Out-Law Guide 7 min. read
30 Mar 2005, 4:10 pm
This guide is based on UK law. It was last updated in February 2008
The pressures which lead organisations to outsource show no signs of slackening and cost savings remains a major incentive. However, other factors are increasingly influencing the decision to outsource – access to innovation, increased speed to market, and service quality are proving equally as important as cost savings.
As the value of transactions has increased, so too has the range of outsourced services. Most non-core services which organisations have traditionally provided internally – IT, finance and accounting, HR and property management - are now commonly outsourced. The locations from which services are provided have also changed – the attraction in outsourcing to offshore locations such as India has soared.
Reports show that the fastest growing sectors are business process outsourcing and business process management. For many large IT suppliers outsourcing and process management are one of the few areas to have flourished in the difficult market of recent years.
Outsourcing involves the transfer of the responsibility for carrying out an activity (previously carried on internally) to an external service provider. The service provider in turn provides services back to the customer against agreed service levels for an agreed charge. In many outsourcings the transfer of the activity involves the transfer of staff and assets (see the employment section below).
Outsourcing is often characterised as having 3 distinct phases:
(a) renegotiation/renewal of the service contract; or
(b) exit management either by:
(i) the service being brought back in-house (in practice this is rare); or
(ii) the appointment of a new service provider (most likely course).
Outsourcing is not a new concept: many organisations are into their second or third generation of outsourcing. Traditionally the financial sector and the motor, defence and aerospace industries have dominated the outsourcing market. In the construction sector outsourcing is not unfamiliar but is a more recent phenomenon. Contractors have outsourced as customers to third party service providers. They have also, and increasingly, set themselves up to provide outsourcing/FM services to their clients, having identified outsourcing as a means of securing long term profit growth. In this briefing we look at contractors outsourcing as the customer and we focus primarily on IT outsourcing. We take a look at the pros and cons of outsourcing, issues relating to employees, global deals and off-shoring, and how to plan and prepare for a successful outsourcing.
The reasons for outsourcing IT are varied but some of the most frequently cited drivers include:
In practice the benefits of outsourcing tend to be spread across the above areas. Those seeking to outsource to achieve cost reductions alone may very well be disappointed.
The potential downsides to outsourcing include:
The number of companies choosing to outsource continues to grow so, for many, it seems that the potential benefits outweigh the downsides. However the benefits of outsourcing will only be realised if the customer is well prepared, the outsourcing contract contains sufficient detail and the ongoing relationship is managed effectively - it is an old adage that one should never outsource a problem, but unfortunately, this frequently occurs.
Outsourcing disasters get reported frequently but successful outsourcing deals rarely get the same press. Like any commercial transaction, outsourcings can go wrong, but the mistakes that contribute to their failures can be avoided. Investing effort in the early stages of the outsourcing and good management of the relationship once it is implemented can help to prevent an outsourcing disaster. For example:
The Transfer of Undertakings (Protection of Employment) Regulations 2006 (normally called 'TUPE') will apply to almost all outsourcings where the activity to be outsourced is currently based in the EU. The effect of TUPE applying will be to transfer the employees engaged in the relevant services from the customer to the provider. Where one provider is replaced by another, the employees will transfer from the outgoing provider to the new provider.
TUPE transfers the rights and liabilities associated with the employees from the old employer to the new. For instance, if an employee of the customer has a claim for race discrimination against the customer, liability for that claim will pass to the provider when the employee transfers. New liabilities can arise if the outgoing and incoming employers fail to comply with obligations under TUPE to inform and consult employees. The services agreement therefore usually contains appropriate warranties and indemnities in relation to the parties' liability for the transferred staff prior to the transfer, post transfer and on exit.
Other employment law developments affecting outsourcing transactions include the following:
Growth in the globalisation of markets has led to an increase in global outsourcing transactions. Multinational companies are seeking to provide implementation and management of their technology and other business processes on a worldwide basis. Normally there is a requirement for a consistent level of service in all countries in which the customer is present and the ability to deliver that same service in countries that are targets for expansion. This requirement for "global reach" means that, in practice, very few service providers are able to deliver the range of the services required and global deals tend to be concentrated in the hands of very few players.
The main issues to be considered in global deals include:
Businesses are increasingly looking to move their functions to an offshore destination – whether the services in question relate to the provision of call-centres, mass business processing or highly specialised software development. Issues to consider when a customer is considering buying off-shore services include:
Once an outsourcing deal has been concluded committed management of the outsourcing relationship is critical to its success. A successful outsourcing requires processes and procedures for managing the relationship between the customer and the service provider: for example, regular service meetings, agreed processes for reviewing the services (preferably involving benchmarking provision against other service providers), reporting procedures and a robust mechanism for escalating and resolving problems. An outsourcing services contract is not a contract which should be put in a drawer once signed – it is a live and operational document.