Outsourcing

What contractual structure in an outsourcing agreement?

The selection of the correct contractual counterparty and of the modalities of provision of services in an outsourcing agreement impacts actionable rights

An outsourcing agreement frequently raises crucial questions on the contractual structure to get better control over its performance.

I tried to cover below some of the frequent issues to be considered in determining the contractual structure of an outsourcing agreement.

A single general contractor vs. direct relationships with outsourcing providers

The question is whether it is better to rely on a general contractor that will provide services through its sub-contractors or have direct contractual relationships with each of the providers and

Both solutions have advantages and disadvantages since the identification of a general outsourcing contractor allows not only to often negotiate a better price for the services, but also to ensure that the general rules set out in the master agreement such as those on limitation of liabilitypenaltiesforum selection and applicable laws as well as termination events and consequences apply to any service provided through the general contractor’s subcontractors.

Indeed, each new service will be regulated in a schedule of the master outsourcing agreement that will provide the special terms applicable to that specific service and refer to the general rules for what not mentioned in the schedule. At the same time since the general contractor is likely to be a sound company, the recipient of the service does not risk (or has at least a lower risk) that its counterparty is not able to pay penalties and damages or gets bankrupt and can rely on a single point of contact in order to manage all the services provided.

Obviously, such advantages are considerably lowered if the terms of the master agreement are not beneficial to the recipient of the service and if the general contractor is willing to renegotiate the liability cap with reference to each new service provided.

Likewise, the possibility to have a direct contractual relationship with each provider of services allows to have a direct claim towards them and directly require them to comply with the instructions of the recipient of the service. Additionally, it avoids that potential issues relating to a service might affect the provision of other services conveyed through the same general contractor since they will be regulated by different agreements.

A possible solution might be to have – in relation to the most sensitive services – a three-party agreement involving the recipient of the service, the general contractor and the provider of the new service. But the structure shall provide that the general contractor remains liable up to the liability cap set out in the master agreement also for this new service, while the new provider is liable within the limits of a liability cap negotiated from time to time in the three-party agreement. Such approach might be an interesting solution subject to the peculiarities of the service involved and the availability by the general contractor to be liable for the service of the new provider within the limits of the master agreement.

Infrastructure and personnel on promises vs outsourcing as a service

Cloud-based solutions led to a shift as to the modalities in which technology is supplied. In the past, all the technical infrastructure was installed on site at the premises of the customers. On the contrary, solutions based on infrastructure as a service, platform as a service and eventually software as a service are becoming exponentially frequent.

This shift might give the impression that there is a lower control on the performance of services since customers cannot actually see machines employed in the provision of services and the personnel dedicated to their company. This is usually more a cultural issue since for instance a solution based platform as a service might rely on a much larger and safer technical infrastructure able to provide higher levels of service.

However, it is true that such a structure creates a considerable dependency and reliance on suppliers by their customers, making more difficult and expensive to switch to a different supplier.

Contracts need to have in place sufficient safeguards, mitigation measures and detailed migration plans, also in relation to personal and machine data generated through the provision of the service, to avoid to end up locked with a supplier.

What is the best contractual structure for an outsourcing agreement?

There is no right or wrong answer to this question. The matter shall be assessed on the basis of the peculiarities of the case.

On a similar topic, you may read the following article “The 3 most relevant issues on liability clauses in an outsourcing agreement“.

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Giulio Coraggio

I am the head of the Italian Technology sector and the global head of the IoT and Gaming and Gambling groups at the world-leading law firm DLA Piper. IoT and artificial intelligence influencer and FinTech and blockchain expert, finding solutions to what's next for our clients' success.

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