Outsourcing contracts can be complex affairs, but a
good outsourcing contract will examine service level
agreements, penalties and rewards, timeframes and measurements,
regular reviews, and
exit strategies.
What are outsourcing contracts for?
Outsourcing itself can cover any or all IT system operations,
with some organisations choosing to outsource their
whole IT requirements.
In these cases, they tend to work closely with an outsourcing
service provider, at home or abroad.
The sorts of operations that are
often outsourced include the running of desktop and server
applications, business processes,
backup and recovery,
customer services and billing.
What are the benefits of outsourcing?
The benefits for businesses that outsource their
IT include lower IT costs, and the ability to scale up their
operations as and when required.
They can also gain from using the expertise of the outsourcing
company’s engineers and support staff. This is particularly handy
if IT is not your
core competency or industry.
How do I get started with outsourcing contracts?
It is a good idea to clearly define the scope of the
outsourced operations beforehand, to have a good idea what
exactly the service provider is doing, and
what is left to your business.
Striking the right outsourcing deal also comes down to having
the right legal agreements at the core of a contract, so it is
worth getting the right advice.
The contract itself should be clear, fair and well negotiated
from the start. It should define the full extent of the services
that are to be delivered and for which the service provider will be
responsible.
These are called
service levels and service level agreements.
What do I need to know about service level agreements?
Service levels are formally agreed targets which the service
provider must meet, and the list can be as
long or short as the user organisation requires.
They should be based on detailed schedules, with the point being
that neither side can be in any doubt as to what is required of the
service provider.
Setting these service levels so that both parties can benefit
are fundamental to business process outsourcing contracts.
As well as describing the deliverables and expectations of the
service provider, good contracts will also describe the reporting
methods for service level measurement. These could cover factors
such as how and when targets are met.
They could also include
potential penalties or benefits if requirements are or aren’t
met.
What penalties or benefits can I apply?
Service levels can have penalties or benefits attached to them.
The most common forms of penalties are service credits, and
liquidated damages, (also referred to as liquidated and ascertained
damages).
Liquidated damages are calculated in relation to the customer's
estimated potential loss. They might refer to a specific breach of
contract, such as late performance.
In terms of rewards, benefit sharing is often used to reward the
service provider for delivering real business value to the
customer.
Percentage uplift is another term used to describe a clearly
defined improvement on a service benchmark, for which there can be
a financial reward.
What else do I need to consider with an outsourcing
contract?
The
key to outsourcing with service levels and
outsourcing contracts is clarity.
But this can be different if the contract covers many
operations, with large and
complex systems requiring different levels of service.
However, if the agreement is too loose or hard to understand
both parties lose out.
Also, objectivity is important in ensuring the
service level measurements are fair for both parties. For
example, is a service level measurement tracking a response time,
or a fix time?
How do I terminate or end a contract?
It is vital to have
a well thought out termination or exit strategy from the
outset, and also to have options to continue
after the end of the contract’s term.
Termination conditions cause frequent disputes, particularly if
there is a transition and handover period between two service
providers.
Options to consider are
break clauses which allow either party to end the agreement
early. You might like to form contingency plans in case either
party gets acquired. Finally, you might want the option of
partially terminating the contract.