At McCarthy Tétrault’s 3rd Annual Technology Law Summit, Charles Morgan, Barry Sookman, George Takach (all of McCarthy Tétrault) and John Chang of PricewaterhouseCoopers were featured in the Innovation in Outsourcing panel. Top takeaway tips from the session include:
Do your Diligence: You would never buy a company without performing comprehensive diligence first, and you should take the same approach to signing an outsourcing contract. Diligence ought to be thorough and rigorous – go to the facility where your data will be stored and ask tough questions about network latency, data security, service levels, technical infrastructure and privacy.
Pay for the Best: Ensure that the very best people are assigned to you. Good people are worth paying for, and will be critical in determining the success of any outsourcing arrangement.
Store Data Securely: The advent of cloud computing has revolutionized data storage, but there are risks associated with storing your company’s data outside your organization’s protected infrastructure. Companies with sensitive data, such as financial institutions, will want to pay especially close attention to the location of data storage. Some key players in the information storage business have drafted contracts that allow either themselves or their affiliates to store information anywhere in the world. Those kinds of clauses ought to be a red flag. Commoditized cloud-based data storage services may save you money, but don’t let that cloud your view of the risks.
Flexibility is Key: It is critical for your company to maintain flexibility, so ensure your outsourcing contract has a termination for convenience clause. In order to be effective, termination clauses, and in particular concepts such as notice periods and payment provisions following an early termination, must be drafted in an extremely clear way.
Be Innovative: Innovation clauses are a necessity, but companies ought to be wary of them. If drafted incorrectly, an innovation clause can stifle innovation. Consider implementing a clause that requires the service provider to bring forward a set number of new ideas on a regular schedule.
Right-Sourcing: In previous years, the common refrain was, “do what you do best, and outsource the rest”, but that approach hasn’t always panned out for its adherents. Companies that have outsourced large swaths of their business have begun to rehire certain key jobs. The advantages of “insourcing” are that it brings managerial competency back within the company and sends a strong message to your outsourcing providers that your company is ready and able to terminate the outsourcing relationship if you are no longer happy with the terms. Companies should also look at “multi-sourcing” as a way to reduce your dependence on one service provider and create competitive tension among providers, leading to better prices and more innovation. This strategy works best for services that have been commoditized.