Initial lead

In relation to private-sector outsourcing work, the supplier will clearly need to keep its profile high in the marketplace, generally marketing its services and following up leads in order to be included and sent a request for information (RFI). If an outsourcing RFI is received and it appears interesting, the supplier should consider responding to it following the instructions contained in the RFI with a view to receiving the ITT from the customer in the future. If supplier is unclear about certain parts, questions or other aspects of the RFI or later the ITT it should raise them with the customer. 

Preparing the business case

The customer will then send out the ITT and, once it is received, the supplier will need to decide whether or not to respond. As part of this process, it will need to prepare and analyse the business case for making the particular bid in question and determine whether or not to proceed with making a bid. This will entail a review of the key issues involved, such as those surrounding the supplier’s ability to deliver the services, the contractual terms, the staff and the level of the proposed bid. It may be necessary at this stage for the supplier to create a prototype or other model for submission. It will need to clarify what will happen to the information/models provided. 

Negotiating the outsourcing contract

If, following the customer's evaluation of the bids, the supplier is invited to negotiate, either as the preferred supplier or in tandem with other suppliers in order hopefully to become the preferred supplier, the negotiation process will begin. The supplier may at this stage conduct its own due diligence process on the customer and the business to be outsourced, often being asked to produce a due diligence report to provide to the customer. The due diligence findings made by the supplier may lead the supplier to propose amendments to its bid.The contract will then be negotiated and finalised.   

The simplest form of outsourcing transaction structure is an outsourcing agreement between the customer directly with the supplier for the services. The outsourcing contract should include the following legal issues:

(1) If a transfer of assets (including people) is also anticipated, a separate transfer agreement may be negotiated. In any case issues such as TUPE and incoming/outgoing liabilities, exit strategies and procurement of new equipment must be also addressed. If a separate transfer agreement is to be used, it is advisable to ensure that any provisions that apply to the parties’ ongoing relationship do not appear in the transfer agreement but are covered in the outsourcing agreement. 

(2) If the proposed supplier is not the main trading entity within its group, or does not have sufficient assets to meet its potential contractual liabilities, then it may be prudent for it to seek a parent company guarantee to afford the customer with a sufficient degree of protection in the event that the supplier defaults under the outsourcing agreement. If the customer procures services on behalf of itself and its group companies will either enter into the outsourcing agreement as agent on behalf of its group companies, or the rights of its group companies will be secured by an appropriately-worded third party rights clause and appropriate annexes.

(3) The supplier will require the contract to include specific provisions controlling potential cross-actions by several group companies and to ensure that its liability limitations and exclusions apply to the group companies as a whole. If the supplier intends to use subcontractors, the customer should require prior written notification of the subcontractor as a minimum may be by inclusion in a schedule to the agreement, and preferably should retain a right of veto over the use of particular subcontractors.

(4) The supplier should also remain liable for the acts and omissions of its subcontractors as if they were its own. The customer may also seek a contractual right to pay key subcontractors directly or to seek the assignment of key subcontracts to the customer if the supplier suffers a certain level of financial distress, often linked to a decline in the credit-rating of the supplier. More complex contractual structures are often used in outsourcing transactions where the risks and potential success of the arrangement can be shared. A joint venture structure, whether corporate or contractual in nature, gives the customer a greater degree of control and enables know-how to transfer automatically to the customer during the period of the outsourcing.   

All articles are for general purposes and guidance only and do not constitute legal or professional advice. Copyright 2011 Anassutzi & Co Limited. All rights reserved. Information may be shared or reproduced only if accompanied by the author’s name and bio.