Tag Archives: Outsourcing Contracts

Outsourcing Contracts: What do you need to consider when creating one.

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There are thousands of companies all around the world doing outsourcing. In India, they are a little more nitpicky about defining exact requirements to the point that you can’t have a conversation with them about anything without them asking, “So, what are the requirements?” I like to chat and feel people out before I talk about exact requirements. But, if you are in the business of drafting contracts, you need to have a very point by point system of identifying requirements.

If you are outsourcing call center services or software, it might be difficult to define quality in contractual terms. Contracts typically act on the behalf of the call centers providing the service. As a buyer, you need to have a contract that protects you too. Here are some contractual issues that I will elaborate upon below.


Payment for outsourcing services involving call centers is normally on an hourly rate with a fixed number hours per month or a fixed rate for a project. Contracts typically specify when payment is to be made and with some basic terms. However, there are some issues with these basic contracts.

Hourly Wages — Contracts with hourly wages ensure that the company will get paid. However, the buyer has no way to know if the number of hours the company claimed to have done really got done. Additionally, there is no way to know which worker completed the hours, or if the work completed was efficient or quality work. With software work, the code might be sloppy or have bugs which is another huge issue. If the buyer doesn’t make sure the contract specifies quality control in some way, shape or form, the seller is solely getting the benefit of the contract.

Fixed Rates — Fixed rate contracts are risky for both parties. If you are an outsourcing company and bug fixing is part of the contract, five months after you finish, you might still be getting requests to fix bugs. Additionally, what if your client wants add-ons to the programming. If you are the buyer, fixed rate compensation protects you from people who pad hours. However, you still do not know if a quality job will be done. As a buyer of programming services, if the programmer doesn’t deliver functional, clean code on time, you are in big trouble. Unfortunately most firms do not do good work, nor is their work on time, nor do they care even slightly. Knowing what you are paying doesn’t guarantee the work will be done on time or protect you from “spaghetti code” which is messy code.

Specifying Workers — it might be difficult to get an outsourcing house to do this, but specifying which worker will complete the job or the parts of the job at least guarantees that someone you like or know will be doing the work regardless of quality or efficiency of work.

Deadlines — If you have a clause in your contract that specifies deadlines for when parts of the project get done, you as a buyer are safer. However, if you are paying a deposit, you could still lose your deposit. I have never seen a programming company deliver on time, so your deposit money is generally money down the drain which will put you in the economic position of a hostage. Think very carefully before giving a deposit to a stranger unless they have very good reviews from reputable sources. If you divide your project into bite sized parts and pay upon completion, you will find out very quickly if the company you hired misses the first deadline — and it will be their problem.

Specifying Particular Workers — A contract could specify which employee is going to do the job. If you like Ramesh and feel he does good work, you could specify that Ramesh will complete the project singlehandedly. Ramesh would have to have an investment in the contract because in India people quit their jobs every four months on schedule usually for frivolous reasons. The boss of the outsourcing company will not be comfortable with this because he knows his turnover is unpredictable, plus other clients might need Ramesh since Ramesh is a star employee. You might have to pay extra, but it might be worth the protection. Playing musical chairs with employees is something Indians are used to, but is suicide in American business. You need someone good who won’t quit, so if you can negotiate that into the contract, you will be a lot better off as a buyer.

Emergencies — Some companies have clauses in their contracts about what happens if there is a natural disaster, war or other uncontrollable circumstance. Holding yourself not liable in such a situation is reasonable.

Penalty Contracts — If you can get the outsourcing company to agree to pay a penalty for finishing late, you have more leverage to get them to finish your project on time which in outsourcing is almost unheard of at least for the smaller players. No outsourcing company will agree to such a term without being paid a lot more. But, it might be worth it to you otherwise you will get hung up to dry for sure.

Quality of Code Contracts — If you are the buyer of programming services, you need to be very sensitive to the quality of code, especially if you are dealing with Indian companies. You need to first of all have an expert who you can hire in America to assess the cleanliness of the code. Ask your expert how you can write specifications in the contract that will protect you from the infamous spaghetti code which is a nightmare that will haunt you as long as you own the code which could be as long as a decade. If you put restrictions on the quantity of lines of code used, that might be a primitive way to safeguard yourself. Additionally, if you give a test project to see how efficiently they write code, that will give you an indication how good the individual is who did the test project who might not be the same guy who does the real project. Tricky— hmmm.

Another way to ensure concise code is to stipulate that if your expert can write any part of the code in 25% or less lines and make it work correctly, that the vendor is penalized. This is easy to enforce if you can get your expert off his rear end to actually do the work at $150 per hour instead of the $18 per hour you’re paying for an average guy in India.


Call Center Result Oriented Contracts — Most call centers do not want results based contracts otherwise their income very unreliable. It makes more sense to pay a base rate and then extra if sales quotas are met. It also makes sense to quickly fire a company who doesn’t get you enough sales. I recommend comparing about twenty companies and see which one gets you more sales in the long run. Keep in mind that if Company #1 has Filipe you might get good results until Filipe quits and Scott takes over. So, make sure each company puts at least three employees on your job so you can get a sense of the average output that the company gives rather than how things are when you get their star employee.

Call Center Monthly Contracts — It is risky for a new client to just trust your company with a one year contract, especially if they have never visited your office. If the client is in Manchester, NH and you are in Manila, Philippines, it might be hard for them to come and visit although I recommend that they do. Many call centers try to get people to invest in long contracts when they are just starting out. It makes sense to give new clients the right to have smaller contracts with easy terms and not too many minimums so you can at least get them on board. Once they like your service, then you can be a little more demanding. Additionally, explain your countries employment laws, minimum wages, minimum hours per week or month so that your American client doesn’t act surprised when he/she finds out at the last minute.


If you are an outsourcing company, it makes sense to have contracts that get you paid by the hour. That way you are not reliable for quality, timeliness or anything else. You might get fired, but you will still get paid if the quality of your work is horrible. Make sure you get paid a lot more if the client has unique specifications. However, I would not necessarily say no to unusual requests. The reason is that other companies will say no, so this is an easy way to get a client who will be loyal to you assuming you don’t screw up too badly. In general, to attract new clients, I would be flexible in your contracts so you can attract a higher percentage of your leads to try you out.


As a buyer, you need a contract that protects you from:

(a) Poor Workmanship (sloppy coding, bugs, or general bad service)
(b) Goal Achievement — in the call center work this means retaining clients & making sales.
(c) Missed Deadlines
(d) Disappearing Staff Members
(e) Inefficient Hourly Based Work (or hour padding which amounts ot the same problem)

A contract that doesn’t incorporate quality standards is a contract that makes sure you pay without guaranteeing value. If you can get to know the company and work with them for a few months before signing a bigger contract, that would make your situation somewhat safer. No contract will protect you 100% and few vendors will sign a contract that protects anyone except themselves. So, at least try to have contractual control over being able to choose your workforce, have control over deadlines, have an incentive plan which motivates the vendor, and have some stipulations for quality. If you are signing a big contract, you should consult an Attorney and really think deeply about what the issues are. If you are not experienced, you will overlook some very serious issues — so be careful.


5 Tips for Rewriting Your Outsourcing Contract

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If the workers assigned to your project are not at the level you originally requested both verbally and in writing, or if your Service Level Agreement is not being fulfilled as agreed upon in terms of time and quality, it may be time to renegotiate your contract. Such factors should have been part of an initial verbal agreement and contract, but since only hindsight is perfect — renegotiate your contract now!

1) Are you getting the level of experience you asked for? If you discover, for example, a few weeks or months into an IT project, that you originally asked for a senior programmer (5+ years) and are being billed for such–but that the programmer you have been working with has only 3 years of experience and is extremely slow and inflexible, you want to obtain some kind of credit and better accountability going forward. Write it into the contract in more definitive language, and include what the penalty will be for such an oversight. You as a consumer have the right to get what you originally contracted for and were promised. Is a required training period being adhered to (in a call center campaign, for example)? Ask that a specific level of skill and work experience be documented as part of the contract. Since this request was not adhered to from the very beginning–although it was agreed upon–see if the company is willing to give you a credit or substantial discount, particularly if there have been problems that might not have occurred had you been assigned a more experienced programmer or worker. And–write that penalty or discount into the terms of the new contract.

2) Are you getting your money’s worth per hour? If the company is giving you less effort per hour than you know to be indicative of an hour’s work, find a way to put that in writing: build in an incentive for certain quality delivered on a certain schedule, and for work done in much fewer hours than you think is necessary–with good results, of course. Money (a bonus) is the best incentive, but a few companies have succeeded in creating effective incentives such as trips, restaurant dinners, or shopping sprees (see www.anyperk.com for ideas on how to do this in the U.S.; in a foreign country, ask managers what employees would like). By the way, incentives are better than penalties, but they work hand in hand as we discuss in “Motivating workers with bonuses or shortages

3) Forgot to include checkpoints and reviews? Add them this time: include periodic virtual (Skype or phone) meetings to let everyone know what is going well and what needs to improve. If you include in your contract this simple review process– and how often such checkpoints or reviews will occur– your needs and intentions will be clearer. Be sure to include wording that lists exactly what you will be looking for–for example, number of hours spent, specific tasks accomplished, concrete suggestions made by the project manager and workers, improvements made since the last checkpoint, and what procedures are yet to be perfected. Put it in writing. Then, the outsourcing company and its employees will know your expectations and respect your standards.

4) Are there liability issues not covered by a contract that is essentially unfavorable to you? For example, if code is broken (IT), or the query system does not work (IT), or certain calls made by a call center on your behalf cause problems and actually cause you to lose business, be sure the rewritten contract states all terms in your favor as well as the outsourcing company’s. The standard contract may limit the company’s liability. Make sure the final contract asks the company to take a good look at what its negligence might cost if your business suffers. If the company is not willing to take responsibility for certain errors…you pretty much know what will happen if the contract-makers do not change their attitude.

5) Last but not least…your contract should include what party will mediate the contract if things do not improve. Again, this should have been part of the original contract. With a professional mediation organization such as mediate.com with mediators in every country, you may do better than with an international law firm such as perkinscoie.com with offices in both the U.S. and the outsourcer’s country. Remember: You do not want to get to the point of litigation…but you do need to consider how the contract will be mediated or brought to suit if needed. Otherwise, your company looks foolish and lacks the power needed to control the level of work you are getting from the company in the first place. If they realize you are savvy about litigation with a company in their country and have laid out all the possibilities, many issues will be solved in a professional manner from the very beginning. By the way: one tip so obvious you are likely to overlook it is to make sure the contract is bilingual. That way, no one can claim that certain points were not clear. Get someone to check the foreign language contract against yours (English) and make sure the agreements are the same in both languages. How did we think of this? We know of a case where the contract was substantially different in Chinese than in English. The company’s written contract, created and signed by them, was actually in several ways a different contract than the English version a U.S. company signed.

Good luck making your contract perfect the second time around. If at first you don’t succeed– do it again–or prepare to find another company to outsource to.

You might also like:

International contracts to watch out for

Precontracts for outsourcing: before the real contract!

“I refuse to sign”: International Contracts to Watch Out For

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Many business people accept the idea of a contract as a given. Sure; you are buying a service, so you need a contract, right? In the case of outsourcing to a foreign country, this seems to be even more of an assumption.

Here’s a question: if you do not know the company at all–except for a few references on the internet and a phone conversation or two– how do you know that signing a contract will head off any problems? And how will the contract work if you are thousands of miles away? Finally– what will you do if you actually need to consider litigation at some point?

Recently, before doing business with an IT company overseas [it was in Russia/ I thought it better not to say where], a U.S. company refused to sign a contract. Why? The IT firm required this preliminary contract just to be able to negotiate with the U.S. company and provide any details about pricing and terms and actual contracts! The U.S. company refused to sign. This idea of a preliminary contract was not a good sign: it indicated that the IT company was highly suspicious and unfriendly, had had several bad experiences communicating with or working for foreign companies, or was either burned out or inexperienced. In short, they did not want to do the work of finding out what the U.S. company needed or working with them on a trial basis for even a small paid project first– without a contract–so they could all get to know each other. If you find out at the very beginning that this is how a company operates, it is a blessing…but don’t think it will get any better because you sign a contract. Run, don’t walk, and find another company–no matter how friendly the sales people seem up front.

Another scenario: an IT company in India wants a U.S. company to sign three separate contracts before any serious conversations about work can begin. One is a “Master Services Agreement” that describes how the three contracts work, includes warranties, obligations…and an entire section that suggests what part of the client’s website might in fact be the intellectual property of the company creating or working on the site. This master contract by itself is daunting, but the combination of the three contracts (including a SOW or scope of work, plus a mutual non-disclosure agreement) makes the relationship–before it has even begun–a maze of unpleasant twists and turns, unknown obstacles, and hidden agendas.

Consider this advice from www.answers.onstartups.com:

Enforcing a contract where the parties to the contract are from different countries is very difficult. The reason is that even if you win from a legal perspective, you still need to collect damages, and in order to collect damages you probably need to file suit in the country of the other party. (enforcing international agreements, 2011, http://answers.onstartups.com/a/27846)

In other words, with any contract, you need to know ahead of time what court has jurisdiction over that contract; this must be agreed in advance. Otherwise, it is just a friendly understanding between business associates, not an enforceable legal contract. The commentary justly concludes:

Even if you get over that hurdle, and you win the lawsuit and the court says that the defendant owes you $1 million, you have to be able to collect that money from the defendant. If the defendant does not have any assets in the U.S., then the only way to collect money would be to sue the defendant in a country where the defendant has assets, and that country may not honor the judgment of the U.S. court. In summary, if you have a contract with a party in Timbuktu and that party breaches the contract, you should just write it off and move on because the likelihood of collecting any damages is minimal. (http://answers.onstartups.com/a/27846)

In other words, an international contract may end up being just for show, a club held up in the air to convince you the company has clout. It is at best a power play by the outsourcing company, and does not often benefit the client as much as it benefits the outsourcer. Unless it includes statements that benefit your company, it is a bad start to a business relationship.

In my experience, it is whatever is left out of a contract that invariably becomes the problem. Remember, the contract specifies what service you are getting, for how long, and some liability issues. But the contract does not often control who will be doing the work, and how efficiently the work will be done. It is rare that an IT company will give you a contract that protects your interests as well as it protects theirs. You also don’t know if they are really giving you as many hours as they bill you for.
If you must sign a contract, be sure you have the ability to add or change certain parts, including the level of workers they give you and the quality of the work: be sure these statements are adequate. But you have to let them cover themselves, or they will not work for you. If you refuse to sign a contract, they will most likely not do any work for you at all.

If you are outsourcing, be prepared to think hard about the details of any contract and ask hard questions like ‘Why should I guarantee the hours of work I am giving you–if you can’t guarantee the quality?’ And—if you ask this kind of question ahead of time, you will find out enough about the company so that you will get a better idea of whom you are dealing with, how they really do business.

Ultimately, that is why, if you outsource, you may want to go to the country to meet them…and then be prepared to lose everything you have already put into the relationship. If you find you do not like how they do business, there is no use pursuing a business relationship at all.

In other words, agree on scope of work, penalties and incentives… and try to make a preliminary “contract” or agreement by email, but suggest that you make the contract informal until you have had a chance to work with the company for a short while. If a company will not allow you to have any input into how the relationship will work, and will not do a paid test project for you without an extensive legal contract, chances are that signing a contract with them will not lead to results you will be happy with, and you will save yourself a lot of grief and money if you Just Say No.

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Pre-contracts for outsourcing: before the real contract!

Using contracts to get more clients for your call centers

Pre-contracts for outsourcing: before the real contract!

Categories: Outsourcing Articles | Tagged , , , , | Leave a comment

Talking on the phone is a great way to find out what your new business associate is really concerned about (money? time? the level of skill of his workers? whether you are a good fit for his company?) If the other person won’t talk about the proposed terms of the contract or the person wants to talk only through an attorney or legal department, you already know you are on shaky ground. Ditto if you are not willing to talk on the phone!

1) Write down the details while you are talking with the representative from the other company, and ask him or her if you may send an email that summarizes your conversation. The other person will respond, and the two of you will already have gathered some of the details for the written contract. Remember, any understanding between parties must be written down in order to be enforceable … so when you have an understanding, write it down!

2) People tend to show their true colors in a second interview or a second meeting [http://bpo.123outsource.net/2013/09/02/the-2nd-interview-why-is-it-so-important/ ] Have a second conversation to hammer out more details you want in the outsourcing contract or call center contract. If you hear something that is a deal-breaker, tell the person you will get back to him. If all goes well, again, make notes and exchange emails. After two or three conversations, you should have the entire contract pretty much figured out.

3) If the written outsourcing contract comes back without these details, or with significant additions that ignore the meaning of your conversations…it’s not going to get better. The final written contract must reflect the spoken, agreed- upon details. Otherwise, you already have a problem.

IN SUM: If the other person is not willing to exchange a few emails with you–and if, after the first conversations, you simply get a reply with an attached contract drafted by a company attorney or legal department–your relationship is already questionable or meaningless. Sending a standard contract at this juncture is rude, and renders pointless the pleasant conversations that took place. The other person has just been humoring you–or, the legal department has more control over the company than the person you have been conversing with. These are sure signs that your relationship will be short-lived.

Better you find out now than after paying for services for an extended period of time! In sum, don’t continue in a relationship that is obviously not based on a real meeting of the minds and some effort on both sides. If someone is not listening or communicating at the beginning, signing a contract will not make the situation work. Walk away.

Are Outsourcing Contracts Just Another Trap?

Categories: Management | Tagged , , , , | 1 Comment

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.

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International contracts to watch out for!

How to gain clients for call centers — contracts!