Updated October 28, 2020:

An outsourcing agreement is a contract formed between a company and a service provider wherein the provider promises to deliver specified services. An example would be data processing from a service provider that utilizes its own staff and equipment, typically working from their own location as well.

IT Outsourcing

Outsourcing IT systems operations is common, with some businesses opting to outsource their entire IT division either domestically or internationally. In these situations, businesses typically work very closely with an outsourcing service provider. These tasks are among the most commonly outsourced:

  • Business processes
  • Customer billing
  • Customer service
  • Server and desktop applications
  • IT backup and recovery services

The benefit of outsourcing IT services can include reduced costs and the flexibility to ramp up operations when needed.

Guide to Starting an Outsourcing Contract

While they can be complex, good outsourcing agreements contain important information:

  • Service expectations
  • Any potential penalties and/or awards
  • Expected timeframe
  • Reviews
  • Potential exit strategies

It's a smart idea to sit down and work on developing a clear definition of what is to be outsourced and what is to be left to your business to handle. Having the right legal agreement is the central core of a good outsourcing agreement, so seeking expert legal advice ahead of time is a smart decision. The agreement needs to be fair and clear from the inception, in addition to clearly defining what services are being outsourced. 

Formally agreed-upon targets, like service levels, can be a list that is as long or short as the business requires. They should be formed using detailed schedules so neither side has confusion or doubt about what is required of the service provider. 

Termination conditions can cause disputes, especially if there is some type of transition and handover to a new service provider. Good termination clauses or exit strategies should be in place from the start and continue after the end of the contract.

Elements of a Vested Outsourcing Agreement

There are some important things to remember when working on creating an outsourcing agreement:  

  • Focus on the overall outcome by completing a business model map first. Then work on a joint vision and statement of intent that will help provide guidance for the duration of the working relationship.
  • Create measurable outcomes and work on performance management goals.
  • Ensure you have a good pricing structure that also includes incentives for best pricing and service trade-off.
  • Have a relationship management structure that helps foster collaborative working relationships.
  • Make sure there is an exit management element included, because even the best plans don't always work out like you expect.

Differences Between Outsourcing and Contracts

A general contract is a binding agreement that can be enforced under the law and is made regarding a specific action. An outsourcing agreement is an arrangement where a company outsources some of its business tasks to another company and utilizes a contract to decide on what will be outsourced.  

What to Include in Your Outsourcing Agreement

It's recommended to start with something that includes basic identifying information like the agreement and effective dates as well as the names of contract parties and their addresses. There is a variety of other sections a good outsourcing agreement should include:

  • Detailed description of services
  • Deliverables
  • Payment schedule, often a net-30 basis
  • Terms and conditions
  • Insurance requirements
  • Warranties
  • Inspection and acceptance
  • Governing law
  • Independent contractor clause
  • Force majeure
  • Severability

The agreement should discuss retained rights and the fact that each party retains all rights, interest, and title to its own pre-existing intellectual property. The provider should not use pre-existing intellectual property unless it has the right. If the provider lacks sufficient rights, they will need to obtain them from the rightful owner as required in order to perform the services outlined in the agreement. The service provider should offer the warranty that deliverables and services are original and do not infringe on anyone else's intellectual property.

The clause on confidentiality should be detailed and discuss what constitutes confidential information and how sensitive information is to be handled. It should include specific details on customers' confidential information and what is not to be disclosed to third parties, such as the following: 

  • Deliverables
  • Ideas/concepts
  • Designs, drawings, models
  • Research and development
  • Marketing plans
  • Pricing lists, policies, and other financial information

If there is a right to cancel, the section should include the terms that allow for the agreement's termination: 

  • Is there liability for canceling?
  • Is written notice needed, and how many days' notice is required?
  • What are the non-performance penalties?
  • How many days does provider have to correct for breach or failure to perform?
  • How will information and documentation be handled upon termination?

If you need help with an outsourcing agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.