Commercial and technology contracts legal A-Z: O is for outsourcing

Commercial and technology contracts legal A-Z: O is for outsourcing

Outsourcing is a term that is used to describe a variety of contractual and business relationships. It tends to involve the engagement by a customer of a third party supplier to provide certain services or functions which may have been provided by the customer itself. It is this dynamic which distinguishes outsourcing arrangements from an "ordinary" supply of services arrangement, and provides a rationale for why, in comparison to an "ordinary" arrangement, a customer in an outsourcing arrangement tends to retain strategic responsibility and control over the outsourced service.

Examples of commonly outsourced services include IT services, human resources services, facilities management services, customer call centre services, delivery and logistics services and business process services. When the customer’s outsourcing arrangements move from one supplier (rather than the customer itself) to another supplier, it is known as second generation outsourcing.

A successful outsourcing arrangement can offer a number of benefits to a customer. By outsourcing to a specialist third party supplier, the customer may be able to obtain an expert standard of service in a more cost effective manner. In addition, the operational risk inherent in the relevant service or function is transferred to, or shared with, the supplier rather than borne solely by the customer.

There are also a number of challenges to be addressed. For example, as outsourcing arrangements tend to be for the longer-term, it is important to ensure the arrangement is flexible enough to accommodate the risk of changing needs and environments. Also, depending on the nature of the outsourcing, there may be market-specific or regulatory aspects to consider (for example, the SYSC requirements in the financial services sector) which mean that the customer is required to retain ultimate responsibility to its own clients if things go wrong. There may also be accompanying transfers of certain personnel (TUPE), assets, software and/or existing contracts to the supplier to enable the outsourced service to commence, and these elements may have their own timetable.

As with all services contracts, the outsourcing contract must cover key aspects such as the services description, service levels and remedies for poor performance, fees, term and termination rights, liability and insurance.

Other important issues to consider include contract governance requirements, change control procedures, employment liabilities (particularly TUPE, as outsourcing arrangements may involve staff transfers), transition issues on commencement, exit management issues on termination and whether the customer requires any step-in rights (or even whether step-in is possible in practice).

For more information, please contact any member of the commercial contracts team at Stevens & Bolton LLP.

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