It is key to the success of an outsourcing arrangement that the contract creates a flexible, long-term relationship which sets out detailed rules and also deals with the pace of change and problems when they arise. Some key issues to be addressed in the outsourcing contract are set out below and in the next articles. 

Term

The length of the outsourcing agreement will need to be considered including the length of the period for which the customer may reasonably predict its needs for the future, the potential life expectancy of any assets used to provide the services, the pace of perceived technological change and the financial implications of the length of the outsourcing agreement. 

The customer, therefore, will want to be able to terminate the agreement for convenience in circumstances where there is no fault by the supplier. The supplier, however, would wish to ensure that its initial investment in the services has been recovered prior to any possible termination and would calculate its charges so that it recovers its set-up costs and certain other costs (such as unavoidable redundancy costs and any costs of breaking the contracts with key subcontractors). The supplier may also want to be able to recover some of the profits that it will lose if the outsourcing agreement is terminated early (subject always to its general duty to mitigate any losses).  

One way of dealing with this is to negotiate a sliding scale of termination charges on termination for convenience by the customer which should be designed to compensate the supplier for the losses which arise if the contract is terminated earlier than its full contract term. 

Implementation/transition

The outsourcing agreement will need to include detailed provisions on how the services are to be implemented by the supplier and the acceptance criteria for measuring successful implementation. It is usual to attach to the agreement an outline implementation plan with key milestone dates identified at the outset. In addition, if the supplier fails to achieve any milestone dates for reasons which do not solely relate to the acts or omissions of the customer, the customer should be entitled to claim predetermined delay deductions from the amount paid to the supplier.

Customer's responsibilities and improvementThe supplier should consider what assistance it requires from the customer in order to provide the services. This will include any facilities it requires the customer to make available, including access to its people, facilities and data, and any other assistance it needs. The supplier should commit to introducing improvements to the services during the life of the outsourcing agreement. Such improvements may derive from internal improvements put in place by the supplier or external improvements arising in the marketplace, for example, as technology develops. The outsourcing agreement needs to provide a mechanism for deciding which improvements should be introduced and how the costs of improvement are to be met. 

Changes and change management

The outsourcing agreement will need to be flexible to allow for changes in the parties organisations, requirements or changes in the law. It will include a change request process. The outsourcing agreement will need to be able to respond to the provision of additional and reduced resources as well as the provision of new services and fundamental changes to the existing services. The outsourcing agreement should try to anticipate the consequences of particular changes, for example, which changes in the law should be paid for by the customer and which by the supplier.  

People issues

The people issues surrounding an outsourcing arrangement are complex including (i) transfer of the employees; (ii) ongoing obligations in relation to employees and their provision of the services to the customer during the life of the contract; (iii) liabilities in relation to employees involved in the provision of the services at the end of the contract term. 

TUPE will usually apply to outsourcing, both on the initial outsourcing and on any subsequent outsourcing. This will mean that the contracts of employment of those employees engaged in the outsourced services will transfer from the customer or an existing supplier to the new supplier at the outset of the outsourcing arrangement, and from the supplier back to the customer or to a replacement supplier (depending on whether the services are taken back in-house or terminated and the contract granted to a new supplier) at the end of the contract term. 

Both the customer and the supplier will need to ensure that their obligations in relation to TUPE are met. They will need, for example, to comply with their respective duties to inform and, in some cases, consult with appropriate representatives of any of their employees who may be affected by the transfer, whether or not such employees are to be included in the group of employees who are going to transfer. 

The parties may also need to be aware of potential consultation obligations under the Trade Union and Labour Relations (Consolidation) Act 1992 and the Information and Consultation of Employees Regulations 2004. Where 20 or more employees are to be made redundant in 90 days or less, the employer must consult within specified time periods. In addition, certain employers must provide information to, and consult, with information and consultation forums over certain proposals, at an earlier stage than required by TUPE.  

Assets and third party contracts

Assets owned by the customer which are to be used by the supplier in the provision of the services may be sold, leased or loaned to the supplier. The outsourcing agreement will need to address what happens to the assets at the commencement of the arrangements, the treatment of assets (including new assets which are used by the supplier for the sole purpose of providing the services) during the life of the outsourcing agreement and what happens to the assets at the end of the contract term. The outsourcing agreement will also need to address the treatment of any relevant third party contracts such as supply or maintenance contracts and whether, for example, they are to be retained by the customer with the supplier managing them or transferred to the supplier.  

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.