2. Key issues

Special attention should be paid to the following issues.

Confidentiality

All parties to the agreement and all their staff and agents are normally required to respect the confidentiality of the key elements of the contract. This requirement can continue for a number of years beyond the duration of the original contract.

Payment terms

The service to which the outsourcing contract relates and the charge that will be made for that service must, obviously, be set down in clear and unambiguous detail together with the commencement date and, if it is different, the date from which charges will commence. Invoicing procedures and settlement terms should be clearly set down, along with any agreement allowing increases in charges during the contract period, with a detailed explanation of the inflation index or other basis upon which such increases are made. It is often necessary to estimate payment in the early stages when the amount of work to be performed is, as yet, uncertain. This situation is normally dealt with by the inclusion of a clause detailing how and when any discrepancies should be corrected.

It is likely that, no matter how carefully planned the agreement, during the course of the contract it will be appropriate for the service provider to perform additional services not originally allowed for. This situation should be anticipated with the inclusion in the contract of a formula by which payment for these services may be calculated.

The provider will normally wish to insert a clause requesting that expenses should be paid within a specified period, on presentation of the relevant expense forms and receipts. Such expenses will mainly be those that the client’s staff previously incurred themselves in carrying out the transferred service, such as travelling and living expenses.

Procedures

The contract normally includes a clause requesting the provider to attempt, to the best of its abilities, to meet any unexpected increases in workload and changes in target dates that might arise. Such a clause would be very difficult to enforce but it is intended to demonstrate that the provider should react to changes in circumstances in the same way that the client’s staff would have done and with the client’s best interests at heart.

Most outsourcing contracts will also contain an acknowledgement that changing circumstances over the lifetime of the agreement, often five years or so, will naturally affect the level and type of the service required. The flexibility necessary to adapt to such changes should be built into the contract from the outset. Normally both parties agree that there should be no increase in cost for changes that do not result in an increase in workload. The framework should be in place for agreement to be reached at a suitable level on any changes to the scope of the contract. If the situation changes to the extent that alterations are required to the SLAs or to payment terms laid down in the contract, then suitable amendments should be added to the contract at the earliest possible date.

It may be appropriate, particularly where a partnership arrangement is in place, for a clause to be inserted giving the provider the right to charge for short-term development costs incurred during the contract period. Incurring such costs would require the client’s agreement, and would be justified by action taken to improve the service in some way.

Intellectual property

The issue of intellectual property is given a great deal of attention in many contracts. This is natural, since not only will both client and service provider soon be using each other’s existing intellectual property, but they will also wish to know whether they have joint ownership of any new developments. Contracts tend not to go into precise detail about the individual elements of such property, instead classifications such as ’software’ are normally sufficient. Generally speaking, the parties to the agreement do not pay each other for intellectual property rights. However, where such rights belong to third parties, care must be taken to ensure that the terms of any existing agreements or licences are not breached.

The right of inspection

It is frequently necessary for the client to enter the site and inspect various elements of work at intervals during the period of the agreement and the right to do so should be set out in the contract. Reasonable access should not be refused, although the provider may request written notice in advance of a visit to the site by the client for any purpose, including internal audit. It is not unknown for providers to insert a clause into the contract allowing them to charge the client for extra and unnecessary work caused by excessive visits.

There can be no change to the right of access of the external auditors, which remains as it was prior to the outsourcing agreement.

Statutory and other obligations

The contract will normally contain a clause obliging all interested parties, including subsidiaries and any subcontractors, to comply with all statutory regulations such as health and safety requirements, by-laws, national and such international laws as apply and any rules previously imposed by the client. Discussions on any unusual rules and regulations relating to the client’s business should be held at an early stage of negotiations.

Transferred property

In some outsourcing agreements, the work will be carried out at premises already owned by the service provider. The contract relating to such an arrangement will probably contain a clause requesting the provider to ensure that reasonable security measures are in place. Where the client owns the premises in which the work will be carried out, then it may wish to insert a clause in the contract stating that no changes should be made to the buildings and site without prior notice being given. If the agreement involves leasing or selling the site to the provider, the client should probably consider what the best course of action would be in the eventuality that the agreement has to be terminated, and make provision for this in the contract.

The possibility of claims

The contract will normally contain an agreement that notice will be given in writing as soon as possible of any intent on the part of either of the parties to make a claim against the other. In addition, they will agree that in such an event, any relevant records requested by either party will be made available to the other as rapidly as possible.

The contract will also need to deal with the possibility of a successful claim for negligence against one or both of the parties to the agreement by a third party. It is important that neither client nor provider should suffer a financial loss as a result of negligence on the part of the other. Thus, there will usually be a clause in the contract stating that where the fault lies only with one party, it will indemnify the other against any such claims.

Limitation of liability

It will usually be in the best interests of each of the parties to the contract that liability should be limited for both of them. They will normally agree that any problems should be addressed amicably, avoiding punitive damages where possible. The party at fault should have as much chance as possible to redress the situation and the other party should do its utmost to limit any resulting damage.

Some contracts also include a clause specifying a time period within which any claim must be made. Such a time period will normally commence at the point when the problem has become apparent to both parties.

Dealing with personnel

The contract will normally state that, from a specified transition date, the provider will take over complete responsibility for the staff, including the need to conform to the TUPE regulations and Acquired Rights Directive. It will usually be made clear that responsibility for any actions taken before this date rests with the client. The provider will wish to ensure that any personnel liabilities which become known after the transfer date but which relate to the period before that date fall to the client, whether or not the client knew about them or should have known about them.

It is important that any liabilities for redundancy settlements should be clearly understood. It will normally fall to the client to settle with any employees made redundant prior to the transition. If those redundancies took place after the parties began their negotiations, it will be advisable to explain in detail the action that was taken and ensure that there is no uncertainty about the liability.

The transferred employees must be informed of their new terms and conditions in writing, with clear explanations of any changes. The contract should contain a statement to the effect that this has been carried out. If the client wishes to make any guarantees to the staff being transferred, relating either to their continuation of employment or to their terms and conditions, then these will also need to be precisely documented.

Dealing with pension rights

The TUPE regulations do not go into detail on the issue of pension rights. For this reason, some people feel that the subject can be safely omitted from an outsourcing contract. In practice, however, this is an area which does need to be laid down in careful detail in the contract, due to the long-term nature of any problems which might arise from short-term errors. The fact that each member of staff may have a different pension arrangement means that, in order to cut down on the possible confusion in years to come, full details will need to be given of the actions taken and arrangements made for each transferred individual.

The provider normally requires certain guarantees and assurances

It will normally be in the provider’s interests to ensure that the following provisions are included in the contract.

An undertaking by the client to provide all the necessary documentation, specialized knowledge and anything else required by the provider in order to fulfil its obligations, without additional charge. The client’s guarantee that the information it has provided and on which the provider’s bid was based is accurate. This should cover issues such as the ownership and condition of all relevant assets, including intellectual property such as software licences, and also the financial records and payments relating to the transferred staff. An undertaking from the client that, for the period of the contract, it will allocate personnel and managers with the necessary skills to liaise with the provider and, where applicable, provide an acceptable working environment for the provider’s staff. An undertaking from the client to make good any breaches of the above clauses at its own expense. Following on from the last point, an agreement that if the provider’s performance is affected by serious breaches by the client of any of the above then the provider will have the right to renegotiate or, as a last resort, to cancel the contract.