Outsourcing Services – Key Considerations

The outsourcing of technology services by businesses has become commonplace. The use external companies to manage and update constantly evolving technologies and supporting business springs from the now ready resources of specialist skills that often do not exist within a business or are needed for a short period of time at increased levels to ensure reliable delivery of critical business systems to meet variant demand at competitive prices.

The scope of outsourcing services is flexible enough to meet the segregated and isolated tasks of an individual IT contractor on a time and materials basis, to engaging dedicated outsourcing providers to outsource entire business processes and/or infrastructure.

Specialist software, hardware and application service companies compete within the UK and in recent years against the influx of competition from offshore outsourcing services companies.

Temporary recruitment of a skill base may assist the core skill-base in a company to complete special projects, or provide a an additional layer of skills to complement a solid skill base. On a larger scale, the enterprise outsourcing provider in the capacity of a contractor may be well suited to assuming responsibility for the delivery of the technology services carte blanche.

Contractual Flexibility

A survey of 200 European executives by analyst house Gartner Group found that 55 per cent of those businesses with outsourcing contracts have renegotiated their contracts. One in eight contracts had been renegotiated within the first 12 months of their operation. The research found that the types of services that are outsourced by a business must be done on a selective basis to make it successful although companies can still achieve cost savings of 25 to 30 percent if outsourcing is conducted successfully.

There are inherent risks involved in outsourcing of technology services that makes the outsourcing agreement key to the success whether a company is company outsourcing or the service provider. The agreement itself must be rigid enough to maintain cost effective high levels of service but remain flexible enough to stay cost effective with a change of services provided, in what is already a fiercely competitive market that may result in mergers of the service providers offering these services.

In a properly drafted outsourcing agreement, service levels for example are a key feature of the contract. As the name suggests, service levels are a contractual commitment to performance requirements by the supplier. Depending on the function being outsourced in the agreement, staff, software, hardware, network availability and what happens when the performance of the agreement is not meeting the necessary levels are all candidates for careful consideration.

Staff

A large part of the cost base in outsourcing agreements is the cost of the staff to develop and maintain the software systems. Keeping these cost levels competitive for both parties to the agreement is crucial in light of the length of these contracts as reasonable rates in the current market fluctuate as markets evolve and the overall skill base in a technology increases. Retention of key staff should also be considered in ongoing projects, whether they are employed or engaged on a consultancy basis.

Software Ownership

Outsourcing ventures require property to make them happen. In the case of software, the parties need to decide who will bear the responsibility of maintaining and/or upgrading to new releases over the course of the contract. It may be that if volumes of end user licences are required for the project, the pricing is best bundled in with the services to be provided under the contract. It may be that one of the parties owns licences that may be used on the project. It then becomes a question of law as to whether those licences may be transferred to the supplier. The question turns on the terms of the licence with the company or software house that licensed the software in the first instance.

Another key factor is maintaining the ownership of the vast amount of intellectual capital that is created during the agreement to ensure these assets are owned by the most appropriate party.

Hardware

In most outsourcing projects, Capacity Planning should be considered. Ensuring that the hardware used in the production environment is capable of performing to the required levels and are maintained at the necessary levels over time is critical for proper performance. System fail-over, system availability and disaster recovery and other contingency plans deserve consideration, rather than the alternative of a gradual reduction of the quality of services provided over time, which defeats the purpose of the project with servers over-stretched causing response times to reduce and mission critical systems to fail.

Network Availability

Network availability is usually catered for over the course of a month, with service level credits applied where the service level is not met. The availability of a network can be confused with availability of the server – the server effectively does not exist if users lose connectivity to it, although the server may be operating within specification. After the quantitative period of availability has been decided, the real question becomes where network availability should be measured. Should it be from anywhere on the network, or a switch under the control of the supplier that feeds the communication to external networks?

Penalties for poor Performance

Service level compensation is a matter for negotiation between the parties. The question is the form and the level of compensation in the event that the supplier fails to perform in accordance with the service standards. Some accommodation for liquidated damages may be appropriate in real-time, online systems and other sensitive applications requiring constant availability.

Closing Remarks

The complexity of the outsourcing agreements reply upon the business requirements driving the agreement. Where transfers of assets to the outsourcer are to take place, companies should take care to ensure that such transactions are possible. The factors set out above are some of the considerations in an outsourcing arrangement. The issues to consider turn on the subject matter of the transaction and technologies to be employed to perform the services.