Once you decide to contract with a third party to carry out some of your non-core functions, you should make sure that you take the steps necessary to get the most out of your arrangement.
Outsourcing information technology services is becoming increasingly common. A Canadian bank recently announced that it has struck a deal to have a third party manage the technology that supports its entire domestic banking operations as part of a plan to focus on its core business.
This particular outsourcing deal was one of the most sweeping of its kind in Canada and was valued at $900 million over seven years. The supplier will assume responsibility for the information technology relating to the bank’s domestic data centres, retail branches, automated banking machines and desktop computer systems.
If a large Canadian bank is willing to trust a third party to manage such mission-critical technology, should your company also consider outsourcing some or all of its functions?
Benefits: One benefit of outsourcing is that it allows a company to focus more intently on its core business, where it can add value, and get out of businesses that do not add value to the company, even though the processes are essential to its success. Examples include investment management, cash management, payroll, benefits and pensions, human resource systems, call centres, and other back-office functions.
Another benefit of outsourcing is that it enables companies to take advantage of technology enhancements that they could never afford on their own. If you are spending significant amounts of money on information technology just to remain competitive, then outsourcing agreements can become particularly important. The supplier can spread the costs associated with leading-edge technology across a larger business base, and your company can save money.
From a treasury perspective, outsourcing reduces your company’s risk exposure. In part, this is because you have less need to invest in hardware, software and training that will become obsolete. As well, your company is protected against losses arising from operational errors and puts that responsibility on an organization for which technology-based operations form a core competency.
Steps to successful outsourcing: To significantly lower your current costs, you must deal with a third party that is an expert in managing the functions in question and has achieved economies of scale that are greater than those your company can achieve. This can be part of an overall strategy to focus on your core businesses while using the expertise of leading service providers to support your administrative needs.
An outsourcing program does not necessarily have to be conducted on a scale as big as the bank’s mentioned in the example above. You can also outsource an in-house ERP application, such as pension benefits, to an application service provider, the maintenance of your web site to a web-site developer or the development of customized software for your business to a software developer.
Outsourcing can apply to more than just your company’s information technology. Companies that do business internationally, for example, can achieve significant benefits by outsourcing their translation services requirements to a translation company. They can also outsource their ..hedging and management of their exposure to commodity price fluctuations.
Retailers can outsource their logistics to a logistics specialist, and manufacturers, their raw material purchasing. In each case, significant bottom-line accrue though economies of scale.
If your company is considering outsourcing, you should plan well ahead. Consider involving your internal corporate service department as a potential supplier in competition with the third party.
Communication is critical. The far-reaching impact of an outsourcing arrangement means that, throughout the course of the arrangement, management has to keep staff in the know and also develop ways to inform suppliers, business partners and other stake-holders. If you try and set up an outsourcing team and send it off to work in secrecy, office rumours can quickly mount to a fever pitch and threaten to doom the project from the start.
One of the first things that an organization should consider doing is to educate its staff and partners as to the reason for the outsourcing initiative. They will need details about how things are going to unfold and what they can expect each step of the way. An outsourcing company will need to hire many of your existing employees as part of the outsourcing arrangement. In many cases, the employees hired by the outsourcing company will benefit through more challenging work and potential for career advancement.
Meanwhile, however, employees may fear that the intent of an outsourcing initiative is to put them out of a job. You should consider giving as many employees as possible the opportunity to participate in planning and executing the outsourcing project. People will generally embrace the initiative if they can play a part in making it happen. To do this, make sure they have the skills, tools and training necessary to let them play a meaningful role and that they have a meaningful incentive to be part of the team. If employees and partners have good reason to believe that they are part of the project and will share in its rewards, they will be full supporters.
Specifically, your company’s purchasing department and legal advisors should be involved early in the process to ensure that the appropriate purchasing disciplines are exercised. A competitive bidding process that makes use of the benefit of Requests for Information and Requests for Proposals is important, because it can save you money and get you better contractual terms and conditions.
In the case of information technology outsourcing, your Request for Proposal should include a statement of your company’s policies relating to technology procurement, employment and outsourcing. These policies can significantly increase your negotiating leverage when dealing with both business and legal issues.
Companies frequently ask their executives and legal advisors to draft corporate policies on different subjects, which then provide a defence in the event of a dispute, regulatory investigation or law-suit, whether such lawsuit relates to your employees, the outsourcer or a disgruntled third party. Banks are particularly good at writing corporate policies that keep all of these goals in mind.
The Request for Proposal should also contain your contractual going-in position. Taking the time to draft your proposed contract for the deal or at least the key contractual terms and have the outsourcer comment on its acceptance or rejection of these terms can save you legal costs and protect your company’s business and legal interests. Remember that there are significant business and legal risks involved in outsourcing. For example, if the in-formation technology function that you outsource fails, your business can suffer loss of goodwill and immediate damages. So your contract with the outsourcer must be carefully drafted and negotiated.
Christopher Koressis, LL.B., is a partner with the Toronto law firm Fogler, Rubinoff LLP. He specializes in information technology and outsourcing initiatives. He can be reached at (416) 941-8807 or by email at firstname.lastname@example.org.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.