Are Outsourcing Contracts Just Another Trap?

Sometimes, people need contracts.

You need one if you are a millionaire and you suspect your wife is marrying you for your money. You need one if you are buying a property or an office and you don’t know the seller personally (or maybe even if you do). You should have one with an employee or an employer or an attorney or a contractor who performs a service .

What about outsourcing? How much contract do you need, and how much is too much?

We are living in a time when people do not trust each other, and even if they do, there is always doubt. Things seem to change in a moment. Even if you have known someone for years, some crisis may strike and you will need to have something in writing to document your original understanding and agreement. Also, people are under a great deal of stress and two parties do not always remember things the same way. Finally, if you are outsourcing, you may not be familiar with the other culture, and it is good to put certain agreements in writing. Actually, a contract can tell you quite a bit about the party you are doing business with. These are all good reasons to have a contract.

However, most contracts are too complex for a simple agreement, and are one-sided: they do not protect both parties equally. Such a contract may show that the outsourcing company just wants to make money, and isn’t really interested in a good business relationship at all. When you see a contract like this, you may get the feeling you would rather not do business with this company at all.

One company we proposed to outsource some IT work to insisted that we sign a contract even before we gave them a one-hour sample project, and one wanted a contract even before they quoted us on several projects. We felt uncomfortable; this seemed extreme.

If you feel you have a good connection with a company, they should be willing to do a few basic things for you without a contract so that you can see how they work. Of course, if it involves giving them codes or confidential information, you will want some kind of understanding in writing. But if you do not already have a good understanding with the company by talking to them on the phone or in person, no contract will make it better…and if you do have a good understanding with them, there is no need to put in writing anything more than that understanding of details you already have and maybe a few details you have questions about. If the contract makes both parties feel safe, it may work…but the best contracts are drawn up by the two parties together , after they have had a chance to work together.

A good basic contract should include the names of the companies, responsible parties (business managers, project managers, or whoever is communicating the information), the scope of the work to be done, the dates, approximate number of hours, the fees, and time frame in which the work is to be completed. If the contract is for a call center, it may include training procedures and specific dos and don’ts plus frequent conferences and feedback. But it is fruitless to create an extensive contract before you have had a chance to work with the company on a short project. If a company wants a huge time commitment at the beginning–until you see the results, it makes no sense to sign a contract that binds you to a certain number of hours or fees plus extra fees for circumstances you never even wanted to consider.

In our experience, lengthy and confusing legal contracts up front only serve to show that at least one of the parties has had bad experiences or has not fulfilled some part of the bargain in the past. If this is true, you might want to keep interviewing companies until you find one you have a good understanding with. Nine times out of ten, when you find the right company, they will be willing to do a test project without an extensive, constrictive contract. After a test project, you can sign anything you think is needed–because you will have an idea of who they really are and how the work gets done.

You might also like:

International contracts to watch out for!

How to gain clients for call centers — contracts!

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One Response to Are Outsourcing Contracts Just Another Trap?

  1. John Nicholson says:

    I have to disagree with this. I’m always in favor of a supplier providing some level of service/information/assistance for free because it’s good for the relationship, but no customer should be permitting a service provider to do project work without a basic contract in place.

    At the very least, as noted in the article, a contract is necessary to cover confidentiality and non-disclosure requirements (because the supplier is getting access to the customer’s confidential information), and it should also cover who owns the intellectual property resulting from the project, whether the supplier will indemnify the customer for IP infringement associated with the work, what rights the customer has if the deliverable doesn’t work (and for how long those rights exist), any many other things that protect the customer’s rights.

    The length and depth of a contract should scale with the scope/duration of the work. Many contracts are long because they’ve just grown by accretion – someone had an issue so the author of the contract added terms to cover that issue without ever really going through and rationalizing the whole contract. The contract documents shouldn’t include terms that are irrelevant or inapplicable to the deal at hand, and if it’s a simply consulting project, the contract could even be a letter agreement that covers the necessary issues. If one side is insisting on a 50-page MSA for a small project, that’s a red flag.

    However, for an outsourcing relationship that will last years and is intended to remove a slice of the customer’s operations and give it to a supplier, the contract needs to cover a lot of issues and allocate risks and should have a substantial MSA that covers many more issues, detailed SOWs, SLAs, pricing, governance, termination assistance, etc.

    If you want to get to know a service provider, having them do a pilot project is a great idea, but you should still have a contract in place for it.

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