Everyone is now familiar with the term ‘outsourcing’ as banks, insurance companies and others continue to remove their day to day service functions abroad. Outsourcing has been a feature of the reinsurance market for many years; every run-off, whether of a company, syndicate or book of business, involves outsourcing in one shape or form.

An outsourcing agreement involves the removal of an in-house function to a third party supplier. Outsourcing transactions bear common features which specialist lawyers in the field recognise. We set out below a checklist of these features and guidance on how to address them.

An organisation looking to outsource must think about not just what it is transferring in the short term but also what sort of service it wishes to receive and how best to manage the supplier during the course of the agreement. This involves a range of issues, including:

  • How best to maintain flexibility to cater for changes in the business requirements.
  • How to maintain a tight control on costs.
  • How will levels of service performance be monitored?
  • How will the supplier deal with failures to meet levels of performance?
  • How will employees be treated?
  • How will trade secrets be safeguarded?
  • How will the business extricate itself if it all goes wrong?

Outsourcing therefore involves complex long term commercial contracts into which adequate safeguards must be built to protect the customer against the risks associated with transferring functions to a third party.

However, you should expect more of your lawyers than simple contract drafting.

Appreciation of the internal pressures that outsourcing transactions generate is essential. Many arrangements are business critical, involving the future of existing employees and therefore need internal buy-in. Project teams need to be established and advised on project management – including a full explanation of a typical outsourcing process.

Advising on and drafting tender documentation is also a critical part of any outsourcing process. It is important to establish a means of extracting and analysing the necessary internal information: for instance,

  • A definition of the current workload that the function in question undertakes.
  • Details of HR costs for affected employees.
  • Details of third party contracts that will transfer to the new supplier.
  • Details of any transferring assets.
  • Details of third party contracts, licence agreements, subcontractor agreements.
  • Any historical service levels associated with the transferring function.
  • All other cost factors eg: office space, heat, light, power, IT and other shared resources.
  • Dependencies of other departments on the function to be outsourced; and
  • Details of how the service is to be improved and/or changed.

Lawyers need to take the lead in establishing a procurement strategy. At BLG, we have developed term sheets and questionnaires for all outsourcing transactions, including IT and business process transactions, to enable clients to decide on their suppliers. The resultant audit trails can be used internally to justify whatever decisions have been taken as well as to manage risk.

Our IT enables client project teams to view information and documentation via client portals in real time.

Advice should be given at all stages of the negotiation processes and all information gathered during the due diligence, tender and term sheet processes go towards the completion documents, including the supporting commercial and financial material.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.