The market knows no unequivocal definition of outsourcing, but this could generally be described as a transaction in which a supplier starts doing jobs that a company used to do internally. In other words: in an outsourcing, the outsourcing client shifts responsibility for a certain part of its business operations to a supplier.
Almost any part of a company can be outsourced. In the market, outsourcing is most widespread for (internal) IT-related parts, such as the servers or the IT service desk. Although these parts are very important to many companies, they are not among the core competencies of (non-IT) companies. In such a situation, relying on the experience and skills of specialized suppliers is often the wise thing to do. For years we have also been witnessing a growth in Business Process Outsourcing or ‘BPO’. BPO is the outsourcing of business processes such as financial accounting, but also catering, cleaning, et cetera.
The question whether or not to outsource should be answered first by the business rather than by lawyers
A characteristic of many forms of outsourcing is the transfer of resources to a supplier and the supplier taking over (part of) the relevant staff from the client. The supplier will then uses these resources and this staff, supplemented by its own resources and procedures, to provide its services to the client. The question whether or not to outsource should be answered first by the business rather than by lawyers. The business case must be in order, the (intended) supplier must offer the reassurance that the outsourced tasks are in its capable hands, and – very importantly – the organization must be ready for it.
An important consequence of outsourcing is the distance that is created between the client and the outsourced activity, resulting in a great dependency. If the services are disappointing, the client can no longer instruct its own staff to do the work differently or better, but will have to call its supplier to account for breach of its contractual obligations. This requires a solid agreement, and this is where the lawyer comes in to add value, which he will have to deliver.
Practical example
Let us take the following situation as an example. On each of its 20 sites, the hotel chain De Jagt has an area for cleaning the bedding, clothes, towels, et cetera. Although the quality of the cleaning work is generally good, the equipment on many sites is in need of replacement and the turnover among cleaning staff is high. The board has sought information on the market and wants to team up with a supplier that can take over the entire cleaning work chain, to offer it as a service. Concretely, this means that the supplier will first take over the cleaning staff and the old equipment. With time, the supplier will move all local cleaning services to its central location. They promise that hotel chain De Jagt will get a maximum benefit out of the resulting scale-up and cost saving from then on.
A specialized lawyer or attorney will be able to pinpoint and include relevant arrangements in the agreement.
A specialized lawyer or attorney will be able to pinpoint and include relevant arrangements in the agreement. Besides arrangements of a more legal nature and about HR, these will concern the following topics in any case:
Quality of the services.
In practice, this comes down to a good and clear description of the services and responsibilities, supplemented by clear and measurable service levels. If we go back to the example: how frequently is the bedding picked up? How quickly is everything cleaned? And how clean is clean? However useful service levels may be, it is important to use only those service levels that really provide insight into the quality of services; a persistent problem is that all indicators may be green, whereas the client is not really satisfied.
Continuity of the services.
This category concerns the supplier’s ability to deliver, and is especially relevant if services are provided centrally. How can the client’s position be safeguarded if the supplier in turn depends on subcontractors or suppliers? What happens if there are unforeseen situations?
Compliance with rules and regulations.
Depending on the sector, different statutory regulations will have to be shifted to the supplier. In addition, the client may have regulations of its own that the supplier must adhere to. Examples are the screening of staff, safety regulations, privacy, et cetera.
Prevent a too great dependency.
It is very important to consider a possible farewell already at the start of the relationship. A contractual obligation for the supplier to cooperate in a smooth exit if the agreement ends is worth its weight in gold, and will prevent the client from becoming dependent on the supplier if the client has just shown him the door.
Clear financial arrangements.
It may look like stating the obvious, but clearly writing down financial arrangements is crucial to prevent the client from paying too much and being taken by surprise. The supplier’s interest in this is often not parallel to the client's, so good follow-up questions are in order. Also consider the value of the company resources to be transferred and the conditions on which people may be transferred. The good news is that the outsourcing market is now mature and that most suppliers are open to sound arrangements. Legally there are no real barriers against outsourcing, provided that the relevant risks are addressed in the agreement. For the lawyer and the business, this means asking good follow-up questions and putting responsibility where it belongs; in most cases this will be with the supplier.
Do you want to know more about outsourcing? Please feel free to contact Joost Schmaal.
