On 31 October 2014, the International Organization for Standardization ("ISO") published the first international standard for outsourcing, ISO: 375000: Guidance on Outsourcing (the "Standard").1 The Standard seeks to provide a comprehensive guide to the outsourcing process, regardless of the size of the transaction, the industry sector or the activities to be outsourced. The Standard provides guidance on the phases of an outsourcing project, the processes that organisations need to implement and the governance that is required for an outsourcing transaction to be successful.
The Standard is the final product of a process instigated by a request from the national standards authorities of the Netherlands and Switzerland in 2010. In 2011, an ISO Technical Committee was formed and received input from the standards bodies of 13 countries.2 The Technical Committee also received input from buyers, service providers, outsourcing advisors and academics over the four years of the Standard's development. A draft standard was published in 2013 and a final version was agreed in October 2014.
ISO standards are not legally binding but are important statements of industry specific best practice, which suppliers and customers alike are likely to make reference to, both in their general business conduct and in their contractual arrangements with customers and suppliers.
SCOPE OF THE STANDARD
The Standard covers the main phases, processes and governance aspects of outsourcing as a proposed potential 'one size fits all' reference model across all industry sectors. In addition, the processes are intended to be tailored to fit the specific outsourcing strategy and maturity of the particular customer and provider. The Standard starts with the precondition that a customer organisation has already established a sourcing strategy and concluded that there is a beneficial business case for outsourcing. The decision to continue or terminate outsourcing as a strategy option is outside the scope of the Standard and is based on the continuing validity of the particular business case at hand.
The Standard aims to provide a common vocabulary for stakeholders with which to interact and plan the outsourcing process and represents a useful toolkit for the governance of outsourcing throughout its life cycle.
Intended for transnational and horizontal application across industry, the Standard is principles-based and therefore does not enumerate specific legal or regulatory compliance issues that may arise during the outsourcing process. It nevertheless provides an effective business planning framework that should help stakeholders and their advisors to anticipate the compliance issues likely to arise on a case-by-case basis.
FOUR PHASE LIFE CYCLE OF OUTSOURCING
The Standard is structured around the four phases of the "outsourcing life cycle" with an emphasis on effective governance practices throughout. These four phases are:
- outsourcing strategy analysis,
- initiation and selection,
- transition, and
- value delivery.
The Standard focuses primarily on general principles of governance and supplements them with arrangements intended to facilitate the identification of risk at each phase, while preserving the flexibility required for outsourcing material arrangements. The main steps of each process of the Standard focus on the building and maintenance of relationships between the customer and the provider through, for example, the establishment of a joint mission statement and elaborating an outsourcing roadmap with key milestones and success criteria. Each phase contains processes to address its purpose, the main activities to be performed, key success factors and the main inputs and outputs.
The Standard includes a number of useful checklists of issues to illustrate the topics the customer and provider should consider in dealing with specific processes or steps. We discuss the four phases of the outsourcing life cycle below.
PHASE 1: OUTSOURCING STRATEGY ANALYSIS
The first phase of the outsourcing life cycle is outsourcing strategy analysis. According to the Standard, the purpose of this phase is to "initiate and evaluate outsourcing opportunities and establish and maintain an outsourcing strategy that meets business goals and requirements." This phase is, by nature, predominantly customer-based and aims to enable a customer to assess the value and feasibility of available outsourcing options.
In terms of governance, the Standard suggests that a customer-based governance committee should be established to oversee the entire strategy analysis on the basis of agreed terms of reference and in accordance with a project timetable. Such terms of reference should include consultation with internal and external stakeholders, together with consideration to the integrity of the business case for sourcing and mechanisms for protecting investments made in sourcing options.
Matters to be assessed at this stage include checking whether outsourcing prerequisites are in place, such as up to date business strategies and appropriate approval by senior management. The services eligible for outsourcing are assessed in terms of their scope and strategic importance, underlying service elements (and whether these can feasibly be detached from the organisation) and identifying relevant resources and assets, including personnel, intellectual property, data, hardware, etc. Organisational impact is also considered at this stage, resulting in a detailed impact analysis report addressing benefits, risks, costs, constraints and other impacted factors, with expected best, worst and most likely cases.
An outsourcing strategy is then shaped around the outcomes of these steps, enumerating the chosen goals, model and approach to be taken by the organisation, including the type of relationship it wishes to have with its chosen provider. Selection criteria and high level execution plans can also be prepared at this stage. The crux of the first phase is a decision on whether to proceed with outsourcing by way of the mandated strategy and, where relevant, setting up an outsourcing project.
PHASE 2: INITIATION AND SELECTION
The purpose of the second phase is to specify the exact requirements for outsourcing, select adequate providers and successfully set up outsourcing agreements. This phase involves drawing up the required services in detail to include the forecasting of future service levels. The outsourcing model to be adopted is also fleshed out in more detail, including governance, performance management, commercial arrangements, transitional issues and business continuity.
Draft outline agreements are also to be produced at this stage, including consultation with legal, tax and other advisors. Potential providers are to be identified based on defined selection criteria and in accordance with any relevant procurement regulations, culminating in a shortlist of providers with whom the outline agreements may be discussed. The final step in the second phase is to negotiate and establish an agreement with one or more preferred providers.
In terms of governance, the Standard suggests that a governing committee internal to the customer should oversee the entire phase, end to end. Internal to the provider, a governance committee should ensure compliance with customer selection processes and incorporating appropriate internal expertise to ensure the value of its proposition is clear. The Standard recommends that, where possible, the customer and provider should collaborate directly during this phase to maximise the effectiveness of later phases for both parties.
PHASE 3: TRANSITION
The third phase enables the migration of service delivery from the customer or an incumbent provider to the new provider. The Standard recommends that the active participation of the customer in collaborative planning is essential for the success of this phase.
The Standard focuses on governance during this phase in particular. It emphasises the importance of robust management of all projects and programmes during this critical period in order to mitigate against service disruption and to ensure the adequate resourcing of services for the duration of the transfer. The Standard suggests that this phase should be governed by a formal transition management committee jointly staffed by customer and provider and recommends that changes in key resources are kept to a minimum, at least across phases 3 and 4, to ensure that the necessary knowledge and experience is continuously available.
Aside from the governance aspects, the phase comprises refining a delivery framework and executing the transition of knowledge, people and technology as necessary. Risk, audit and compliance functions are allocated and service delivery is tested and finally handed over. The phase comes to an end when delivery capability is confirmed according to agreed specifications, with the official transfer of responsibilities to the provider initiated after key stakeholders have reviewed performance test results and given final sign-off. The Standard recommends that the business case should be updated at this stage and the performance level obtained used as a baseline for evaluation purposes.
PHASE 4: DELIVER VALUE
The purpose of this final phase is to realise the benefits of the outsourcing arrangement for both parties and to ensure consistent performance and adherence to commitments. This phase is ongoing and ends only when the relationship between the customer and provider is terminated. It consists of service delivery, monitoring and review of service performance, the management of finances and relationships, and the ability to resolve any issues arising. It also incorporates preparation for the continuation or end of an agreement, an aspect of the outsourcing relationship, which the Standard states, is frequently underestimated, imposing risks for both customer and provider.
The Standard states that jointly staffed committees continue to play a key role in providing supervision and control through formal and regular management mechanisms. These facilitate the making of effective service related decisions and development of a trust-based relationship between customer and provider. Depending on the scope of the outsourcing project and relevant compliance requirements, it is expected that a joint committee would feed into the work of specific internal governance committees such as audit, risk and strategy.
The Standard is designed to function as a guide for any organisation either considering its sourcing arrangements for the first time or seeking to improve on previous experience and current practices. This is a lofty goal and, as a 'one size fits all' document for organisations of all sizes, shapes and colours, the Standard generally fulfils its purpose as an adaptable step-by-step guide to best practice. A document with as wide an audience as envisioned by the Standard will naturally have its limitations, speaking no doubt in too much or too little detail for certain organisations. There are a wealth of factors that may be crucial in the outsourcing relationship, such as public procurement issues, which will need to be addressed at the very outset of the "outsourcing lifecycle" and may not be immediately apparent from the Standard itself, given its horizontal application. Advice should be sought at an early stage before significant resources are invested in the outsourcing process. Nevertheless, the Standard certainly provides a roadmap that, if managed from the outset, should help to flag avoidable pitfalls and provide a common language on the basis of which customers and providers can engage, particularly when the international nature of many outsourcing relationships is taken into account.
1 Available for purchase at http://www.iso.org/iso/catalogue_detail?csnumber=56269
2 Bulgaria, Canada, Denmark, Finland, France, Germany, India, Malaysia, Netherlands, Russian Federation, South Korea, Spain and the United Kingdom
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.