Business Law & Compliance

Vital legal considerations for your business when outsourcing

6 min read

05 January 2016

When you have an in-house team bound by the company contracts and employment laws, it’s a different prospect to outsourcing vital business processes to third parties. It’s vital you know where you stand legally in a dispute or you may find yourself in a risky and unpleasant situation.

Subcontracting or outsourcing your business processes is a very popular practice today for businesses, big and small. It means, as a director, you can save money on offices, wages, various company bills and logistical nightmares. It’s smart and efficient to bolster the weakest parts of your business by hiring contractors with proven expertise.

Be explicit, not vague

Trusting another business or several businesses to deliver what you need from them, to represent your brand to your customers or clients, means you have a clear expectation of standards and what is going to be delivered and by when. You need to communicate this, in writing and get it signed by the relevant person in authority. That expectation needs to be explicit, it has to be a Service Level Agreement (SLA).

A SLA is the proof that you need to fall back on if there is an unacceptable drop in standards or performance from the supplier. From this document you can argue about payment reduction where work falls short of stated results or if unsatisfied that the brief has been fulfilled as asked.

There needs to be dates on the expected delivery of those results too – don’t leave it open ended. A schedule or perhaps a time tracking sheet should be used to ensure that those unobserved working hours are accounted for satisfactorily for the payer.

There will also be the understanding of liabilities and how to deal with business losses, whether from under performance, negligence or lost assets from the contractor.

It’s worth knowing that sometimes it is the contractor who will want to offer you the terms of the service, so whilst there maybe room to negotiate, be mindful of what you need for your business from the service provider.

Read more on outsourcing:

The price is right

This is so important. There has to be an understanding of the fee structure and payment terms from the outset. The worst thing that can happen is that your business is held hostage over a misunderstanding in payment policies, which does happen.

In really bad disputes, assets you assumed belonged to your business may not be accessible or not handed over. Imagine if you did not have access to your company artwork and branding or a data list you relied on for business.

It would be hard to move forward. Payment terms range from a proportion up-front, payment on receipt, or up to 90 days and anything in between – it’s sometimes best to find out the norm for your sector.

Whilst many who outsource presume it’s best to hang on to the cash as long as possible (to gather interest – buffer the capital etc) a good relationship can sometimes be built on the faster payment terms.

Money can be an awkward subject and with SMEs it’s sometimes the case that the client invoices without knowing exactly when to expect the money. This is a stressful position for the client and one that can ultimately lead to confrontation.

Continue reading on the next page for information on data issues and asking questions you may have missed.

Image: Shutterstock

Cover the data issues

Confidentiality and data protection is a major issue. Client data for instance has a whole level of legal considerations to prepare for. What if there is a data breach or hack? What protection and liability has the third party agreed to?

In the broader sense, what provision is in the contact for an unforeseen disaster relating to the third party that could dramatically affect your business?

Disaster Recovery plans should be discussed in contractual terms. Data can be backed up to the cloud to protect your business for instance.

Changes in service provision also need to be tracked contractually, with renewed contracts agreed and signed. 

Cover all eventualities

Finally – here are some important questions which you may not have considered:

Are you happy for the third party you have hired to subcontract the work?

Have you considered Arbitration as a route to agree on prior to dispute resolution (this will mean it is a more private process of dispute resolution as opposed to going to court)?

Who will be liable if the client breaks the law on your behalf, in your company name?

Fortunately, outsourcing does not usually fall into a legal quagmire and can be a very rewarding business deal for both parties involved but once in a while – like a bad marriage – an outsourcing relationship collapses into a mess of accusations and threats of legal action.

It’s best to think carefully about responsibilities and assets prior to your new business partnership, just in case. 

Richard Forsyth is the PR Manager at Varn MediaContact the professional team at Halebury for legal advice on issues raised in this feature.