Outsourcing has its place. However outsourcing also involves risks. We solve risk problems from early stage negotiations through to adapting established outsourcing agreements to make them fit for purpose.
Our solutions for outsourcing agreements include:
- Structuring an outsourcing agreement;
- Dealing with multi-jurisdictional issues;
- Dealing with data protection issues;
- Managing software rights; and
- IT support agreements
Structuring outsourcing agreements
The simplest form of an outsourcing structure is an outsourcing agreement directly between the customer and the supplier of the services. But there can be added layers of complexity to work through. A number of the common complexities are set out below and include:
- Transferring assets outside the outsourcing agreement
- Contractual liabilities under the outsourcing agreement
Transfer of assets outside of the outsourcing agreement
If a transfer of assets is anticipated, a separate transfer agreement may be negotiated. Or, in some cases, it is easier for the transfer arrangement to be covered in the outsourcing agreement itself. If a separate transfer agreement is to be used, we cover off the risk that provisions governing the parties’ ongoing relationship are overlooked. A transfer of assets will involve tax considerations we can involve specialist teams to help with the process from start to close.
Contractual liabilities under the outsourcing agreement
If the proposed supplier is not the main trading entity within its group, or does not have sufficient assets to meet its potential contractual liabilities then there are risks. Solutions we consider include a parent company guarantee. The advantage of a guarantee is that it offers a degree of protection if the supplier defaults under the outsourcing agreement. This will all depend on commercial bargaining power.
The relationship can also become more complex if the customer procures the provision of services on behalf of itself and its’ group companies. If we are acting for a supplier, we suggest that the outsourcing agreement includes specific provisions controlling potential cross-actions by several group companies. The risk we are looking to bolt down is the extent of liability. Outsourcing agreement limitations and exclusions which attach to group companies as a whole will leave the supplier in a stronger position in the event of contracting customer default.
In many outsourcing agreements the transfer of staff means that TUPE has to be considered. Employment agreements in practice can throw up a range of contractual risks for both parties to an outsourcing agreement. The issues ultimately reflect pricing.
You will be well advised to be aware of the risks early on and before the final pricing is agreed. Prevention is cheaper and more effective than cure.
Multi-jurisdictional outsourcing agreements
Risks for customers can be avoided if you require that the supplier should remain liable for the acts and omissions of its subcontractors as if they were its own. The customer may seek a contractual right to pay key subcontractors directly or to seek the assignment of key subcontracts to the customer if the supplier suffers a certain level of financial distress, often linked to a decline in the credit-rating of the supplier. Another route is to consider a deed of indemnity from the original supplier direct to the customer for the acts and omissions of its selected subcontractor. The supplier then has to think carefully.
More complex outsourcing agreement structures are often used in outsourcing transactions where the risks and potential success of the arrangement can be shared. A joint venture structure, whether corporate or contractual in nature, often gives the customer a greater degree of control. Control will help know-how to transfer automatically to the customer during the period of the outsourcing. Like every other joint venture, the parties should consider ownership of intellectual property and exit provisions at the commencement of the collaboration.
If the supplier intends to appoint subcontractors in multiple jurisdictions, and if we are instructed by the customer, we will review the risk around choice of appointments. As a customer you should require prior notification of the selected subcontractor as a minimum. Preferably you should retain a right of veto over the use of particular subcontractors if this is likely to be a problem.
Data protection issues in outsourcing arrangements
Data protection issues are a major cause of tensions between customers and suppliers of outsourcing agreements. Issues usually revolve around:
- Distinctions between controllers and processors;
- Restrictions on data transfers; and
- Security obligations.
Unless contractual provisions provide clarity, a fact finding exercise will reveal what role each party is taking with respect to the handling and control of data. Cross warranties are not uncommon and special care has to be taken when data is likely to flow outside the EEA. This is particularly important for companies in a group with seats overseas.
Software rights in outsourcing agreements
We can review with you the IT outsourcing agreement as a whole.
Based on past experience we find you may benefit in particular from a review of IT outsourcing agreements relating to:
- Intellectual property rights. You need to consider in particular those that relate to the customer’s use of existing third party software. Other catch areas are around the ownership of, or rights to use, any software developed by the supplier in the course of providing the outsourced services.
- Most pure IT outsourcing contracts will include an element of applications development during the life of the contract. You may need to think about whether the outsourcing agreement needs to include a process where the supplier is required to develop a solution to meet the customer’s requirements. Is this going to be on-going, or one off?
IT support agreements
A support and maintenance company will often provide its services to customers via contractual means, whether one off or ongoing. When ongoing, care has to be taken to ensure that both parties have the appropriate layers of protection in the event that systems default. Businesses are heavily reliant on IT support and the provider will often detail a list of problems ranking in seniority.
Customers should consider response times. A licence will have to be included to ensure that the parties’ objectives are aligned.
Website development agreements
These are flexible in nature and can span from pure website build through to SEO maintenance agreements. The detail to address is around expected service levels and deliverables. If acting for the service provider, we have to consider limitations on liability and statement of work specifications.
Cloud service agreements
Uptake of cloud computing among SMEs is rapidly growing. Services range from a single application delivered as Software as a Service (SaaS) to entire data centres being transitioned to the cloud using infrastructure as a service (IaaS). Cloud service agreements fall under the umbrella of outsourcing agreements so the considerations above apply here also.