Outsourcing Agreement

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Outsourcing Agreement

A Brief Introduction About the Outsourcing Agreement

What is an outsourcing agreement? The definition of outsourcing is to simply contract out. An outsourcing agreement is an agreement between a company and a service provider where a specific service needs to be provided against a mutually agreed fee. An example of outsourcing would be when the data processing function of a company is performed by the service vendor who has its own resources, staff, and office space.

There are three types of outsourcing agreements. They are:

Fixed price contracts:

These types of contracts are ideal for short-term projects, and a fixed price is paid to the vendor. The company is not involved in product development.

Time and material contracts:

Unlike fixed-price contracts, time and material contracts are suited for long-term projects where a pre-project estimation of costs is not possible. The client reimburses the vendor for hours given to the project along with the cost of materials used and other ancillary charges.

Dedicated team contracts:

Under a dedicated team contract, the vendor provides the company with a dedicated team. This kind of contract is project-specific, and the staff of the vendor becomes full members of the client’s team for the duration of the project.

Who Takes the Outsourcing Agreement – People Involved

What is outsourcing? The basic definition of the word outsourcing means obtaining goods or services from an external supplier. The key people involved in an outsourcing agreement are the company and the vendor. It is a question of opportunity cost when it comes to outsourcing a service.

Purpose of the Outsourcing Agreement – Why Do You Need it

An outsourcing agreement is required when a company feels it would be more profitable to engage an external service provider for a particular project, service, or function rather than have an internal department perform it. The purpose of the agreement is to make sure that the interests of both the company and the vendor are protected.

The details regarding the services to be performed by the vendor are clearly laid out, so the client knows the deliverables from the vendor.

The vendor is clear about the requirements of the client as the details of the project are given in the contract. If the vendor is able to perform the task according to the expectation of the client, then the client is legally bound to pay the vendor the agreed fee.

Contents of the Outsourcing Agreement – Inclusions

An outsourcing agreement is a legal contract between a company and a service provider. The services that a company generally outsources would include business processes, customer invoicing, customer service, service, and desktop applications as well as IT backup and recovery services.

The agreement should include:

  • The effective date of the agreement is important
  • The agreement should clearly mention the parties to the agreement and the relationship between the two
  • Service and payment expectations by both parties
  • Potential penalties or awards
  • Expected timeframe: The tentative time frame within which the project needs to be completed or service provided will need to be mentioned.
  • Reviews: Periodic reviews of the project and assessment of the deliverables need to be mentioned in the agreement. 
  • Potential exit strategies: The agreement needs to clearly state how the parties can exit the agreement.

How to Draft the Outsourcing Agreement

While drafting an outsourcing agreement, the following points are to be considered:

  • The names of the parties in the agreement and the relationship shared between them
  • Specification of the job being outsourced: The general scope of services to be completed by the vendor as well as the day-to-day responsibilities need to be mentioned.
  • Fees: The fees or consideration payable by the client, frequency of payment and the penalty payable.
  • Limitation of liability: After a year of lapse of the outsourcing contract, no action can be taken by either party.
  • Proprietary information: All the private information of the client to which the vendor has access to while working on a contract should not be divulged to a third party.

The key terms of an outsourcing agreement are:

  • Work specifications
  • Consideration or fees payable
  • Limitation of liability
  • Proprietary information
  • Return of materials
  • Ownership rights
  • Term and termination

Negotiation Strategy

Before entering into an outsourcing agreement, the client should shortlist the vendor providing the best value for money. The client can then negotiate favourable terms with the selected vendor.

The vendor should also negotiate a fee that is commensurate with the scope of the job.

Benefits & Drawbacks of the Outsourcing Agreement

Benefits

  • The interests of both the company and the vendor are protected. The company is assured that the job will be completed by the vendor in accordance with the quality parameters and deadlines mentioned in the contract, and vice-versa when it comes to the vendor
  • The client can focus on business growth.

Drawbacks

  • Control over processes: When you outsource a function or a project, you pass the control to the vendor. There will be periodic evaluations, and if there are delays, there will be time and cost overruns.
  • Termination of agreement: The quality parameters are defined by the client and to accept, terminate or reject the work done is completely their discretion.

What Happens in Case of Violation

In case of violation of an outsourcing agreement, the penal provisions in the contract will be implemented.

The agreement is drafted according to the laws of the state where the company that is outsourcing the project or service. If there is a violation of any law of the state, then the contract stands automatically terminated.

If the vendor does not complete the job to the satisfaction of the client in terms of quality or the given deadline, then the vendor will have to pay the penalty to the client for violation of the contract.

On the other hand, if the client does not pay the vendor on time even though the job has been satisfactorily completed, then the vendor can take legal action against the client.

Outsourcing is an indispensable part of every major organization globally and has now assumed industry status. There are huge benefits with outsourcing both for the client as well as the vendor. Outsourcing is a global feature and is expanding at a very fast pace. 

You can benefit from outsourcing provided you have a proper outsourcing agreement in place. The agreement should contain all the details, such as the nature of the job, price, quality parameters, and delivery deadlines.

Sample Outsourcing Agreement

A sample of the agreement can be downloaded from below.

Download Outsourcing Agreement Template

Outsourcing Agreement

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