Originally published in published in 2006/07 Outsource Directory
The business case for your outsourcing has been agreed with the board of directors. You are now left with the tricky problem of getting it all down on paper. Where do you begin?
Many people regard the contracting process as some necessary evil that is completely divorced from the deal at hand. This could not be further from the truth. The reality is that the outsourcing contract is the deal - recorded in legal terms, on paper.
Draft Contract – Whose Form: Yours or Theirs?
There is no right or wrong answer to this question. Bear in mind that draft contracts from outsourcing suppliers are likely to be a generic compromise reflecting a "standard" outsourcing service. This starting point is likely to be highly favourable to the supplier and unlikely to fully reflect your priorities and principles, or indeed the governance model of your business. You may be sold on the premise that using the supplier's standard form of agreement is a quick and hassle free way to get the deal going. That is only the case of course if you agree with what is contained in the document in the first place.
In contrast, this may be your first outsourcing deal. Even if you are a second or third generation outsourcing customer, it is still not your core business so you are unlikely to have a "standard" contract. Yes, there will be an upfront cost involved in preparing the document. But is that necessarily wasted when you end up with an agreement which does fully reflect the deal at hand and which, at first cut, will reflect those elements which you, and not the supplier, find important?
Whatever approach you ultimately take, it is worth bearing in mind that a good outsourcing agreement is one which adequately reflects the position of both parties and is not biased in one way or another. If an agreement is too heavily weighted in favour of the customer, the supplier is likely to end up aggrieved and may not provide you with the best service. If too heavily biased in favour of the supplier, the customer may end up paying over the odds for a mediocre service.
Contract Terms – What's Fundamental?
It is of course important in any agreement to get the fundamentals right. There is no point arguing over the finer details of clause drafting if the critical contract building blocks are not there.
- Service Description
The service is what you are paying for from the supplier. The description of it informs at a basic level what the supplier does and does not do - in industry terms, what is "in scope" and what isn't. If you get it wrong, by misdescription or even a failure to include, it is likely to cause confusion and difficulty to both parties. If you don't know what the service is, how can you baseline service levels against it?
- Service Levels
It follows that the levels and quality of service that are required should be adequately charted in the agreement. Service level metrics should be drafted so that there is very little ambiguity. If the metric does appear equivocal, consider changing it or even taking it out.
- Pricing
Clear principles need to be applied to ensure that costs and charging structures are understood. This is regardless of whether the deal is fixed price, capped price, time and materials or unit based.
- Warranties and Indemnities
Non lawyers quake at the mention of these terms. The simple truth is that they are the mechanism under the agreement to ensure that the parties perform their legal obligations, as they are set out in the agreement. They also provide protection in unanticipated circumstances.
- Liability
Both parties need to understand the extent of their liability to the other in the event that something goes drastically wrong. Set liability levels too low and you may not be able to recover the full extent of your damage. Set them too high and you may end up bankrupting your business.
- Covering the Exit
Never, ever leave the deal open to interpretation in the event that it comes to an end (either prematurely or because it has run its course). The customer needs provisions which guarantee co-operation from the supplier in either handing the services back in-house, or over to a replacement supplier. It also helps to agree costs up front for services performed in any termination notice period.
Finally, it is a poor contract that can only be understood by the lead solution architect. A good deal is one that can be understood by anyone picking up the agreement and reading it from cover to cover.
John Buyers is a partner and head of Commercial, Outsourcing and Technology at international law firm Stephenson Harwood.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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