- The 4 biggest risks you face when outsourcing - Trade Ready
- Companies should consider outsourcing their annual compliance work. Here's why.
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Each of these responsibilities can benefit from the help of a professional with expert knowledge in these areas. Staying across all the finer legal details can be a cumbersome task, especially when things start to change. Small business owners need to pay attention to these cases, but without a legal background they might not know how to protect themselves.
The 4 biggest risks you face when outsourcing - Trade Ready
There are ways to protect yourself if things go awry, but with so many moving parts to owning and managing a business, seeking additional help can minimise any risks and give SME owners the chance to be successful. SmartCompany is the leading online publication in Australia for free news, information and resources catering to Australia's entrepreneurs, small and medium business owners and business managers. Monday to Friday, SmartCompany. Partner Content Articles Is your small business exposed to these damaging legal pitfalls?
This risk is particularly present when, as a result of an over-reliance upon the competitive procurement process just discussed, the customer has aggressively negotiated down the profit margin accruing to the service provider pursuant to the agreement as initially negotiated. Potential Pitfall: A service provider may not pass on the appropriate portion s of the cost reductions generated during the term of an agreement, such that the customer is subsequently placed at a relative competitive disadvantage.
In order to have a viable means for testing whether any promises made by the service provider have been adhered to and that the expected cost reductions have materialized and have been appropriately shared during the term of the agreement, the customer will often propose that benchmarking provisions also be included in the agreement.
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On the other hand, a customer would be leery to agree to provisions where the output of a time consuming and expensive benchmarking process is merely an opportunity to meet with service provider representatives to discuss the possibilities for reducing costs, and therefore pricing, under the agreement. Potential Pitfall: A failure to adequately define the nature of the service expectations via the service level agreement SLA portion of the overall outsourcing agreement, and the initial monetary consequences in the event of failure s on the part of the service provider to meet those expectations, will increase the likelihood of disputes between the parties and leave the customer with inadequate means of incenting the service provider to meet its contractual commitments.
It is difficult to overstate the importance of negotiating a comprehensive and realistic SLA and, generally speaking, this portion of the negotiations tends to be both challenging and time consuming. This approach addresses the reality that termination tends not to be an attractive remedy for the customer in the event of poor service and thus should only be considered after less draconian options have been exhausted.
As is the case with other sophisticated commercial contracts, outsourcing contracts usually include dispute resolution provisions. Such provisions can provide for an initial phase during which a dispute will be escalated up through a series of suitably constituted committees staffed by representatives of the parties.
This is followed by a second more formal phase during which any dispute which remains unresolved at the conclusion of the initial phase becomes the subject of: 1 litigation; 2 mediation a voluntary, non-adjudicative process in which the mediator assists the parties in negotiating a settlement ; or 3 arbitration arbitration can be considered as providing the function of a private judge and accordingly is an adjudicative option conducted before either a panel of one or three arbitrators.
This process is intended to promote the submission of reasonable offer proposals by the parties as the arbitrator is limited to awarding one of the offers submitted. Potential Pitfall: The customer will be in a weak position at the time the outsourcing relationship is being terminated or is expiring to negotiate transition out terms and runs the risk of being exposed to large unexpected costs.
The obligation to provide such termination services should be made contingent upon the payment to the service provider of all prior undisputed service fees and the execution of an appropriate confidentiality agreement by any such third party provider. The service provider will generally be entitled to additional compensation at defined rates if, in providing the termination services, it is required to use additional resources or additional resource hours.
Transitioning out provisions also usually address: the return of data and records relating to the services, each in a specified format; the return of ownership to the customer of assets previously sold by a customer to a service provider; the reassignment of contracts including licenses to the customer that were originally assigned by the customer to the service provider; the provision by the service provider of the necessary staff, services and assistance to effect an orderly transition and migration, which obligations will frequently encompass the hiring of staff, software training, access to personnel, provision of copies of procedures manuals, use of software, sale to the customer or the third party provider of dedicated equipment, and the disclosure of service provider proprietary information.
A key concern with outsourcing arrangements is ensuring the adequate protection and security of personal information customer, employee, contractor, etc. As a result, additional consent for the transfer is not required provided that the information is being used for the purpose it was originally collected. However, in accordance with transparency requirements, companies proposing to transfer data across borders for processing must advise the individuals concerned that their data may be transferred to a foreign service provider and that, when held in the foreign country, the data may be accessible to law enforcement and national security authorities of that country.
The Privacy Commissioner has not provided very much guidance as to how information respecting the intended processing of data outside of Canada must be communicated to the individuals concerned. However, in two cases, she has approved of procedures whereby organizations sent a communication to customers notifying them of the intended processing. Principle 4.
Companies should consider outsourcing their annual compliance work. Here's why.
Although the guideline sets a high standard for the protection of sensitive financial information by financial institutions, it can serve as a model for other organizations involved in the transfer of sensitive personal information. In evaluating the risks associated with an outsourcing arrangement, management of the risk may be scaled to take into account the different levels of risk attendant to a particular arrangement. The materiality of an outsourcing arrangement will depend on the extent to which the arrangement can influence a significant line of business of a company.
Therefore, companies should consider the following when assessing the materiality of an outsourcing arrangement: the impact of the outsourcing arrangement on the finances, reputation and operations of the company, or a significant line of business, particularly if the service provider or a group of affiliated service providers should fail to perform; the ability of the company to maintain appropriate internal controls and meet regulatory requirements - including those of OSFI - particularly if the outsourced party were to experience problems; the cost of the outsourcing arrangement; the degree of difficulty and time required to find an alternative service provider or to bring the business activity back in-house to the company; and the potential that multiple outsourcing arrangements provided by the same service provider can, in the aggregate, have a significant influence on the company.
Under Guideline B, companies are also required to have in place a risk management program that applies to all material outsourcing arrangements. According to OSFI, this risk management program should include: an internal due diligence process to determine the nature and scope of the business activity to be outsourced, its relationship to the rest of the activities of the company and how the business activity is managed; policies and procedures to manage risks associated with material outsourcing arrangements including performance measures, reporting requirements, a dispute resolution mechanism, provisions for termination, ownership of and access to intellectual property and tangible assets, contingency planning, confidentiality, audit requirements, and a business continuity plan of the company; and finally, monitoring and oversight of material outsourcing arrangements commensurate with the size and complexity of the arrangement.
Where a company is considering outsourcing an activity to a jurisdiction outside Canada, OSFI expects that the company will assess the legal requirements of the foreign jurisdiction, including the potential political, economic and social conditions, along with any events that may inhibit the ability of the foreign service provider to provide the service. This review could include an assessment of the service provider's circumstances such as its reliance on significant subcontractors and the historical performance record of those subcontractors. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries lexology.
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Register now for your free, tailored, daily legal newsfeed service. Canada April 6 Risks Specific To Offshore Outsourcing When services are outsourced to offshore providers, a customer faces increased costs and risks compared to solutions involving on-shore resources.
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Vendor failure to deliver A common oversight for IT organizations lies in not implementing a contingency plan to deal with the risk that a vendor, for whatever reason, fails to deliver as expected.