Components of an outsourcing contract, Part 2

This week is a continuation of last week’s newsletter, discussing common elements of an outsourcing contract. Check out Part 1 if you missed it, or jump right in to Part 2.

Reports

The contract should include the frequency and types of reports the client will receive. Common types of reports include performance reports, control audits, security metrics and business resumption testing.

Business continuity plans

This section should address the critical recovery times following a disaster and define the service provider’s responsibility for providing back-up equipment, ongoing testing and back-up plans for data and program files. If you use multiple service providers, you should consider incorporating language to cover interdependencies between providers and possibly requiring coordinated testing.

Sub-contracting

This section defines the service provider’s rights to use sub-contractors in delivering their services. Most service providers will want this flexibility. You should be concerned with ensuring that the service provider remains responsible for all work and requires similar security and non-disclosure requirements of the sub-contractors as is required of the service provider. You should also require notification of which resources are sub-contractors and possibly retain the right to approve all sub-contractors.

Cost

This section will define the fees for services. Be certain that all development, implementation and conversion costs are clearly defined and understood. Also look for de-conversion costs at contract termination. Finally, this section should define all conditions under which costs can change, including increases in activity levels, annual inflation based increases, and limits to any increases.

Ownership of work product

This section will define ownership of the tools, equipment, data, and output of the work to be done. It is critical to ensure ownership all of your data, trademarks, and other intellectual property. Equipment ownership will depend on the type of relationship. If the contract includes creation of custom software, ownership of the rights to the product created may be retained by the client or the service provider. Generally, if the client is defining the specifications and the work is an extension of existing client systems, the client will retain ownership of the resulting software. If the work is to extend or customize a product of the service provider, rights may be shared as the service provider will need the right to incorporate the changes into their product.

Duration

This section will define the length or term of the contract. Look for automatic renewal clauses and notification requirements. Consider the type of technology involved and the current rate of change in the industry around that technology as you consider the length of the contract.

Dispute resolution

The contract may contain process for escalating and resolving conflicts. It is common to have time frames for escalation to senior management within the client and service provider organizations as well as final resolution by arbitration rather than the court system.

Indemnification

This section essentially says that the service provider will take responsibility for their negligence and keep the client out of any problems.

Limitation of liability

This section may set limits on the service provider’s liability. It is common to have a limit set equal to the fees paid.

Termination

This section defines provisions for ending the contract early and will generally include termination fees and notices required.

Assignment

This was covered in a previous column.

Service-level agreements

These additional agreements are usually handled as attachments or exhibits to the agreement and are an often discussed topic in this newsletter. They are the formal documents outlining required service levels for key metrics. Check out these archived newsletters for more information. Key SLA metrics; SLA negotiations; and SLA credits.

This is only a primer on outsourcing contracts, but should be useful if you are new to the contracting issues in outsourcing arrangements.