More perils of outsourcing

In the second of a two-part series, Ziad Choueiri of the Rights Lawyers goes into further detail about what to be aware of when writing outsourcing contracts.

Change orders and variations

As far as IT contracts go, variation orders can cause some confusion and so warrant extra care. IT requirements for companies are constantly adapting to their surrounding market demands.

The services and products provided need constant monitoring and evaluation. In doing so, the company remains updated on its current IT status and may take action where necessary to upgrade its systems.

Variation orders included within the outsourcing agreement will need to be strictly laid out and the procedure stringently followed. It is not unheard of for the parties, in order to save time, agreeing to a variation through a brief email or verbal exchange without clearly abiding by the agreement’s procedural requirements.

Service level arrangements

An outsourcing agreement contains large amounts of service level arrangements. IT provisions often have quite technical details and benefit from the inclusion of a schedule highlighting the levels of standards and performance required.

The service levels will be subject to continuous monitoring and review at pre-determined intervals by the parties. Using third parties to provide benchmarks to be met can also introduce a neutral element to satisfy both parties.

Payment

Payment arrangements for outsourcing agreements should be based on targets met by the supplier, though a payment by date is also acceptable.

Also, the supplier’s right to payment should not be hampered by the client’s delay – or failure – to comply with its obligations under the contract.

Pitfalls

Outsourcing IT needs will create problems, primarily in relation to software. Copyright issues must be dealt with very clearly within the agreement. The supplier may restrict the client company from using the software other than for the agreed needs. It is important that the client company is offered a continued right, or a perpetual right to use the product.

There are issues relating to the confidentiality obligations on both parties due to the access to sensitive information and provision for the same must be included.

In addition, there exists the issue of the use of the premises.

Termination

The termination or re-transition phase of the service and/or product will occur either through a breach of the terms by either party, or the decision to appoint an alternative provider to bring the service/product back in-house. Provisions must be made to ensure that in the event this does occur, the client company maintains a continually functioning service/product without interruption.

At this point the copyright issue will also come into question as the client will not want to relinquish software that it may have become reliant upon. The provider may want payment in line with the client’s request for a perpetual right to continue using the product. Third party issues will need to be considered. Employees will also have to be considered and in the UAE this may involve the cancellation or reissuing of visas and of other factors regarding severance pay and benefits will have to be considered.

It must be kept in mind with regards to outsourcing that although it may provide a company with a means to reduce on added costs and allow a more efficient provider to handle a key aspect of a company’s in-house affairs, the structure and provisions of an outsourcing agreement itself, if not drafted or considered properly, may result only in added costs and reduced efficiency. Prudence is key.

Ziad Choueiri is a solicitor with the Rights Lawyers.

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