The market for outsourcing IT services remains buoyant, and the potential financial savings have ensured that offshore outsourcing is increasingly popular. Yet whilst there are potential advantages to both parties to an outsourcing agreement, it is essential to be aware of the unique nature of outsourcing deals and the approach required to ensure a successful outcome.
The most widely acknowledged incentive for entering into an IT outsourcing agreement is financial. The provision of IT by a dedicated company, which has often had to tender for the work, can ensure a more cost effective IT service. Offshore outsourcing can of course provide further financial benefits through reduced labour costs. Outsourcing also allows for minimising fixed costs of capital expenditure on IT infrastructure, replaced by fees paid to the IT supplier. Cost monitoring is most often undertaken through benchmarking – the use of a third party to monitor and report on the costs of the supplier's services in the market. This is clearly advantageous to the customer, but also allows the supplier independent confirmation of its level of service, potentially increasing the likelihood of securing a longer term agreement.
Clearly outsourcing should have a broader focus than merely providing the same services for a lower cost. The service may also allow the user to take advantage of the latest developments in IT, as a specialised IT supplier may be more likely to be at the forefront of technology than an in-house IT department. Care is required here however, as a distinction should be drawn between the most advanced systems and those which are most effective and efficient for the user. Yet if a company outsources to a major IT supplier they will often be substituting a small, localised in-house IT department for a global-scale IT supplier with greater knowledge and expertise.
There is no definitive term which can be regarded as ideal for outsourcing agreements. It may prove difficult to predict the IT requirements of a company for over three years in advance, and shorter contracts can ensure any potential for supplier complacency is avoided. However, longer periods can avoid the potential for a cycle of sales pitches from the supplier to renew the agreement and the unsettling adjustments that a new agreement may entail. With outsourcing agreements increasingly taking a long term form (often five years or more), it is important that the agreements allow for renegotiation and variation to meet the evolution of the parties' requirements. These are clearly matters which should be considered at the outset when negotiating the initial agreement.
The essence of an outsourcing agreement is co-operation, allowing the supplier to provide the service more efficiently and cost effectively; benefits which in turn can be passed on to the user. Co-operation should ideally permeate the working relationship between the parties throughout the deal. If an outsourcing agreement is overly favourable to the customer, the supplier is likely to constantly seek to economise, to the detriment of both the service provided and the working relationship. Ideally negotiations should therefore avoid aggressive or unreasonable demands by either party, thus focussing legal resources on creating a flexible contract which best represents both sides' interests.