A plethora of issues arise in the context of any outsourcing arrangement.  These issues can be considered from the differing perspectives of each the outsourcing company and the supplier to whom the relevant services are outsourced.

Broadly speaking, outsourcing arrangements can be divided into four inter-linked phases. First is the decision to outsource and the selection / procurement process for the purposes of selecting the supplier.  Second is the contract negotiation.  Third is the transition from incumbent to new supplier (noting the incumbent may in some cases be the outsourcing company itself).  Fourth is on-going relationship management between the parties for the term of the outsourcing relationship.

Very many important issues arise in each of the four phases listed above, however, this article focuses on matters arising in the contract negotiation phase.

Contract phase

The length and degree of detail contained in an outsourcing contract is determined by a combination of factors. These factors will drive the resources that each side is required to dedicate to getting the deal over the line.  Obviously it is not possible to exhaustively list all relevant factors as they will be deal specific, however, they generally include the following:

• The value and extent (and the overall importance to the outsourcing company) of the services being outsourced.  Clearly there is a significant value difference between a firm appointing a new courier company and the same firm outsourcing its payroll and finance function to a specialist service provider;
• The duration of the outsourcing arrangement; - Whether the service provider is taking over delivery of the services from a departing third party incumbent, thus necessitating the establishment of contractual parameters governing the transition phase.  Transitions involve close co-operation between the incumbent and the new supplier, and this can be challenging where the incumbent is aggrieved about not being reappointed, and depending on the content of their existing contract with the outsourcing company whether the incumbent has strict contractual obligations in relation to the exit process;
• The extent to which the relevant services are technically complex and, where so, the requirement to describe the services in minute detail.  Service descriptions can be enormously complicated, in particular where they are crafted to accommodate financial penalties and rewards for the purposes of measuring the supplier’s performance;
• The extent to which delivery of the services will require the service provider to have access to confidential information and intellectual property owned by the outsourcer, or data controlled by the outsourcer which is subject to data protection legislation;
• The extent to which the service provider will be obliged to comply with industry specific legislative provisions or a particular regulatory framework; - Related to the above is the extent to which the services will be carried out across jurisdictions, thus involving legal compliance in each relevant jurisdiction.  It is commonly necessary to spell out in detail the relevant legislative and regulatory provisions applicable in each jurisdiction to ensure that each party is under a contractual obligation to comply with the relevant provisions and not simply a legal obligation at law;
• The extent to which delivery of the services requires the service provider to licence its (or any third party’s) intellectual property to the outsourcing company.  This is often contentious;
• The extent to which the service provider will subcontract part of the services, and in this regard whether the outsourcing company requires oversight on the approval, appointment and performance of subcontractors;
• Whether the outsourcing company requires the contractual arrangements to accommodate and provide a set of consequences for future changes affecting itself, the service provider and / or the relevant industry in general;
• Whether the provisions of the Transfer of Undertakings (Protection of Employees) Regulations are relevant to the services to be performed.  TUPE has potential consequences both on the appointment of a service provider and on their exit. For more on the relevance of TUPE in outsourcing contracts

Common themes

At a more micro level, and in addition to the matters raised above and those issues that can be regarded as ‘boiler plate’, contract negotiation will inevitably focus on issues such as:

• Termination entitlements and contract extension rights of either side;
• Intellectual property, in particular the extent and quantum of responsibility for IP infringement, licencing obligations and the ownership of IP improvements that arise in the conduct of the outsourced services;
• Representations and warranties from each side, but in particular those being given by the service provider;
• Liability issues such as that attaching to contract and warranty breach, indemnification, liability caps and the extend of any uncapped liabilities;
• The categorisation and consequences of force majeure events and other excused performance events; and
• Obligations relating to insurance.

Ebb and flow

The ebb and flow of the contract negotiation phase in an outsourcing deal can be very significant. It is often the case that parties, whether the outsourcing company or the service provider, will from time to time pause to question the underlying business case for doing the deal.  This is particularly relevant where the relevant bargaining positions of the parties changes during negotiations.

• Outsourcing Agreements- Under the Bonnet, by Elizabeth McCann, Solicitor at McDowell Purcell Solicitors.
• The Risks in Winning Contracts Involving TUPE, by Julie O' Neill, Associate at McDowell Purcell Solicitors.
• The Business Case for Outsourcing, by Clair Hayes, Solicitor at McDowell Purcell Solicitors.