The Independent Counsel

Operations


Outsourcing - A Legal Perspective


BY JOSEPH VALOF

Outsourcing occurs when a company subcontracts to a third party - the “outsourcer” - for the performance of certain services or operations normally performed by the company internally. More and more companies now seek outsourcing as an attractive alternative to the overhead of full time, in house workers.

This article points out some of the legal and practical business means by which companies may avoid potential financial and legal exposure.

Prepare a Request for Proposal

If time and resources allow (and if not, experienced consultants should be used), the outsourcing process should start with a detailed RFP, or Request for Proposal, describing the company’s current operations, its needs and its expectations with respect to the services that it wishes to outsource.

These issues, as well as all the legal concerns, must be communicated to the outsourcer in the RFP and included within the resultant contract. Most costly disputes arise when these matters are not spelled out at the outset and therefore are omitted from the resultant contract.

Legal Considerations

In the typical outsourcing arrangement, the company provides the outsourcer with access to necessary equipment, software, technology, and other tangible and intangible assets, as well as to company personnel. Such access should be formalized either through a sale, rental, lease or sublicense.

Where software is to be sublicensed to the outsourcer, the original license agreement may trigger a new license fee. Other company assets, such as leased equipment, may also come with legal restrictions on use by non-employees. These concerns should be factored into your negotiations.

Where assets and personnel are transferred, the company must ensure that all such resources are employed for the company’s sole and exclusive use and not used for any outside purpose. The contract should also cover matters such as disaster and migration plans, confidentiality of business and technical secrets, and the return of resources when the contract is completed or terminated.

All Terms Are Negotiable

Given the competitive nature of today’s outsourcing marketplace, it should not prove necessary to sign the vendor’s form outsourcing contract. All terms are negotiable.

The above represent only a few of the key concerns that must be included in any outsourcing contract, and there are, of course, many other issues to consider. No company should venture into outsourcing without being well prepared and, if possible, assisted by an experienced consultant.

Comment: Both the Request for Proposal and the final contract should clearly spell out all the business, financial, and legal terms of the arrangement.

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1995; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.