WRITING AN OUTSOURCING CONTRACT
Points to consider when writing a contract between a client company and a services supplier. Disclaimer: this is not “legal advice;” for that you need an attorney. This article provides some tips and points to consider when deciding what to put in the contract.
Part 3 of Outsourcing Perspectives by William D. Engelke
Copyright 1996, All rights reserved. All opinions presented herein are the author’s personal views.
It is hard to over-emphasize how important the content of an outsourcing contract is. Once you have an outsourcing contract in place, the clauses of this agreement will guide your outsourcer’s every move, and may act to free you to do business or feel like a straitjacket. Here, in layman’s terms, are some points to consider when planning the contract. Be sure to use an attorney who is familiar with and has experience writing outsourcing agreements.
Example contracts are hard to come by, because each one is so closely tailored to the particular case, and often has a confidentiality clause that makes the contract itself proprietary information. The Outsourcing Institute can provide some guidance, as can many law firms.
This article discusses the major parts of the contract, the Scope of Work, Deliverables, Terms and Conditions, and Service Level Agreements.
Major Parts of a Contract
An outsourcing agreement is much like any other contract: it is putting in writing what the two companies agree will be done by each party, and usually how it will be paid for. If you have worked with government contracts, you may see numerous similarities. Typical contracts contain the following parts:
- Scope of Work
- Terms and Conditions
- Service Level Agreement
The terms and conditions often will be the bulkiest part of the contract, because they cover so many things that may seldom or never occur, such as early termination. However, the part of the contract you will probably work with most often (and have the most trouble with) is the Scope of Work, because it describes what the outsourcer will do. This area can be a source of disagreement when the contract is in force due to differing interpretations of the text and also the fact both companies probably forgot to put some things in the contract and this could cost them money later.
Deliverables are specific things that will be put in place, delivered, and turned over to the client (such as documentation, completed equipment, working systems, etc). Often the dates (or time after signing of the contract) are specified.
The Service Level Agreement is used when the outsourcer will be providing an ongoing operation for the client, and may go all the way into details about the time to repair items, the response time of computer systems, and even the number of bytes to be transferred per month, for example.
The following sections go into more detail about these areas.
Getting Started – A Systematic Approach
Writing a contract for outsourcing services can be an intimidating prospect: it’s complex, covers a lot of ground, and worst, you can’t know and settle all the issues in advance. A systematic approach is needed to do the best possible job up front; also, you must plan with your outsourcer how to agreeably handle the inevitable changes and unanticipated issues/requirements.
1. Define your objectives in priority order. What is most important in what you are trying to achieve with the outsourcing contract? Ensure your attorney understands this. (That’s another reason to have a law firm experienced in your business area; you don’t want to have to teach Information Technology or some other specialty to a lawyer who is billing you while receiving your tutelage!)
2. Decide on the basic contract type:
Fixed price – outsourcer will do everything listed for a fixed fee. Additional items must be negotiated as contract changes.
Time & material – outsourcer will do everything listed, plus anything else you add, and simply bill you for the time at an agreed rate.
Hybrid – outsourcer will do everything listed for an agreed price; additional items can be added and will be carried out with time paid for at agreed rates.
Each contract type has pros and cons. Fixed price contracts let you finalize a budget up front, but assume you have the wisdom of a prophet to be able to include everything. Time & material contracts require few changes, but costs can get out of hand. A hybrid approach combines advantages of both, but at the expense of added complexity.
3. Have your lawyer write a draft. Most clients prefer to start by creating their own draft (rather than letting the outsourcer make the first move); this way, the client ensures that all matters important to the client will be treated.
Following are some important sections of a contract.
Scope of Work
The Scope of Work explains what the outsourcing firm will do for the client. In an Information Technology outsourcing arrangement, for example, it may describe how the outsourcer will build a computer system to do some task, test it to prescribed criteria, and turn it over to operations (at which point the Service Level Agreement takes over).
It is very important to cover every aspect of the system that you possibly can think of. The outsourcer will base their price on the content of this section, so if you leave something out, they will quite legitimately want more funding to add it in later.
Where applicable, you might want to include such detail as:
- Equipment they must procure and/or maintain, including type and serial number, if existing
- Software they must procure and/or maintain, including module names and versions, if existing
- Telecommunications circuits, including number and line speed
- Data backup and archiving activities
- Functional specifications they must implement
- Work Plan. Ask the outsourcer to provide a detailed plan of how they intend to accomplish the work. Once you agree that it is reasonable, make it part of the contract. It should include specifics: what will be accomplished by when. (If dates cannot be used because you can’t accurately forecast the project’s begin date, get them to specify accomplishments in terms of how many days each item will be done after the start date of the contract).
Why be so specific? Main reasons:
You may have a great, trusting relationship with the Program Manager; but what if that manager leaves? Or dies? You may then have trouble with anything that is not spelled out.
Things blur over time, and you need an accurate record of what you have planned to do
What’s “in scope” and “out of scope” will be discussed daily once the contract is in force. Make sure it covers your needs! (You will probably still have to make changes later).
List everything that the outsourcer is supposed to provide, install, and/or turn over, to the client, in as much detail as possible. Include everything, even if the items remain on the contractor’s books (i.e., for tax advantages). List a due date when possible, and cover the equipment’s entire life cycle through lawful disposal. Where documentation is included, consider the following:
- Multiple copies, with accessible backup maintained by outsourcer
- Drawings in a data format your computer can read (i.e., if contractor did their work on Intergraph CAD equipment and you have only AutoCAD, demand AutoCAD files of the as-built drawings!)
- Documentation must conform to industry standards
- Detailed schematic of the network, including locations, user area contacts, TCP/IP addresses, serial numbers, and phone numbers
Terms and Conditions
Terms and Conditions cover the numerous details of the legalistic part of the agreement. The devil is in the details!
Click here to see the separate article on terms and conditions.
Service Level Agreement
The Service Level Agreement, or SLA, lists the services which will be supplied on a regular basis, and includes volumes, response times, and quantitative/qualitative descriptions of these. This may be tied in with payment terms (i.e., more payment for heavier processing loads, more help desk calls, volume of training provided, more data transferred, more transactions processed, more equipment installed, greater user satisfaction as measured by survey, etc., – and conversely, less for less).
The SLA should emphasize measurable items so you can see in objective terms whether you are receiving what you have paid for.