How to outsource business services: A guide to the legal factors

When outsourcing business services, you’re trusting another company to run or shape aspects of your company. It’s important to have legally binding agreements in place to ensure the services you outsource are carried out lawfully, and to protect your business in case anything goes wrong.

Here, we help you understand the legal considerations and steps you should take when outsourcing business services.

Our professional advisors can help you to understand which legal factors you should take into consideration when outsourcing work. 

What is outsourcing and how does it work?

Outsourcing business services is when a company employs a service provider to do something on their behalf. Such as a manufacturer outsourcing its product support to a specialist provider.

It can be a clever way to maximise a company’s efficiency, perhaps saving money and time by allowing it to focus attention and internal resources on its expertise.

Some services that businesses choose to use third-party contractors for include:

• Administrative aspects (such as payroll)
• IT-based services (such as web, software, or app development)
• Production (such as clothing manufacturing)

When outsourcing, you’ll negotiate with your service provider and create a contract, sometimes called a service level agreement (SLA). It should outline your expectations for the service, along with any additional elements that may affect your business.

Everything in your contract agreement should be specific and clear, so both parties understand what’s expected and what will happen if there are issues.

What should be covered in an outsourcing contract?

The contents of a contract will be different depending on your needs and what’s being outsourced. However, we’ve outlined some of the main things that should be included in every outsourcing agreement so you get the promised results and protect yourself along the way.

The service itself: Define your expectations

Outline exactly what you expect from your contractor, so you both know what the outcome of your agreement will be.

This will ensure you get the results you want, and have something to fall back on if there’s a dispute.

Elements to include are:

• What will ultimately be delivered.
• How the outcome it will be measured (such as KPIs or a set of operational standards that must be met regularly).
• A service schedule that plots how long it will take (or when the agreement will be reviewed) along with any other deadlines that need to be hit.
• Communication channels and expectations, including who will manage the relationship between your business and theirs, and how you will communicate.
• Payment terms, including exact details about how much it will cost and when payment will be made.
• A plan that outlines what will happen when the contract ends or if the agreement is terminated.

Risk assessment: What happens in certain circumstances

There are risks to outsourcing as you are passing over control to a third party. Your contract should outline what actions will be taken if things don’t go to plan or unforeseen circumstances arise:

• Determine what will happen if the contractor doesn’t do what’s agreed. Specify you can terminate the contract, or state the contractor’s responsibility to fix any mistakes.
• Write a ‘changes clause’ that lets you alter the contract to reflect wider changes in the industry.
• Give direction about what to do if the contractor’s company has internal issues that affect your agreement.

Liabilities: Protect your business

There are many basic legal aspects you’ll need include in a service agreement to ensure the core elements of your business are protected.

• Outline the service provider is responsible for anyone it chooses to employ, and that all employees must be qualified and keep to health and safety standards.
• Should something go wrong with the service that’s the contractor’s fault, such as damage or loss of property, ensure it will take responsibility and have the means to reimburse your business (e.g. through insurance).
• Include rules and expectations surrounding data protection, confidentiality and intellectual property rights.

Your business: What you’ll deliver

A service agreement works two ways, and so part of the agreement should state what you will contribute when working with the contractor. This might include:

• Any equipment you might provide (and your rights around recalling it).
• A reasonable timeframe in which you’ll deliver any necessary information or materials a contractor requires.
• A notice period you’ll give if you need to make changes to any aspects agreement.

By writing a detailed and transparent contract you’ll get the benefits of outsourcing business services and peace of mind.

Our expert advisers can help you to understand exactly what should be included in an agreement – contact us for advice tailored to the needs of your business, and see our legal services for outsourcing