Remember those early days of your business when you had your own two hands on everything? As your business has grown, you’ve likely amassed a team that can help with some of the core functions of your operations to lessen your load. You may now have people handling manufacturing, sales, accounting, and even operations to make your life that much easier and let you focus on what you do best.
If it’s in budget, your teams may be internal, and all employees of your company. More and more though, small and medium-sized enterprises are turning towards outsourcing – either within Canada or internationally. This can mean hiring partner agencies, fractional professionals, or other arrangements that can ultimately lower your cost and make your business easier to run.
Outsourcing agreements can look different than your other contracts, especially if you’re new to dealing with procurement. Here are a few things worth a closer look in your services agreement:
Scope of Services
You’ve likely reviewed the scope of services within many contracts before but remember that when dealing with outsourcing the scope of services can have a different impact. For an employee under your supervision, something like a job description usually has some elasticity – most contracts include language stating that employers can make at least small changes at their discretion.
Outsourcing agreements, however, are far more rigid. Think for example about working with an overseas supplier, with an offshore team, a different time zone, and even communication challenges. That scope of services needs to spell out exactly what that supplier will and will not be expected to deliver, whether for a product or a service.
- What exactly is being included within each service?
- What quality control measures will be in place, and what is considered an acceptable level of satisfaction?
- What level of detail will be required with each order to ensure satisfactory production?
- How can modifications be requested and when does this need to be done?
- What happens when the agreed-upon quality standard is not met?
These questions can apply across the board. If you are outsourcing your hiring, for example, what information will you need to provide to find a quality candidate, and what happens if the candidate does not meet your standards? If you are manufacturing a physical product overseas, how do you determine what is acceptable to sell, and what happens if there is a marked change in quality from one order to the next?
Fees and Payment Methods
Between rising interest rates, inflation, and international currency markets, there is a great advantage to hammering out fees and payment terms in an outsourcing agreement, especially if you can lock in at a good rate for an extended period of time.
Not only should your agreements include a specific price breakdown for each service, but they must also be clear on the agreed-upon payment terms, and method of payment. Does the vendor have a ‘net 30’ clause that aligns with your business cycle, or are you going to be constantly borrowing money each time payment is due?
Also, if working in two different currencies, it is even more important to settle on an agreed-upon rate between each currency. This helps avoid the risk of international events significantly impacting the purchase price that you’ve already accounted for.
Lastly, remember that if the payment terms in a proposed contract do not align well with your business, they may be negotiable! Your legal counsel can act as your advocate when reviewing and negotiating contracts to ensure that the terms protect and strengthen your business rather than put it at risk.
Intellectual Property and Data Protection
When you deal with any outside agency for products or services, you’re likely providing them with a tremendous amount of intellectual property and data. This can be in call scripts for offshore technical support, in product designs and specifications for manufacturing, or any internal processes that you had previously spent years working to perfect.
While non-competition and non-disclosure are a concern (and can be accounted for in the contract), the greater concerns today often revolve around data. The contract must account for the intellectual property – confirming that ownership remains entirely with you. Any ambiguity may give your vendors some path towards ownership of the IP, so it needs to be made expressly clear.
The other consideration is data, and data security. While large enterprises are felled by data breaches nearly every day, good security practices can help avoid an incident. Especially if your data is being sent overseas, ensure that all possible measures are taken (and regularly maintained) in order to avoid any sort of breach.
Indemnifications
What happens if something goes wrong? What if a product is defective, and accidentally injures a customer? What if an outsourced financial or HR department makes a costly mistake in their documents – one that leaves your business vulnerable and exposed to hefty costs or litigation?
Outsourcing contracts should include indemnifications on both sides that protect both the purchaser and the vendor. These agreements can indemnify your business against any losses caused by your outsourced contractor due to their negligence, or anything that they fail to deliver. It can also confirm that you’ll receive compensation for whatever their errors end up costing your business.
Termination and Dispute Resolutions
Just like in any employment contract, a termination clause is crucial here too. This clause will state how the contract can be ended by either party, how much notice will be required, and what form this notice must take (regular mail, email, etc.) It can also outline penalties for early cancellation of a term, and how that cancellation will impact any outstanding work.
Finally, if there is any dispute between you and your outsourced vendors, the contract should also include language about how such disputes will be solved, and what law applies. If an overseas vendor includes language that their local laws and dispute resolution processes apply, you could be subjected to expensive legal and interpreter fees to plead your case in a foreign court.
Instead, you can negotiate that Ontario law applies, and any disputes will be subject to Ontario law. Moreover, an alternative dispute resolution clause can confirm that any disputes will be resolved through mediation and arbitration, thus avoiding the high cost and uncertain outcomes of arguing any disputes in court.
Final Thoughts
Outsourcing contracts can be complex and multilayered, and it’s important to work with knowledgeable counsel who can understand the fine print, and who can read between the lines to realize what key pieces the contract may be missing. Without a certain portion in writing, a court may be unlikely to guess at your intentions.
We regularly draft and review all sorts of contracts for our corporate clients, from employment contracts and non-disclosure agreements to terms of service and outsourcing agreements. We represent businesses of all sizes throughout the Cambridge, Kitchener, and Waterloo regions. Contact us today to set up a consultation.