Key points you must have on your outsourcing agreement

Key points you must have

Outsourcing is an effective process of hiring a third party to handle your specific business processes. The practice of outsourcing has become a common phenomenon among businesses due to its several advantages such as cost-effectiveness, increased efficiency, improved focus on core areas of business and more.

However, with a lot of advantages, comes a few risks as well. To minimize these risks, companies should have a comprehensive outsourcing agreement with their service provider, detailing everything from data protection and payments to milestones and penalties.

What is an outsourcing agreement?

An outsourcing agreement or a contract is a legally binding document between you and the service provider or the outsourcing company. The document contains information regarding your expectations from the third-party service provider. Commonly, there are two main types of outsourcing including IT (Information Technology) outsourcing and BPO (Business Process Outsourcing), such as Human Resources (HR), and accounting. In both types of outsourcing, you’ll need to share your confidential information, Intellectual Property (IP), and business assets with the third party, which is why you must ask the third party to sign an NDA (Non-Disclosure Agreement) to protect your IP.

Key things to include in your outsourcing agreement

1. Description of services

The first and foremost thing to include in your contract is a detailed description of the project and its scope.

The description should involve the following sections:

All services required

Description of each required service
General service standards such as compliance with international standards.

Once you have described the general purpose of your contract, you can move forward with the specifics such as primary deliverables.

2. Services requirements

Your outsourcing contract should specify what work is being done, one of the key areas to establish. ‘Design work,’ for example, would be a suitable description. It all depends on your requirements and what the third-party company is offering. ‘Design work,’ for example, is an appropriate description. You should always finish this portion of the contract so that everyone is on the same page and agrees with the work being done, even if the provider is providing a lot of services for your firm.

3. Fees and payment

You must communicate the amount payable to your outsourcing partner for the services they will be providing. It typically varies based on job staffing requirements and the project scope. You may also need to consider exchange rate fluctuations when outsourcing overseas. In addition, you should specify whether the service provider must make all tax payments in their country of residence (place of residence). Make sure you specify if they are responsible for staff and independent contractor salary payments or not. It is advisable to ensure that the contract terms can be renegotiated as a result of market changes. Compensation for variable aspects like new technologies may be included. You should seek legal counsel from a financial law firm for legal advice.

4. Transfer of assets

Your outsourcing companion may require you to give them access to specific business assets in order to deliver a specific deliverable. Telecommunications equipment and software licenses are common examples of IT assets. A sales contract is necessary to transfer these assets officially. Depending on the asset, you may be subject to additional taxes and stamp duties if you transfer software licenses. Your legal contracts should account for these transferring expenses.

5. Terms and conditions

This is the most important section of your outsourcing agreement. This is the part where you will need your lawyer’s guidance. In this section, there are several things that you’ll need to say in order to protect your business from potential risks while dealing with a third party. These include:

Retained rights: It tells what pre-existing intellectual property each business has. In addition, it also mentions that those parties need to keep all of the rights to their previously created intellectual property.
Pre-existing intellectual property: In extension to the first point, this section explains what pre-existing intellectual property is, how it can be used, what it can’t be used for, and more.
Confidential information: This section defines the term ‘confidential information,’ explains how it may be utilised, and addresses similar issues. If you proceed to the next section, ‘client confidential information,’ you will cover both parties—the contractor and contractee.
Termination and how it works: It covers everything from who has the right to terminate the contract to what happens afterwards.

Wrapping Up

When it comes to creating outsourcing agreements, you need to pay special attention to the details you are filling in. Make sure you explain everything in detail to eliminate any potential business risks that might come your way. To pull this off, work closely with your lawyer to make things extremely simple.