In difficult economic times, companies often look for ways to reduce their expenditures and generate cost savings. Outsourcing is often heralded as one way that companies can realize those cost savings. It can also result in improved services and access to best-in-class technology. While outsourcing has many benefits, there are also inherent risks. If your company is considering outsourcing, here are several steps that you should follow at the outset in order to minimize those risks:

1. Determine whether to outsource. Before proceeding to outsource any service or function, your company should establish a clear business rationale for the outsourcing. Possible rationales include cost savings, efficiency improvements, service quality improvements and implementation of new capabilities. Look at your operations and understand their strengths and weaknesses.

2. Determine what to outsource and what to keep internally. Not all services or functions should be outsourced. They should be something that can be effectively and safely done by an outsider. The best candidates for outsourcing are services that are not strategic to your business. Core functions that are critical and need to be closely managed can be successfully outsourced, but they require even greater diligence. Therefore, you need to examine your current operations and assess whether the services in question are peripheral support functions or core business functions. As part of this review, you should look at what you own, what you license and what you need to transfer (be it assets, people or IP).

3. Establish a steering team. A company contemplating a major outsourcing should assemble a team at the start that includes fairly senior people from a number of areas of the company. The team should include representatives from IT, Legal, HR (if employees are being transitioned) and Finance. It should also include your external legal counsel. Each member must have the appropriate skills and be committed to the mandate. The lines of communications among the team members and between the team and other players need to be clearly defined, including the process for escalation and decision-making.

4. Decide whether to retain an outsourcing consultant and, if so, what role he or she will play. Companies that do not have a detailed list of the functions or processes to be outsourced may wish to seek assistance from an external consultant. A consultant can help examine internal practices and recast them as arm’s-length service commitments for the chosen outsourcing vendor. The consultant might also be involved in selecting the vendor and negotiating the outsourcing deal, but be careful to clearly articulate the consultant’s role at the beginning of the process.

5. Identify and get advice on key legal issues. Tax consequences, intellectual property ownership, treatment of employees, pension obligations and regulatory compliance are but a few of the legal issues that can crop up in an outsourcing deal. Financial institutions that are considering outsourcing, for example, will have to comply with guidelines from the Office of the Superintendent of Financial Institutions (OSFI). The legal issues should be examined early on, as their resolution may impact your company’s ability to realize its outsourcing objectives.

6. Define deal-breakers. Your company should identify up front any points that would not be acceptable in any circumstances. These might include an intolerable allocation of risk, unsatisfactory service levels or insufficient cost savings. A deal may also be a no-go, for example, if the vendor will not take your people on comparable terms or if the vendor proposes that your confidential data be sent offshore. Identifying these deal-breakers in advance will avoid wasting time going down a fruitless path.

7. Decide on the process. There are many different methods for completing an outsourcing contract, including issuing an RFP, approaching recommended suppliers and selecting one of your existing vendors. Which method your company selects will depend on your situation. An RFP, for example, may be appropriate for larger outsourcing deals, when you want to generate competition to obtain the best price. It may not be appropriate if there are a limited number of suppliers in the marketplace, if the subject matter is highly sensitive or if you have a short timeframe for getting the deal done. Whenever possible, however, a competition process is likely to yield better results than purely one-on-one negotiation. (See our article on Making the Most of Your RFP Process for more RFP tips.)

8. Develop a negotiation strategy. To effectively negotiate an outsourcing deal, your company should develop a roadmap that sets out the company’s position (and fall-back position) on key business and legal issues. The roadmap should also provide guidance to your negotiating team on dealing with timelines and internal expectations. In addition, it should leverage the company’s knowledge of and relationship with potential vendors.

9. Develop vendor selection criteria, if using an RFP. To provide a meaningful basis for comparison amongst the vendors, your company should establish a list of criteria to evaluate their responses. These criteria should be customized to meet your objectives for the outsourcing. Some criteria may be on a pass-fail basis, while others may be on a points scale.

Taking some time at the outset to develop an adequate plan and prepare for an outsourcing transaction will better ensure that your company’s objectives are met and reduce some of the inherent risks involved.