Practical Guidance for a Successful Outsourcing

The use of outsourcing continues to expand within the franchise industry. In addition to information technology outsourcing, service providers are being called upon to perform a number of business processes including accounting, call center operations, disaster recovery, human resources management, and sales training.

Statistics compiled by research agencies indicate that about half of all outsourcing engagements are terminated before the initial term is completed. However, there are strategies companies can use when entering an outsourcing relationship to maximize the chance of the engagement being successful.

12 tips for successful outsourcing

To enhance the chances of success when entering into an outsourcing relationship, the parties should focus their efforts on the following items:

Internal analysis: At the outset, a company should determine why it is interested in outsourcing particular activities. Typical reasons include a desire to lower the price for certain services, obtain better performance, redirect capital spending, or allow company personnel to concentrate on more strategic initiatives. Once the company has determined the basis for the outsourcing, it should obtain management approval and establish a process for selecting a service provider and entering into a contract.

Scope: After a service provider is selected, the parties should clearly define what services are within the scope of the engagement, how and when these services will be transitioned to the service provider and what methodology will be utilized to adopt new services that are "outside the box" or in addition to the initial services.

Performance standards: The parties should decide what performance standards should be measured, what quantitative set of metrics should be applied, and what consequences result from not satisfying such standards during the engagement.

Term: The parties must determine how long the outsourcing relationship is intended to last, what renewal and termination rights are desired, and what termination assistance will be needed to transfer the services back in-house or to another service provider.

Price: The price for the services should represent good value, not necessarily the lowest price available for the services. Additionally, pricing should be based on a straightforward algorithm and be as predictable as possible. Finally, the pricing provisions should address any associated costs like license fees, cost of living increases, and time and materials rates for additional work.

Employees: The parties should describe which, if any, employees of the customer will be severed or transferred to the service provider and, for those employees transferred, what benefits will be guaranteed to them. Additionally, the parties should address whether any of the service provider's employees are key to the success of the engagement, requiring that they remain on the contract for some period of time.

Assets: The parties should determine what assets will be purchased, leased, or transferred without charge from the customer to the service provider for its use in performing the services. The arrangement should also address what assets, including hardware and software, the service provider will supply, when and what assets will be replenished or upgraded, and how the assets will be disposed of at the end of the engagement.

Governance: A structure should be established to allow regular communication at various levels between the customer and the service provider. Roles should be established, cultural differences recognized, and management should plan to monitor and evaluate the performance regularly.

Compliance: The parties should address what audits will be necessary, how applicable laws and regulations will be satisfied (e.g., Sarbanes-Oxley), and how long pertinent documents will be retained.

Dispute Resolution: Both informal and formal (arbitration or litigation) mechanisms should be adopted for the parties to address any concerns and differences.

Risk allocation: The parties should consider how various risks will be shared between them. Such risk allocations are generally dealt with in contractual clauses like the indemnity, insurance, liability, and representations and warranty provisions.

Other unknowns: To the greatest extent possible, the parties should decide in advance how certain unknowns will be handled. For instance: What if the customer later wants to share the services with affiliates or the service provider wants to use subcontractors? What are the ownership and usage rights of any new technology that may be developed during the term? What if the pricing is no longer competitive in the marketplace? What if an unforeseen disaster occurs?

Implementation

The above list is not all-inclusive, but if the customer and the service provider conscientiously address the 12 points discussed above before they enter an outsourcing arrangement, their chances of success will be greatly enhanced. Once agreed upon, the resolution of these concerns can be reflected in a contract that memorializes the parties' understandings.

Milton Whitfield is a partner in the Outsourcing Practice Group of Haynes and Boone, LLP.

Published: August 29th, 2006

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