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Rightsourcing Considerations in Outsourcing Agreements
Practical Law Legal Update 2-562-8066 (Approx. 3 pages)
Rightsourcing Considerations in Outsourcing Agreements
by Practical Law Intellectual Property & Technology
| Published on 01 Apr 2014 • USA (National/Federal) |
An overview of "rightsourcing" issues to address when negotiating outsourcing agreements to give the company the ability to maintain flexibility and bring services back in-house in response to changing business needs.
Rightsourcing describes the process a company uses to achieve a proper balance between outsourcing certain functions and retaining others in-house. Outsourcing is often an effective way for companies to reduce costs and improve service levels. In many cases, a company outsources non-core functions to service providers who specialize in those areas. Benefits may include:
- Gaining access to information technology (IT) resources that are unavailable internally.
- Freeing up resources to focus on the core business.
- Achieving economies of scale by sharing resources among many companies.
- Accelerating a company's transformation.
However, outsourcing involves business risks that may weigh in favor of performing certain functions in-house. In addition, a company's needs may change over time, including as a result of changes to its business or the market. A company's ability to effectively rightsource generally depends on how easily and cost-effectively it can change course. A company that wishes to bring outsourced services back in-house may find its objectives frustrated if, for example, it:
- Remains obligated to pay fees, including a possible termination fee, under the outsourcing agreement.
- Must migrate to a new software solution because it does not have rights to the service provider's solution.
- Loses access to data it has stored on the outsourcing service provider's system.
Addressing end-of-contract issues in the outsourcing agreement at the beginning of the relationship is generally in the customer's interest. Customers tend to have more negotiating power when the service provider is seeking to secure revenues and other potential contract benefits than at the end of the relationship, when relations may have become acrimonious. In addition, obtaining this flexibility can minimize some of the risks associated with outsourcing.
Key outsourcing agreement provisions that can help the customer retain rightsourcing options include those relating to:
- Term. Outsourcing agreements typically have a term of several years. A customer may achieve more flexibility with a shorter term paired with a renewal right.
- Customer termination rights. A right to terminate without cause (for convenience) may help the customer avoid some costs if:
- its business needs change; or
- it is dissatisfied with services that may not be sufficiently poor to support a right to terminate for cause.
- Rights to service software and other technology. To facilitate uninterrupted performance, the customer should seek to ensure that both it and a successor service provider has the right to use the software and technology the service provider uses to perform the services.
- Data rights. Failing to clearly provide for both access to and ownership of data may result in loss of the data or substantial costs to retrieve it.
- Transition services. Unwinding a complex outsourcing arrangement often takes several months, during which time the customer typically needs the service provider to continue providing services.
For a discussion about these and other rightsourcing considerations, see Practice Note, Rightsourcing: Seeking a Balance between Insourcing and Outsourcing.
For information about information technology outsourcing agreements, see Practice Note, IT Outsourcing: Main Issues in Outsourcing Agreements.