The Outsourcing Contract

One of the main reasons why outsourcing engagements fail is poor or misguided contract planning. Here are the important components in an outsourcing contract.

What is a Service Level Agreement (SLA)?

It defines the performance standard that the service provider is required to deliver. Service levels are used to measure and monitor the service provider's performance. They are determined at the beginning of the outsourcing relationship.

The SLAs are measured in two ways. They are quantified for contracts focused on tasks (or input-based schemes). For example, a call centre must be staffed 24 hours a day, 7 days of the week.  They are based on performance or results for SMEs which are focused on outcomes (or output-based pricing schemes). For example, 90% of the calls must be answered at all times within two rings.

What are the factors to consider when developing service requirements?

These are the basic factors that need to be considered.

  • Outsourcing objective
  • Scope of work
  • Volume of work
  • Stakeholders' roles and responsibilities
  • Work statements
  • Performance measures and targets
  • Performance monitoring plan 
  • Performance assessment plan
  • Management, work, contingency, and quality assurance plan
  • Performance incentive (optional)
  • Penalties for non-performance (optional)

What are the important reminders when developing service requirements?

  • SMEs need to indicate the required service in clear, concise, specific, and logical terms.
  • Provide adequate information to the service provider and price the service they offer.
  • Specify measurable performance outcomes when necessary to assess the service provider's performance.
  • Flexible targets, goals, milestones, and other measurements for long-term contracts.
  • Use only essential requirements.

How long should an outsourcing contract last?

In the early days of outsourcing, a contract can last up to 10 years. Over time, many businesses have realised that this is not always ideal. Businesses are affected by a myriad of changing factors including consumer demand, economic conditions, technology, and regulatory compliance. The ideal duration depends on what's being outsourced and why.

Small and medium enterprises (SMEs) that want to become market leaders need a transformational outsourcing deal. This type of deal focuses on how the contractual obligations will be delivered. This requires more time to achieve. However, they should keep in mind that the longer a contract is, the more flexibility it needs to adapt in a changing business landscape.

On the other hand, if SMEs only need a simple, well-defined service, such as accounting or tech support, a short-term contract can suffice.

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