Most of the outsourcing situations include an IT element whether it is the administration function of a travel agency that involves the use of electronic booking or the outsourcing of a credit card processing function by a retailer. There are many different types of IT outsourcing arrangements. Some cover particular service elements and some contain a bundle of different IT services. Some situations require the effective integration and interfacing of the computer systems of the customer, the supplier and also third parties, and are often referred to as business process outsourcings. 

A pure IT outsourcing usually affects the outsourcing of one or more of the IT functions of a business, such as software provision, development and maintenance, and hardware and network infrastructure provision and maintenance.  Assuming that the outsourcing will require the hand-over of complex IT systems, the importance of pre-contract due diligence at an early stage by both parties is very important for a smooth transition from either an existing supplier or an in-house function to the new supplier.

The supplier will often seek warranty protection in respect of the transferring systems or reserve the right to revisit the pricing structure if certain assumptions are proved to be inaccurate. However, the customer should strongly resist such provisions and should instead insist that the supplier performs sufficient due diligence to satisfy itself that there are no "hidden surprises" which may arise after signing the contract. 

Other issues to be considered: 

Software licences being transferred to the supplier. Their licence terms should be reviewed at the outset by the customer to identify whether assignment or sub-licensing of the software licence to the supplier (and any of its potential sub-contractors) is possible without the express consent of the software licensor and whether the licence scope prohibits the effective use of the software by the supplier. Some software licensors make such consent conditional on the payment of a transfer or additional licence fee. Are software licences are held by another group company and can customer and supplier use the licence within the scope of the software licence?

Software maintenance contract terms. Can sexisting oftware maintenance contracts be assigned to the supplier or can the supplier provide similar services?

Software source code. The extent to which the supplier requires access to the source code of the customer's proprietary software if the supplier is to assume responsibility for running such software. The supplier will also need to be able to access the source code of such bespoke software if such software is not to be supported by that third party or some other conditions occur via an escrow arrangement should the licensor become insolvent or breach its software maintenance obligations.

Of particular importance in an IT outsourcing will be the clauses relating to intellectual property rights, especially those that relate to the customer’s use of existing third party software and to the ownership of, or rights to use, any software developed by the supplier in the course of providing the outsourced services. Indemnities in relation to intellectual property rights should be provided, in case the developed software infringes any third party rights. 

The hardware (including network equipment) infrastructure being transferred to the supplier. Some of the hardware may be leased from third parties and the lease terms may prohibit the physical transfer of the hardware to the supplier's premises or servers. Hardware maintenance contracts must also be transferred to the supplier or terminated. It may be cheaper to terminate the leases early on the basis that the supplier will be able to use its own existing hardware capacity or lease new hardware for the purpose of providing the outsourced services to the customer.

The migration of data to the supplier's systems. This may require the purchase of specific software licences, the writing of bespoke interfaces or may even require manual transfer. Most pure IT outsourcing contracts will include an element of applications development during the life of the contract. The contract needs to include a separate set of provisions regulating the development of new applications in accordance with customer’s requirements and in accordance with agreed project plan, milestones and specifications. The developed software may then be added to the general support and maintenance agreement.  

Also critical in an IT outsourcing contract will be the provisions relating to change control, as changes will be needed throughout the contract duration. However, change control should not be used by suppliers to increase the price of the service.  

Another key area of an IT outsourcing contract concerns data and data protection. If the data which is processed or which is generated as a result of the outsourcing agreement includes data which relates to individuals, data protection law will apply and the Data Protection Act 1998 (DPA) will need to be complied with, especially in cases regarding the outsourcing of human resources functions or payroll functions. The supplier will almost always fulfil the role of a data processor only processing data on behalf of the data controller, acting in accordance with the data controller’s instructions and the customer will be the data controller and responsible for compliance with the provisions of the DPA and security of the personal data. The Information Commissioner has recommended certification with, or adherence to, British Standard (BS) 7799 and ISO 1799.  

If you want to find out more on the key legal and commercial issues in an outsourcing agreement, what intellectual property issues in an outsourcing agreement to consider, the service levels, the importance of due diligence in an outsourcing arrangement and the invitation to tender please have a look at our previous articles.

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.