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What is an IT outsourcing agreement?

Almost every business around the globe has to have a website, collect/process data and deploy various IT products such as automation software products or customer management software.

However, creating a new software from scratch, maintaining that software or finding qualified personnel to do the related tasks may be challenging if not impossible for a business. This is why businesses may benefit from contracting with external experts to carry out these tasks more efficiently.

Outsourcing is a type of arrangement between a business and an external service provider where the service provider performs that business’s certain or specific IT tasks. Outsourcing agreements are quite common in the IT industry as service providers’ expertise is valuable to the efficient operation of business tasks and can significantly reduce the business’s IT related costs.

Example of an Outsourcing Agreement

For example, Netflix has to collect and store its subscribers’ personal data related to their ID, interests and preferences. Netflix does not store and process these data on its premises but rather assigns this task to Amazon and uses Amazon servers. This arrangement between the two companies is a simple example of an IT outsourcing agreement.

Other examples of outsourcing agreements include:

  • Data processing;
  • Customer relationship management services;
  • Website, app, application or database development;
  • Network monitoring;
  • Security, data back-up and recovery.
  • Cloud-based services and software-as-a-service products.

Why do I need an outsourcing agreement?

1. It lowers your costs:

When you carry out your IT operations in-house, you will incur fixed costs such as buying hardware and software, renting a new space to keep your servers and other hardware equipment, hiring new employees to install and run the

hardware, people to configure the software and incurring hardware and software maintenance costs.
These costs may not be justified considering the benefit they bring to your business as IT outsourcing may be more efficient for following reasons:
Training your IT staff may take longer than expected and they may leave suddenly, wasting your time and money.

  • However, the external service provider will probably have expert staff who can support your operations 24/7 and you do not have to incur costs related to staff training.
  • Furthermore, you will not have to pay for payroll taxes or other employee benefits.
  • You may not need your IT equipment all the time; there may be peak periods as well as dry periods. Therefore, owning IT equipment may at certain times be unnecessary. Think of the Tax Office. Come tax time their servers are nearly
  • overloaded, but for the rest of the year they just idle along.
  • So if you outsource your IT operations, you will only use and pay for this equipment/software when you need them. This can substantially reduce your costs.
2. It helps you focus your energy on your core activities:

Most likely your management team would make more effective decisions and perform better if they focused on the core operations of your business. If they are also responsible for daily IT operations, they will also have to spend time worrying about IT operations and will have less of a focus on their core duties. Outsourcing helps your management and personnel as it can allow them to focused on their core duties.

3. You can quickly adopt new technologies

When you run your IT operations in-house, you may have difficulty implementing new technologies because you may have to train your staff to use that technology who may not be qualified to do that. Using outsource service providers is more efficient as they usually have expert staff who already understand and can implement such technology.

4. It can help you achieve scale in your business

If you are a business experiencing rapid growth, you IT operations may also need to be expanded and enhanced. Imagine that you are running a social media website with 3000 members, but what if it that skyrockets to millions within a short amount of time (for instance due to a video going viral)?

In this scenario, you would have to buy more servers to store data and respond to user requests. However, using external service providers will be a far more efficient and effective solution.

What sort of clauses should be in an outsource agreement?

  1. A detailed description of services: You must explicitly determine the extent of services that your contractor has to provide. For example, if you are using a complex customer management software, you may need additional technical support 24/7 and you have to insert it in your contract. Otherwise the external contractor doesn’t have to provide that service 24/7 and you may have to deal with your troubles all by yourself.
  2. Security and confidentiality: The external provider may have access to confidential information, personal data or trade secrets. You must clearly set out in the agreement that both the service provider itself and all its employees (including its management) are subject to confidentiality about any information related to your operations.
  3. Payment terms: Whether you will make monthly payment or you will pay a fixed fee for a whole year should be determined in your contract. You should also explicitly state what you are paying for: is maintenance and technical support included in the price?
  4. IP ownership: The end product or service provided to you may involve IP rights such as copyright and your contract should clarify who owns such IP and the terms of use.
  5. Termination of the agreement: When your contractor breaches its obligations, you may want to end the contractual relationship. You should insert provisions regulating under what conditions and how the contract can be terminated.

For example, you may want to terminate your contract and switch to another provider. To ensure smooth transition, you should decide on what the contractor should do if you terminate the contract.

Got any questions about IT Outsourcing Agreements or in general please get in touch!

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