It is important to have the right provisions in your contract and appropriate indemnities from your service provider in case they infringe the IP rights of another business.
- Rectification or replacement. You could consider including the right to require the service provider to rectify errors or work that does not meet the deliverables agreed. If the provider becomes incapacitated, a right to replacement (whether your choice or theirs) is another protection afforded to you if service interruption can be mitigated.
- Termination notice periods. If in your contract your outsourced provider can terminate at will, it is always prudent to extend out their notice period as it may take you a while to find another suitable outsourcing partner. This type of provision is just one example of how your business can be protected from unexpected loss of service.
How we can help
Our commercial team has extensive experience with helping businesses to navigate outsourcing services. Whether it is to help you negotiate the right terms in your contract or conduct due diligence on your selected provider, we can take care of your best interests.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.