In any legal undertaking, contracts play a vital role in ensuring that the interests of both parties are served. Contracts serve as a binding agreement that the signatories should adhere to. In most cases, any violation of the provisions encompassed in a contract holds the erring party liable for breach of contract.
When a contract is drafted, the lawyer or whoever is in charge of crafting it has the job of ensuring that both parties understand its provisions and making sure that the contents of the agreement are acceptable to both parties prior to signing the outsourcing agreement. Consultation with the signatories is a vital requisite in developing a good contract.
Outsourcing is one of the newest methods that firms utilize in order to hire personnel. Nowadays, one can easily find firms that specialize in outsourcing services. In this kind of business, an organization employs a service provider to handle various functions such as data entry, programming jobs, and others. Usually located in a foreign country, the outsourcing firm performs jobs that could otherwise be done by the employees of the organization.
In a recent survey conducted internationally by the IT Governance Institute (ITGI), it was revealed that clients of outsourcing firms showed a great deal of dissatisfaction with the service provided by these firms. Because of this, the contracting organization made the crucial decision of prematurely severing their ties with the outsourcing firm (Simmonds & Gilmour, 2005).
In the study, it was further discovered that among the 76 percent of the survey participants providing at least one outsourcing service, only 25 percent have an established method in managing their contracts (Simmonds & Gilmour, 2005).
The Importance of Contracts in the Outsourcing Business
Contracts play an important role in providing outsourcing services. It lays down the duties, roles, goals, and controls needed in anticipating change as well as in handling the development, maintenance, execution, pricing, and regulation of outsourced services(Simmonds & Gilmour, 2005).
In addition, outsourcing contracts contains provisions that the service provider must follow in order to ensure a general, consistent, and efficient means of handling the outsourcing agreement. Contracts ensure the proper governance of outsourcing (Simmonds & Gilmour, 2005).
Crafting a contract is by no means an easy job. In order to properly manage outsourcing services, the book entitled Governance of Outsourcing has laid down the following requisites of a good contract:
– Outsourcing contracts should indicate what activities are exempted from outsourcing. It should clearly identify the type of service offered. Complicated and permanent outsourcing requirements may require a more integrated approach (Simmonds & Gilmour, 2005).
– Once the outsourcing strategy has been determined, service provider contracts must clearly point out the methods and structures of the outsourcing agreement. It should clearly establish the responsibilities, goals, and roles of the parties involved. This can be formalized through the creation of a governance schedule. Defective approaches should be taken out of the picture. If management is unable to handle such processes, it is unlikely for the outsourcing provider to handle these processes as well (Simmonds & Gilmour, 2005).
– Good outsourcing contracts must have provisions that will clearly evaluate the competence of the people who will be involved in providing outsourcing. Likewise, there should be provisions for checking the credibility and reliability of the chosen service provider (Simmonds & Gilmour, 2005).
– After a year of offering outsourcing, the service provider should work out a re-negotiation of the contract. If the terms of agreement has a global scope and the service is provided to several components of an organization, there should be supporting contracts for every country involved. Contract re-negotiation should be included in the standard operating procedure of the outsourcing firm (Simmonds & Gilmour, 2005).
– Proper channelling of information should be established as this will ensure improved control instead of drawing reactions. Every communication resource should be utilized in order to guarantee that any human resource personnel involved is properly informed (Simmonds & Gilmour, 2005).
– Any transfer of service connected to the agreement must be accompanied by a formal plan and should be acknowledged by the two parties involved in the process. Benchmarking and measurement should likewise be provided in order to properly manage project costing. This is an important aspect in the total conduct of negotiating for a contract (Simmonds & Gilmour, 2005).
– Aside from daily monitoring, the contract should likewise provide for regular benchmarking. Stable governance should be dynamic. Through periodic benchmarking, the service provider will remain valuable and will become the foundation of decisions whether to proceed with contract re-negotiations or abolish the contract (Simmonds & Gilmour, 2005).
The ITGI survey further revealed that among the organizations included in the study, the main reason why clients outsource is because there are not many people within the organization who have the expertise to perform such service. Forty eight percent of the surveyed organizations support this reason while the remaining 42 percent resort to outsourcing as a cost-reduction measure. However, minimizing costs is not as crucial as improving the value of the organization (Simmonds & Gilmour, 2005).
There are various benefits that can be derived from outsourcing service. One of the major benefits of this kind of process is better quality of service. Since the organization paid the service provider who specializes in such kind of roles, the firm would have an assurance that the finished product would not be haphazardly done.
Another advantage of outsourcing is improved handling of risks. Since the service provider is trained and experienced with the line of work they are paid to do, the risks involved will be much lesser. The outsourcing firm are more equipped to handle possible risks than an employee of the organization who might not have the time to troubleshoot risks.
Likewise, there is no need for the organization to select and utilize its own personnel. Instead, the staff of the organization can focus their energy on performing more important and worthwhile activities.
The last advantage of outsourcing is scalability. If the organization is satisfied with the performance of the outsourcing firm, it could require its services to perform other needs. For example, a service provider providing data entry functions for a certain organization may be expanded to perform database management duties as well.
More and more organizations are realizing the importance of outsourcing as an effective means of strengthening the quality of their business. In order to completely maximize the many advantages of this process, there is a need to ensure the proper governance of these processes. By drafting stable outsourcing contracts, service providers would be able to address and remedy any possible loopholes that may arise from the outsourcing agreement. Thus, assuring that their customers are satisfied with the service they provide lies on how effective the outsourcing agreement is crafted by the service provider. Otherwise, it could lead to a short-term and dissatisfied client.