Basic Elements of an Outsourcing Agreement

As companies continue to turn more frequently to outsourcing solutions for back office processing services it is important executives and senior managers to have a basic understanding of the key elements of an outsourcing agreement.  While every deal is different there are some guiding principles that can be applied in most instances.

First, while the parties obviously contemplate a long-term relationship with significant investments on both sides it is wise to provide for a “pilot period” during which the parties can evaluate how the services are being provided and whether they can establish procedures and protocols that will allow them to achieve the goals and objectives for the contract.  One of the key planning tools for the contract is the preparation and acceptance of an implementation plan and schedule that will be appended to the contact as an exhibit.  The plan and schedule should include acceptance tests that would need to be completed before the services can begin.  The pilot period would commence on the “implementation completion date,” which is the date that the acceptance tests are completed.  The parties should schedule a full-scale review of service provision to be completed on or before the end of the pilot period.  Assuming that the arrangement continues beyond the pilot period the agreement should specify the initial term of the contract and procedures for renewal and extension.  In that regard it is very important for the client to insist on “termination assistance” that ensures that the services will continue to be available for a reasonable period following a decision to terminate in order to allow the client to make arrangements for a new vendor or performance of the outsourced services on its own.

Obviously one of the most important parts of the contract is the description of the services to be provided to the client by the vendor and the parties should prepared a detailed schedule of services that includes objective measures of the anticipated “service levels” as well as an overview of possible incidental services that are not specifically described yet are likely to be required in order for the goals and objectives of the contract to be achieved.  The description of services should be accompanied by a schedule of fees and appropriate details regarding the manner in which the vendor intends to provide the personnel necessary to achieve the mutually agreed service levels.  The parties should be prepared to discuss any changes in the level of services due to increased or decreased demand by the client and/or changes in applicable laws and regulations.  The vendor should be prepared to provide the requisite training for its personnel and render reports to the client regarding the level and quality of services provided under the agreement. Among other things the reports should cover employee work hours and absenteeism and the volume and quality of work performed by vendor employees based on mutually agreed performance metrics.  Weekly and quarterly business reviews should also be conducted.  Finally, a procedure should be established for reviewing possible requests by the client to the vendor for new services during the term of the contact including preparation and review of a written proposal for new services that include an analysis of the additional resources that the vendor would need to devote to the relationship.

Other key issues that need to be covered in this type of agreement include communication procedures, including designation of relationship managers by both parties; identification of key vendor personnel who will be dedicated to performance of the activities contemplated under the agreement; allocation of ownership and usage rights with respect to any intellectual property that may be created or exchanged during the relationship; force majeure procedures; billing and payment procedures; representations and warranties; dispute resolution procedures; events of default and termination procedures; notice procedures; and governing law.

The content in this post has been adapted from material that will appear in Going Global: A Guide to Building an International Business (April 2008) and is presented with permission of Thomson/West.  Copyright 2008 Thomson/West.  For more information or to order call 1-800-762-5272.

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