IT Outsourcing Contracts: Everything You Need to Know
IT outsourcing contracts are vital components in any IT contract negotiation.3 min read
2. Outsourcing Components
3. Service Levels
4. Reward System
5. Potential Conflicts
IT outsourcing contracts are vital components in any IT contract negotiation. Outsourcing agreements can be a complex process, but it will save you plenty of hard-ache in the long-run. Outsourcing contracts cover the following topics:
- Reward and penalties service
- Level agreements
- Measurements and timeframes
- Periodic reviews
- Exit strategies
Further, you should clearly state the nature of the outsourced operation before a task begins to know what the service provider will be doing, along with remaining tasks your business needs to do. Getting the right deal also boils down to obtaining the right legal agreements at the center of the contract, which is why obtaining the right advice is imperative. The agreement itself should be concise, clear, and well-negotiated before signing it.
Further, the contract should detail all of the services the contractor will perform and precisely what the provider will do throughout a certain project.
- Note: The key to outsourcing contracts is clarity.
If the contract is too broad or hard to interpret, both parties will not benefit from the agreement. Moreover, it is imperative to be objective to ensure that service level measurements satisfy all parties. As businesses enhance offshoring methods and IT outsourcing, it’s important that the companies create IT outsourcing agreements that offer business value and optimal IT results.
Each agreement needs to have certain performance metrics that show the vendor is living up to the agreement terms. IT firms place great focus on drafting outsourcing agreements, but such agreements do not always guarantee the best outcomes.
Outsourcing may cover all or part of the system operations, with certain organizations opting to outsource certain IT requirements. In such instances, they may work closer with an outsourcing service provider, abroad, or at home. The type of operations that are outsourced include the following:
- Desktop and server applications
- Business processes
- Backup and recover
- Customer service
The benefits for companies outsourcing IT include low IT overhead and scaling operations when necessary. Further, such businesses can benefit from relying on the expertise of an outsourcing company’s support staff and engineers. This is especially beneficial if IT is not your primary area of expertise.
IT outsourcing also plays a prominent role in enterprise IT firms as these companies grow more efficient and slash costs worldwide. The real value within IT outsourcing is via active governance, not only for current projects, but of interaction and communication between providers and customers.
Service levels are formally agreed standards in which the service provider should meet, and the list of requirements depends on the requests of the organization. In addition, the lists should be rooted on detailed schedules, and neither party should be in doubt as to what’s required of the service provider.
- Note: Establishing service levels is key so all parties can benefit from outsourcing agreements
Moreover, solid agreements also detail reporting strategies in areas pertaining to service level measurements. Such factors would include when and how certain targets are achieved. Further, such methods could include penalties or rewards if a contractor fails or manages to meet the requirements. The most common penalty types associated with service levels include liquidated damages (also known as ascertained or liquidated damages) and service credits. Liquidated damages occur in regards to a customer’s possible loss. In addition, a company could breach a contract for late performances.
Rewards are used to encourage service providers to deliver value to customers. A percentage uplift describes an improvement on service benchmarks, which includes financial rewards.
- Note: Never sign deals without service level agreements (SLAs). If you do not attach penalties with SLAs, then they are nothing more than objectives, and you have no way of holding vendors accountable.
Moreover, clients may grow frustrated when an outsourcer meets the SLA, but are still not satisfied with the service levels provided. In such a case, clients need to know that an SLA simply prevents them from paying for high SLAs than necessary.
SLAs should note numeral objectives and give clear intent of the end expected end results. Further, it’s important that those responsible for such measurement performances are involved in the development metric. Regardless, you may begin through the following steps:
- Creating business goals
- Outsourcing the goals
- Establishing SLA terms
An SLA should not solely be about getting money back from the suppliers. If the supplier has an issue, it should be restricted within a certain time period, maybe two or more months, to satisfy the client again. Such a strategy encourages all sides to strive for achievable SLAs that would enhance the business.
If you need to learn more about IT outsourcing contracts, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers will help you draft a sound outsourcing contract that attracts the best talent and helps you get the results you need. In addition, they will be at your side if are contend with legal disputes.