Checklist: Outsourcing

A checklist of the main issues for suppliers and customers to consider when negotiating outsourcing agreements.

Iain Monaghan, Pinsent Masons
Contents

Outsourcing agreements: main points for customers to consider

The scope and purpose of the outsourcing

  • Define the boundaries of what is being outsourced, in terms of the:

    • business unit (and associated employees);

    • physical and technical infrastructure;

    • services.

  • Analyse the main purpose of the outsourcing: is the primary motive to decrease cost, improve service or both?

  • Determine the optimum period for the outsourcing:

    • short term or long term?

    • with or without break clauses?

Employees

Transferred assets and intellectual property rights

  • What assets and rights (if any) are to be transferred to the supplier?

  • What intellectual property rights will the supplier require from the customer’s existing licensors in order to supply the services? Should existing licences be assigned/novated to the supplier or should the usage rights simply be extended to cover the supplier? Who will be responsible for obtaining the necessary consents and paying any resulting fee?

  • Consider how far it is possible to prescribe in advance what will happen to the assets and intellectual property rights on termination of the services agreement.

  • Who will own intellectual property rights generated by the supplier for the purpose of providing the services?

  • What indemnities does the customer require that the services provided do not infringe the intellectual property rights of third parties?

  • To what extent should rights granted by the supplier to the customer also be exercisable by third parties providing services to the customer (for example, consultants to the customer or successors to the supplier)?

Transition

  • Can the full service commence on signature or is there need for a period of transition? If the latter:

    • How will the transition be managed?

    • What will need to go into the transition plan?

    • What service levels will apply during the transition period?

Services

  • Define the services which are to be provided by the supplier:

    • service description;

    • service hours;

    • service levels.

  • Provide for the remedies, such as service credits, which will apply if certain services are not supplied in accordance with the required service levels.

  • Set out a process for changing services, service hours and service levels during the course of the services agreement.

  • Define the process for ordering services whose volumes may vary from time to time.

  • Consider the arrangements in place to cover disasters (for example, major power disruption, fire or flood).

Service improvement

  • Is provision for a certain degree of improvement in the services to be built in to the services agreement? If so, how will it be measured and what remedies will apply if it is not achieved?

Price and payment

  • What is the optimum method of pricing the services - for example, fixed price, fixed cost per unit of utilised resource, 'cost plus'?

  • Are the charges subject to indexation or other pricing variation?

  • What payment mechanism is to be employed - for example, payment in advance against estimated usage with reconciliation in the following month?

  • Is a certain degree of cost reduction to be built into the services agreement? If so, how will it be measured and what remedies will apply if it is not achieved?

  • If the supplier can use transferred assets to service other customers, should there be a mechanism by which the customer shares the profits which he generates? If not, is the customer confident it has been adequately taken into account in determining the price?

  • Will the value for money offered by the services be subject to external verification from time to time; for example, by a formal process of benchmarking or an informal process of obtaining tenders from third parties? What will be the effect of any such comparison being unfavourable to the supplier? Will the supplier be asked to open his books for inspection?

Warranties

  • What warranties are to be sought by the customer as to the quality of the services compliance with regulations and other matters?

  • If assets, employees and third party contracts are being transferred, what warranties would the customer be prepared to give the supplier as regards pre-transfer acts or omissions?

Customer’s responsibilities

  • What does the supplier require the customer to provide in order to enable the supplier to provide the services − for example, space at the customer’s premises or other facilities?

  • Will those facilities be paid for by the supplier? If not, might their value be taken into account for VAT purposes by HM Revenue & Customs?

Exclusivity

  • Does the supplier require some degree of exclusivity in providing the services or some element of the services to the customer? Will the supplier require a minimum volume of services to be purchased by the customer? What financial or other benefit will the customer gain in return for agreeing to either requirement?

Management and dispute resolution

  • Are there management structures in place which appropriately reflect the importance of the services agreement to the customer’s business?

  • Are there clear reporting lines and internal controls? How easy will it be to apportion the cost of the services among the internal customers of the business?

  • Does the services agreement allow the customer’s internal and external audit procedures to be carried out in the normal manner?

  • Is there a clear procedure for dealing with major changes in circumstances, such as mergers or divestments?

  • Is there a clear procedure for capturing and resolving disputes at an appropriate level?

Termination and remedies

  • What happens if there are major deficiencies in the services (for example, prolonged outages) for which service credits may be an inadequate remedy: are liquidated damages to apply?

  • In what circumstances can the services agreement be terminated? Consider allowing for termination of discrete elements of the service where this is possible.

  • Does the customer require a right of termination "for convenience"?

Limitation of liability

  • Consider how the customer will limit its liability to the supplier.

Exit management

  • Consider the provisions the customer will require on termination, for example:

    • the right to take back licences and assets (or transfer them to a third party);

    • the right to secure continuity of services during a hand-over period.

(See also Transferred assets and intellectual property rights and Practice note, Employment issues on outsourcing (www.practicallaw.com/8-204-4041).)

Other provisions

  • Consider carefully the effect of other terms dealing with:

    • security;

    • confidentiality;

    • data protection (and possibly the Freedom of Information Act);

    • non-enticement;

    • force majeure (and its relationship with the supplier's obligations relating to disaster recovery);

    • assignment;

    • third party rights;

    • boilerplate.

  • Consider the impact of the offence of failure by a commercial organisation to prevent bribery and the adequate procedures defence under the Bribery Act 2010 (BA 2010). For standard anti-bribery clauses and more information about the BA 2010 and its application, see Practice note, Bribery Act 2010: toolkit (www.practicallaw.com/9-503-9451).

  • where the customer is in a regulated industry, consider any regulatory requirements as to the contents, notification or approval of the contract and the rights of cooperation, inspection and approval that the regulator might require.

 

Outsourcing agreements: main points for suppliers to consider

Term

  • Determine the optimum period for the outsourcing:

    • short term or long term?

    • with or without break clauses?

Employees

  • Consider the possible impact of TUPE on the initial transfer.

  • Review entitlement to pensions and other benefits which are not automatically novated by TUPE.

  • Consider how far it is possible to prescribe in advance what will happen to the employees on termination of the services agreement.

Transferred assets and intellectual property rights

  • What assets and rights (if any) are to be transferred to the supplier?

  • What intellectual property rights will the supplier require from the customer’s existing licensors in order to supply the services? Are existing licences to be assigned/novated to the supplier or should the usage rights simply be extended to cover the supplier? Who will be responsible for obtaining the necessary consents and paying any resulting fee?

  • Consider how far it is possible to prescribe in advance what will happen to the assets and intellectual property rights on termination of the services agreement.

  • Who will own intellectual property rights generated by the supplier for the purpose of providing the services?

  • What indemnities does the customer require that the services provided do not infringe the intellectual property rights of third parties?

Transition

  • Can the full service commence on signature or is there need for a period of transition? If the latter:

    • How will the transition be managed?

    • What will need to go into the transition plan?

    • What service levels will apply during the transition period?

Services

  • Define the services which are to be provided by the supplier:

    • service description;

    • service hours;

    • service levels.

  • What will the remedies be, such as service credits, if certain services are not supplied in accordance with the required service levels.

  • What will the process be for changing services, service hours and service levels during the course of the services agreement.

  • What will the process be for ordering services whose volumes may vary from time to time.

  • Consider the arrangements in place to cover disasters (for example, major power disruption, fire or flood).

Service improvement

  • Is provision for a certain degree of improvement in the services to be built in to the services agreement? If so, how will it be measured and what remedies will apply if it is not achieved?

  • Will the value for money offered by the services be subject to external verification from time to time; for example, by a formal process of benchmarking or an informal process of obtaining tenders from third parties? What will be the effect of any such comparison being unfavourable to the supplier? Will the supplier be prepared to open his books for inspection?

Price and payment

  • What is the optimum method of pricing the services: for example, fixed price, fixed cost per unit of utilised resource, "cost plus"?

  • Are the supplier's prices based on any assumptions that should be recorded? What is the effect of those assumptions proving incorrect?

  • Are the charges subject to indexation or other pricing variation?

  • What payment mechanism is to be employed: for example, payment in advance against estimated usage with reconciliation in the following month?

  • Is a certain degree of cost reduction to be built into the services agreement? If so, how will it be measured and what remedies will apply if it is not achieved?

  • If the supplier can use transferred assets to service other customers, will there be a mechanism by which the customer shares the profits which the supplier generates?

Warranties

  • What warranties are to be offered by the supplier as to the quality of the services?

  • What warranties does the supplier seek from the customer in relation to the assets, employees and third party contracts being transferred?

Customer’s responsibilities

  • What does the supplier require the customer to provide in order to enable the supplier to provide the services: for example, space at the customer’s premises or other facilities?

  • To what extent is the supply of services by the supplier dependent on acts of the customer or third parties for whom the customer is responsible? Should the supplier be entitled to relief or compensation if those dependencies fail?

Exclusivity

  • Does the supplier require some degree of exclusivity in providing the services or some element of the services to the customer? Will the supplier require a minimum volume of services to be purchased by the customer?

Management and dispute resolution

  • Are there appropriate management structures in place within the supplier to meet the customer’s needs?

  • Are there clear reporting lines and internal controls?

  • Does the services agreement allow the supplier’s internal and external audit procedures to be carried out in the normal manner?

  • Is there a clear procedure for dealing with major changes in circumstances, such as mergers or divestments?

  • Is there a clear procedure for capturing and resolving disputes at an appropriate level?

Termination and remedies

  • Are service credits to be the customer’s exclusive remedy for the faults they cover?

  • What happens if there are major deficiencies in the services (for example, prolonged outages) for which service credits may be an inadequate remedy: are liquidated damages to apply?

  • In what circumstances can the services agreement be terminated? What termination payments does the supplier require if the customer terminates "for convenience"?

Limitation of liability

  • Consider how the supplier will limit its liability to the customer.

Exit management

  • Consider the provisions the supplier will require on termination, for example:

    • the right to take back licences and assets;

    • the re-delivery of all the supplier's confidential information;

    • the right to secure continuity of services during a hand-over period.

(See also Transferred assets and intellectual property rights above and Practice note, Employment issues on outsourcing (www.practicallaw.com/8-204-4041).)

Other provisions

  • Consider carefully the effect of other terms dealing with:

    • security;

    • confidentiality;

    • data protection (and possibly the Freedom of Information Act);

    • non-enticement;

    • force majeure (and its relationship with the supplier's obligations relating to disaster recovery);

    • assignment;

    • third party rights;

    • boilerplate.

 
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