A little guide to outsourcing for SMEs

Over the last 30 years we have watched a rise of outsourcing manufacturing and business processes. However, a recent survey from SCM World indicated that “onshoring” and bringing back control over supply chain management to the UK could create some 200,000 jobs here. That’s good news for SMEs.

With outsourced providers being increasingly onshore, SMEs will have an expanding role to play within the supply chain. It will also be feasible for SMEs to consider their own outsourcing to obtain efficiencies and cost.

Experience shows that offshore outsourcing can be hard to manage, given the perceived problems of supplier remoteness, language barriers, losing control and different work practices and cultures. But outsourcing in the UK can also be difficult – and go wrong in a costly way.

Contracting out a key part of business processes means that these arrangements by definition often go to the very heart of that business because clients and providers need to be deeply entwined for it to work. If problems arise, the practicalities of unravelling the arrangement can threaten to harm the business itself. 

The client’s normal remedy of termination is unattractive if the provider is embedded in the business, so the client can have a shallow negotiating position when it comes to breaches. Thus it is vital that the contract clearly describes what happens in the event of a serious disagreement (such as escalation to board level, agreeing change expenditure and who pays, change criteria and processes, benchmarking, audit, mediation, dispute resolution etc) so that there is an immediate incentive for both parties to resolve and rectify; and, only if unavoidable, that one or other party can exit in an organised manner minimising the fallout. 

Such clauses should focus on procedure and timings, minimising so far as possible matters for negotiation (for which read possible further disagreement), setting out in advance what events can trigger the procedures and the exact steps the parties are then to go through.

Best of all is to avoid a dispute arising in the first place, so good contract drafting is a necessity. Many disputes arise from the fact that contracts are often poor at contemplating future changes or that the charging methods cannot take new developments into account.  

Say a new technology emerges which could make the outsourced service more efficient, leading to the client demanding greater cost savings. Perhaps this technology, if utilised by the client’s competitors, means that those competitors will jump into lead position if the client does nothing.  But that contract may have to continue in place as is, unless they reach agreement. The provider does not want the cost of investing in new technology as this eats into his profit margin, whilst the client is irritated by the inefficiency.

This can be avoided by agreeing a change control process clause at the outset.  Those in the IT industry will be familiar with this. It should set out how a party can trigger the clause, the steps they follow to agree how to deal with the issues, agreeing what constitutes an acceptable solution, how that is incorporated into the agreement and how any increased expenditure and operating costs will be shared between the parties.

Negotiating these provisions at the start minimises the collateral damage to both parties and allow the relationship to continue. The worst situation is when the awful realisation dawns that the arrangement is simply not working efficiently and there is no route for sorting it out and, even worse, the only real sanction is termination, which suits nobody. 

For those SMEs who are alive to the risks and take sensible steps to protect themselves properly, outsourcing has much to offer. Whether as a provider or when outsourcing themselves, opportunities to cut costs are significant.

Paul Dungate is a Partner at law firm Brachers LLP.

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