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Outsourcing: Making the Killer Deal!

You're a director of a medium sized IT firm.  It's 5:30pm on 10 March 2006 and you have just won a $3 million per year IT outsourcing deal for 10 years.  You're in a celebratory mood and invite your colleagues for drinks and nibbles at the Sofitel Hotel.  This account was going to be the first of many profitable deals in 2006…or is it?

Depending on the way you have structured the outsourcing deal, your new account may generate the millions of dollars which you were promised. Alternatively, it may eventually land you in the midst of an enormous court action over breach of your legal obligations to your client. The damages which flow from a breach of contract may include for example, damages directly attributable to the breach and future loss of profits.  Whilst it should go without saying that you must fully understand your legal obligations in an outsourcing contract, many IT firms (especially smaller and less resourced companies) often do not fully appreciate the legal risks involved when they contract to provide IT services to other companies.

IT firms can run into problems because they over-emphasise the methodology used to achieve their obligations rather than adequately considering the required outcomes and expectations of their clients. For example, inadequate specification of the scope of services in an agreement may lead to unmet expectations due to poor delivery. Documentation which include an outsourcing contract are also often lacking in detail. Directors who believe that "as long as I do the right thing by the client, I'll be fine" should think twice. Reasons provided to us from clients requesting an examination of existing documents to terminate an outsourcing contract include "I found a cheaper alternative from India" or "change of direction by the board" and "we're just not interested anymore".

Companies can choose to spend a relatively moderate amount of money to get their documentation right the first time rather than the amount they may ultimately be required to spend if a dispute arises.  It is no secret that cases are prohibitively expensive when they are passed to lawyers and courts to determine the true contractual relationship and obligations of parties in the absence of proper documentation. You should therefore not accept an existing standard contract without thorough examination as standard contracts are often one-sided and may not cover all the eccentricities of your particular arrangement.

Your lawyers must also understand the particular IT issues and technologies involved in providing the outsourced services so the contract can appropriately reflect the technical details of the transaction. It is obviously not a good idea to engage lawyers who does not advise in IT and intellectual property matters to draft the outsourcing agreement.

General legal issues for consideration in an outsourcing contract include the following:

  1. The status and legal relationship of the participants;
  2. The scope of services provided and required outcomes;
  3. Performance guarantees such as KPIs and service level requirements or uptime requirements;
  4. Payment structures;
  5. Licensing and sublicensing of IT and other technologies;
  6. Ownership of and rights to use intellectual property;
  7. Risk management issues such as limitation of liability, indemnities, warranties and insurance;
  8. Regulatory controls and impact of competition laws;
  9. Privacy, confidentiality, spam and the use of information;
  10. Employment law; and
  11. Occupational health and safety.

There are no correct and universally applicable solutions when tackling the legal issues involved in an outsourcing deal. Outsourcing often touches on a wide variety of legal concerns as illustrated above and consequently, it is important to focus on having not only lawyers at the negotiation table, but more importantly, the right lawyers!

If you have any questions in relations to this article, please do not hesitate to contact us.