Deciding whether services are best provided in house or outsourced to private contractors is a major decision for independent schools. The benefits of outsourcing catering and IT services have long been recognised, but now schools are increasingly looking at outsourcing services from cleaning to facilities management, gardening to security, even payroll and fundraising.
The rationale behind outsourcing is that a specialist service provider will provide the services more efficiently and cost effectively than the school's in-house alternative. However, it does mean that control over service delivery is one step further away from the school's management with the associated risk of reputational damage if it all goes wrong.
When contemplating entering an outsourcing contract, schools need to be clear about their aims and objective from the outset.
First question: what outsourcing model to use? Are you happy to introduce an independent company operating under its own branding or would you prefer a seamless transition where there is no obvious difference to users that the organisation actually providing the services has changed. The school will also need to determine what procurement process it will follow: is a full invitation to tender, followed by short listing required or will a request for information and proposals suffice? What about a shared services model working in partnership with other schools?
Having identified your preferred service provider and carried out due diligence, the next step is to decide who will own the assets used to provide the services and if any formal steps are necessary to give effect to this. For example, particular requirements apply to transfer intellectual property and consent from third parties may be necessary to transfer key contracts and equipment leases.
One of the major areas of concern in IT outsourcing arrangements, as well as payroll and fundraising contracts, is the risk involved in passing personal data to the contractor. It is essential to ensure that data protection matters are properly dealt with and the security of data protected when planning an outsourcing project.
Another risk for the unwary is falling foul of the TUPE regulations. TUPE operates to protect employees if the function they perform is transferred from one undertaking (i.e. the school) to another undertaking (i.e. the contractor). TUPE can also have an effect if, when the outsourcing contract comes to an end, the function is assigned from one contractor to another or is brought back in-house. It is vital to set out in the contract the specific responsibilities of the parties upon transfer of the relevant function from the school to the contractor (or vice versa).
Once the contract is in place, how will you measure the performance of your contractors? Most outsourcing contracts will be governed by service levels, linked to key performance indicators. If the contractor fails to meet the service levels, the contract will typically provide for service credits (that is credits against future performance). But is financial compensation enough? Should the school be obliged to continue with an underperforming contractor or should it be entitled to walk away? Getting this wrong could leave the school exposed to liability for damages to the contractor if the contract does not provide clear rights of termination.
What will happen when the contract comes to an end, whether through effluxion of time or due to the fault of one party? The school will not want the contractor simply to stop working, but express contract terms would be necessary if it is to be obliged to arrange an orderly hand-over to a new service provider. It may be that step-in rights are required before the contract comes to an end in order to protect service delivery during the notice period.
Finally, the parties will need to decide where the risk should sit. The contractor will want to limit its liability as far as possible, whereas the school will want to know that it is covered if it incurs liability as a result of the contractor's acts or omissions. Express warranties and indemnities may be necessary to cover off the school's exposure and it will need to take steps to ensure that the contractor has adequate and acceptable insurance protection in place.
Getting it Right
There are many private service providers offering financially attractive support to schools looking to outsource services. The benefits of such contracts are numerous, but the pitfalls could cost dearly. When it comes to drafting and negotiation contracts for outsourcing services, Bircham Dyson Bell LLP can offer specialist advice within the independent schools sector. Our Education and Schools team offers expert advice on all aspects of the outsourcing process from carrying out initial due diligence, through the procurement process, to agreeing the commercial terms and dealing with data protection and employment issues.
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.