How to Sign a Good Outsourcing Contract?

In spite of the ever growing popularity of business services provided in the external model, clients are still afraid of the loss of control over the process and are concerned with the quality of service. How to protect yourself against the risk of failure and be well prepared for cooperation with an outsourcer?

In spite of the ever growing popularity of business services provided in the external model, clients are still afraid of the loss of control over the process and are concerned with the quality of service. How to protect yourself against the risk of failure and be well prepared for cooperation with an outsourcer?

The decision to separate individual business processes and entrust an external entity with their implementation should be preceded by appropriate preparations. The first step is the precise description of the expected scope of services to be provided by an outsourcer as well as the assumed completion dates and the required business, operational and financial effects. The second step is an analysis of the market and potential partners.

Clients choosing providers usually focus on experience and references, the initial pricing of services and on whether the offered solution fits their needs. However, the very first talks with potential business partners may reveal areas which require clarification as well as possible additional benefits and risks resulting from the assumptions made. The provider should prepare the final quotation of the project only based on the final specific material.

After the most advantageous offer has been selected, it is time for contract negotiations, which in the case of long-term high-value contracts can take up to several months. When negotiating a contract, it is extremely important for the client to pay attention not only to provisions concerning the commencement and implementation of ongoing cooperation with an outsourcer, but also to those related to rules and conditions of terminating the cooperation as well as the possible related costs.

What should be included in an outsourcing contract?

Above all, every outsourcing contract should be tailored to the specific nature of the service it describes. However, there are a few fixed elements which should be included in such a contract. Precise definition of the scope and type of the order as well as the roles and responsibilities of each party is essential. It is also very important to specify measurements which will be used to assess the results of cooperation and will enable the monitoring of the quality of services rendered. A well-drafted contract not only protects the rights and interests of both parties, but is also flexible and does not hinder further business growth. How does it look in practice?

The most difficult elements of a contract

The longest-negotiated parts of outsourcing contracts concern issues related to the scope of responsibilities, SLA (Service Level Agreement) and KPI (Key Performance Indicators). These are key parameters affecting the quality of service. In the case of contact center projects clients attach much weight to data processing safety, arranging logistics services, they expect appropriate products to be delivered to a specified place on time. In document management contracts safety and smooth access to data are of crucial importance. Clients almost always expect an outsourcing partner to guarantee that their work will be completely free of errors and always delivered on time. Such solutions are theoretically possible, but also extremely rare due to their high cost. This is why it is important to establish the maximum level of errors or KPI violations permitted by the parties, agree the principles of operation to be followed in the case of irregularities and specify the method of repairing them as well as implement procedures reducing the risk of more mistakes appearing in the future.

When calculating SLA parameters for a contract one should to take into account a whole range of various risk categories which might appear in the given type of business. However, there are a few basic questions worth answering at the beginning:

• Who are the process clients and what are their needs?
• Which service parameters should be measured?
• What information can the organization obtain from each indicator?
• What steps will we take in order to improve results in specific areas?

SLA and KPI values should be always determined by both parties to the contract and tailored to the specific service type. The need to ensure business continuity is completely different in the case of helpline services for a big telecommunications operator compared to a situation when a contact center works for a small internet store. In back-office projects SLA parameters depend to a large extent on the category of documents entrusted to an outsourcer by the client. Performing a service below parameters specified in the contract usually means penalties for a provider. There are also clients who positively motivate a provider by awarding a bonus for achieving higher quality parameters. It is also a good idea to include the manner and frequency of reporting individual indicators in the contract.

What to focus on

When signing a contract, it is important to thoroughly analyze the so-called project "exit costs" proposed by the service provider. These costs should reflect actual expenses incurred by the outsourcer in connection with the termination of cooperation with the client, the release of documents or the transfer of data bases created during the cooperation. Certain companies are capable of specifying this cost in a contract at such a high level that the termination of cooperation is very difficult. It also limits the client’s possibilities when renegotiating the terms of a contract and often makes it impossible to choose a more appealing offer of other partner.

It is also worth noting that a provider’s financial stability is a decisive factor affecting the quality and timely delivery of services. Clients often expect outsourcing companies to bear unlimited liability for possible damage caused by improper performance of a contract. They forget that it is impossible to completely eliminate the risk that an outsourcer’s employees will make a mistake, regardless of the outsourcer’s renown or position on the market. Therefore, an informed partner tries to evaluate, at the contract stage, the risk in a given contract and introduce limitations of liabilities which, if the payment of damages becomes necessary, will not cause the loss of the financial stability and will have no significant impact on its operational capacity. The lack of such of such protections in contracts can negatively affect the business of all the outsourcer’s clients in the future.

Readiness for change

An outsourcing company can be entrusted both with the implementation of a specific project with established time frames and with permanent handling of a business process. In the latter case contracts are typically long-term: they are usually signed for 3 to 5 years. It is difficult to avoid the need to introduce changes over such a long period of time. Companies grow, enter new markets or expand their service portfolio and location network. This causes alterations to the conditions of provided services – volumes of documentation entrusted to to the outsourcer increase or decrease and the types of POS materials stored and delivered to the client’s points of sale are changed. As business grows, companies often expand the scope of cooperation with external partners and entrust them with further business processes. In such cases it becomes necessary to adapt the provisions of a contract to the new situation, which means that further amendments need to be negotiated. In view of this it is a good idea to provide for appropriate mechanisms, already at the contract conclusion stage, which will facilitate the introduction of new services or modification to the scope of processes already in progress.

A good, sensibly-written and negotiated contract contributes significantly to the quality of cooperation between the parties. However, it is difficult to create a perfect document which is tailored to current business needs, but also takes into account their changes in the future. In addition, the more complex the services, the more difficult it is to foresee possible scenarios and program the course of action in advance. That is why good relations and communication between parties to a contract is so important. It allows flexible response to changes, often without the having to use formal provisions.

Bartosz Terlecki, Vice-President of the Management Board, ArchiDoc SA, OEX Group