As outsourcing continues to be a popular choice for both the public and private sectors in Northern Ireland as a means of reducing cost and improving service, it is important to ensure the underlying contract strikes the right balance between the often competing demands of the customer and supplier.

In any outsourcing deal, whether it is IT outsourcing (including data centre consolidation, IT infrastructure or other ICT services) business process outsourcing (including HR and accounts) or business transformation outsourcing, the success of the arrangement will ultimately be dependent on the strength of the working relationship between the customer and supplier. Although the people (and not the contract) will build and maintain the relationship, getting the right balance in the contract can go a long way to facilitate this process. Although a typical outsourcing contract contains numerous areas where it is beneficial to all parties to apportion risk appropriately between customer and supplier (including intellectual property ownership and licensing clauses, implementation and testing, liability caps, termination rights and exit) this article focuses on building in effective governance structures (including change control), and identifying appropriate and meaningful service levels.  

Building in Effective Governance Structures

The underlying contract is the primary tool for governing the relationship of the customer and supplier over a potentially long period. As the nature of outsourcing deals become more and more complex, and where change is usually a given over the duration of the contract (whether due to technology advances or changes in the customer’s requirements or otherwise), it is more important than ever to build in effective governance structures, including robust change control provisions.

Although the outsourcing contract is written at a moment in time, it should be sufficiently flexible to allow for change in a predictable way. From a customer’s perspective, change control should be viewed not as a process in the agreement, but about closing down the areas that require the parties to negotiate post-signature. A customer would typically want to ensure that any changes to charges are in line with actual changes in supplier’s costs, and that the supplier can demonstrate changes to its costs.  And from a supplier’s perspective, it will be important to identify customer dependencies associated with any change request.

It is also in both the customer and supplier’s interests to have provision in the contract for regular governance meetings between the customer and supplier representatives, to discuss not just operational issues, but wider governance issues such as performance. The benefits to be derived from effective and functioning governance structures include enhanced trust between customer and supplier and more effective lines of communication, including the agility to deal with and escalate unforeseen issues appropriately.

Agreeing Meaningful Service Levels (and Service Credits)

Any large outsourcing contract will contain particular service levels at which certain services are to be provided and the parties' rights and obligations where those service levels are not met. If performance falls below pre-agreed thresholds, a customer would typically want service credits to accrue (by way of abatement of the charges). Service levels seek to objectively define what level of quality the customer has paid for, and how well the services are being performed.

It is in the interests of both customer and supplier that service levels are not only capable of reliable objective measurement but also focus on the areas that really matter to the customer. The parties should also consider, in conjunction with service credits, the merits of appropriate “earn-back” provisions (particularly where a customer realises a cost benefit when service levels are over-performed), allowing the supplier the opportunity to earn back service credits that might otherwise be payable. Typical earn-back conditions would include, for example, for every missed service level, a requirement for a specified multiple of months in which the relevant service level is exceeded. 

Where service levels are meaningful and appropriately aligned to the customer’s business drivers, they can facilitate a successful outsourcing by creating a business-orientated approach, enhancing service delivery and ultimately building relationships.