UK: Outsourcing – Top Tips

Last Updated: 5 August 2013
Article by Davenport Lyons

In the current economic climate it is increasingly important for all businesses to keep their costs under control and to operate efficiently. Outsourcing parts of the business, such as your in-house IT or HR functions, to one or more third party providers is one way of doing this. Outsourcing though should not be considered as an easy or straightforward option. Careful thought and planning by the customer, guided by expert advice, is necessary in order to meet objectives and achieve a successful outsourcing.

If you are considering an outsourcing arrangement, perhaps for the first time, we offer you these 'Top 10' customer tips based on our experience of advising on a wide range of outsourcing deals.

1. Be clear about why you are outsourcing

Think about why you are outsourcing your in-house services and what you want the process to achieve. Often one of the main objectives in any outsourcing is to save money, but you need to be sure that the supplier is able to provide the same - or a better - level of services for less than it currently costs to deliver them in-house. This involves detailed knowledge of how much it actually costs to provide the services at present, and it is surprising how often the customer has very little idea about these details. Once you know the details of your current cost base, you are in a much better position to engage with and push the supplier on cost savings going forward.

2. Don't outsource a problem

Don't outsource a service in the hope of getting rid of any problems – you can expect suppliers to provide (perhaps after a period of transition) a more efficient and cost effective service, but it's unreasonable to expect them to take on board and fix fundamental issues with your current services and personnel.

3. Think about for how long you should outsource

You may be considering a long-term outsourcing, but it could be a mistake to tie yourself to one supplier for an extended period. Whilst it is tempting to outsource for an extended period (between five and seven years was previously a common duration) bear in mind that your circumstances and requirements may change or indeed the relationship might break down - meaning that you want to bring the services back in-house or transfer them to an alternative supplier – both potentially complicated and costly processes. More recent outsourcing trends seem to indicate a preference by customers for shorter duration arrangements with suppliers (often for periods of three years or less).

4. Make sure that the supplier can provide what you want

Firstly, you need to ensure that you are giving them a fair and reasonable chance of doing so. Problems arise when the potential supplier is given an inadequate amount of data and information about the customer's business and technical requirements. The due diligence process for you and the supplier will be critical, both for a successful negotiation of the outsourcing contract and for the subsequent relationship going forward.

Secondly, you will clearly be seeking a supplier with significant expertise and experience in the relevant field, but how closely does that expertise and experience match your own situation? Keep in mind not just the nature of your business: experience of outsourced HR provision in large heavy industrial companies might not mean expertise in providing HR services for a medium sized accountancy firm. IT provision developed for use in one sector may not be easily transferrable to another, as the recent history of IT projects in the NHS has demonstrated.

5. Beware of culture clashes

Cultural issues are important, too: a service provider may be good at managing the needs and expectations of a US or Scandinavian workforce, but does this necessarily mean that the same approach will work with your business? If the service provider is going to be delivering some of the services from outside of the UK (so called 'off-shore' provision of services), how will your customers and others in your business feel about having to deal with someone who is in another country when, for example, they want IT support?

6. Know how much it will cost

The charges schedule to an outsourcing contract is often one of the most complex areas of the document, so make sure that you understand what the supplier will be charging you and how this is calculated. You need to know what is and is not included in the overall contract price. If the supplier's "pitch" suggests they can provide you – say – with a 30% saving on your current costs, they should commit to this (and any other 'promises' made pre-contract) in the contract itself.

7. Consider how the contract will be managed

You need to think about how you are going to interact with the supplier. Governance arrangements are important to establish a regular pattern of meetings and dialogue, and you need to have some form of 'retained customer team' who will be able to manage the on-going relationship with the supplier.

8. Think about what happens if circumstances change

There will usually be financial compensation payable to the supplier if you want to break the contract before the expiry of any initial or fixed term – you need to make sure that you understand not only when a break option may be exercised but also how any financial compensation to the supplier is to be calculated.

9. If things go wrong, know what happens next

The relationship with the supplier is (or should be!) good at the start of the outsourcing arrangement but you have to consider what you want to happen should the relationship deteriorate and even break down altogether. It can be very difficult to get the supplier to focus on exit scenarios, but this is essential if there is going to be a smooth transition of the services on termination. Any consideration of exit issues should always involve an understanding of the practical implications, namely what it is that you expect the supplier to do in these circumstances and the relevant timelines. The outsourcing contract should include an initial exit plan prepared by the supplier, or at the very least a commitment by the supplier to provide this within a specified time after the start of the contract.

10. Take good legal advice

Always remember that the draft outsourcing contract will most likely be provided by the supplier – and is therefore likely to be drafted very much in the supplier's favour. Your legal advisers should be able to identify those clauses which are too heavily weighted in favour of the supplier and suggest alternative options. Try to involve your legal advisers in the project at an early stage so that they fully understand your requirements and what you are trying to achieve in the negotiation process. That will enable them to 'add value' to the process, not only in the drafting of the outsourcing contract but also in ensuring that key legal, commercial and even relationship risks are addressed, to your advantage, as part of the contract negotiations.

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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