A guide to successful outsourcing: Key Initial Issues

More than just a trend

Outsourcing - the handing over of a corporate process to another organisation - is here to stay. Virtually anything can be outsourced, from IT systems and facilities management to logistics and car fleet management.

The attractions of outsourcing are numerous. In the current economic climate, streamlining businesses and cutting costs is increasingly important. Outsourcing is being used as a tool to achieve these goals and at the same time obtain the right level and quality of services from people with the appropriate expertise. Businesses can concentrate on their core competences and reduce costs, increase service quality, turn fixed into variable overheads, gain state-of-theart know-how and provide off balance sheet funding. British Airways' € 600 million IT outsourcing of its reservation and departure control systems and British Telecommunications' £500 million facilities management agreement are examples of this (both transactions on which we advised).

The best outsourcing deals are the ones that are carefully thought about up front, so success comes by design - not by accident! To help you do this, a useful checklist is attached detailing the key initial issues that should be considered at the start of planning a successful transaction.

Facts to ponder

A recent survey by Legal Director magazine of heads of legal or finance directors from 100 leading companies produced the following results which are useful to bear in mind:

• The average total contract value is £1.28 billion.
• Over half (54%) planned to outsource further in the next 12 months.
• Service levels and increased expertise were stated as being more important than cost reductions.
• One-third of companies have been involved in outsourcing disputes.
• One in four contracts have been re-negotiated in the last 12 months.
• Almost one in five companies have brought services back in-house, and the same number plan to bring back services once the contract has expired.
• Worryingly - only 28% of businesses check the credit worthiness of their key outsource providers.

(For Outsourcing Benchmarker Survey click on Practice Areas, then Outsourcing).

A survey by Computer Weekly demonstrated that successful outsourcing deals can have a positive impact on the value of a listed company's shares.

Future briefings

This briefing note is the first in a series of outsourcing briefings based on our experience and designed to help you achieve successful outsourcing projects. We appreciate that each project is different and must be considered on an individual basis, but these briefings will give you the basics.

Initial considerations for successful outsourcing contracts

1. What are your objectives and the risks attached?

The starting point for successful outsourcing is to clearly identify the objectives which outsourcing is intended to achieve and the risks that need to be managed in achieving them. It's always useful to draw up a risk matrix listing the objectives and risks, and then prioritise them so that these can be reflected during negotiations and in the contract.

2. Have you found the right service provider?

Satisfy yourself that the service provider has the ability to provide the services and ensure that it has the financial back-up to support the contract. Also consider how your contract fits in with the provider's business objectives and other responsibilities. If you are transferring key assets to the service provider, you also need to ensure that these are protected and that you can access them should the service provider get into financial difficulties or if the arrangement is terminated unexpectedly.

3. Do you understand each other's business needs?

It's important for both the provider and the customer to understand each other's objectives and drivers. The most successful contracts are those which incentivise both parties to fulfil their contractual obligations and even exceed them.

4. Open book or closed book?

Open book means that the service provider recharges to the client all costs properly incurred on a transparent basis and then adds a margin or management fee. Closed book arrangements include a highly defined service and an agreed fee for performing it. The choice between these depends on the emphasis placed on transparency and flexibility, as opposed to certainty of costs.

5. Have you considered the impact of HR issues, in particular TUPE?

The effect of the Transfer of Undertakings Regulations (also known as TUPE) is that a service provider may, after the end of the arrangement, find itself responsible for employees that may no longer be needed, and a customer can lose employees it wishes to keep. The law in this area is constantly changing, so the risks need to be identified, allocated and then managed. As TUPE is based on the European Acquired Rights Directive, similar (but not necessarily the same) provisions will apply throughout Member States. There will also be local law considerations when the outsourcing is international in nature.

6. Have you taken into account any procurement or regulatory requirements?

Under the public procurement regime based on European legislation, certain sectors, such as utilities and public sector bodies, need to follow a set of procurement rules in order to select service providers. Failure to comply with the rules may mean that the procedure has to start again or that an unsuccessful bidder or potential bidder is entitled to damages. Ensure that you comply with the rules if you fall under them and that you have the correct paper trail to prove this took place.

This list is a sample of the considerations that typically arise. We can help create a bespoke checklist for any specific project or business.