What is outsourcing?

When a business wants to save costs, it can engage a specialist company to provide certain business processes to it, such as its IT requirements or its payroll requirements. This is known as outsourcing.

Outsourcing may involve the business:

  • In transferring certain functions that it used to perform in-house to a specialist outsourcing provider.
  • TUPE transferring its employees engaged in carrying out that function to the outsourcing provider.
  • Entering into a long-term contract for the outsourcing provider to provide the services.

Why outsource?

Businesses outsource for different reasons, including to:

  • improve quality
  • save costs
  • focus on core business
  • establish variable costs.

How does outsourcing work?

The business should:

  • consider whether it wants a single source provider, or whether it wants to multi source
  • send Requests for Information to potential providers
  • send a Request for Proposal (RFQ) to potential providers
  • evaluate the proposals
  • negotiate with potential providers and select preferred bidder
  • negotiate and enter into a contract.

What should be included in the outsourcing agreement?

The contract with the outsourcing provider should provide that the outsourcing provider is responsible for:

  • providing the outsourced business process to the business
  • paying and employing staff who previously performed the function within the business

and required to:

  • Perform the outsourced business process in accordance with specified service levels.
  • Pay service credits to the business if it fails to meet the service levels.
  • Cooperate with the business if it decides to appoint a new outsourcing provider.
  • Manage the transfer of the function from the business.

How long will the outsourcing be for?

There will be an initial set up period. This depends on how complicated the set up is. There is no typical set up period, but it can range from a month to 12 months or more.

Typically, there will be a timetable for the function to be outsourced to the outsourcing provider.

Once the function has been transferred, the outsourcing agreement will continue for several years, often 5 or 10 years.

There may be a provision for the business to terminate after a given period if it wishes to do so, even if the outsourcing provider is not in breach of the agreement.

How are the charges calculated?

This will depend on the contract.

What can go wrong?

Outsourcing contracts are complicated and often expensive. The outsourced business process is usually critical to the business. Sometimes the business is not very clear about what benefit it expects or has unrealistic expectations from the outsourcing. Sometimes the business does not obtain the cost saving and/or other benefit it expected. 

All of this means that there are many things that can go wrong.  These include:

  • The business’s requirements change, so there are lots of change requests which increase the cost and cause delay to the project.
  • The business or the outsourcing provider, or both, have underestimated the complexity and amount of time the set up or transfer will take and/or the cost of providing the outsourced service.
  • The transfer of the outsourced service to the outsourcing provider is delayed.
  • The level of service is in breach of the service level agreement.
  • The outsourcing provider loses money on the contract.
  • The business does not save as much money as it thought it would.

What can we do to help?

Whether you are a provider of outsourcing services or a business looking to outsource some of your business processes, we have the expertise to advise and draft the appropriate contract. If you are entering into an outsourcing agreement or having problems with an existing contract, we can assist you.

About the author

Lindsay Ellis Partner

Lindsay is a lawyer advising on outsourcings, procurements and commercial contracts in the technology, transport/logistics, public, automotive, engineering (including aviation) and retail sectors.