Legal and Contractual Issues to consider when Outsourcing Services

Companies may consider outsourcing services such as payroll, customer call centers, and other units and processes as a way of saving costs and streamlining their business. As such, it is important to consider appropriate cost control mechanisms in the outsourcing contract to ensure that the main driver for outsourcing – i.e. cost savings – is maintained throughout the term of any deal.


The purpose of this clause is to give the customer the right to compare the supplier’s pricing against equivalent suppliers and ensure that, throughout the term, the customer is getting a fair market price for the goods or services. Benchmarking clauses usually operate in a down-wards only fashion (i.e. the price can only go down) and are best used for commodities – where there is a ready and easily identifiable market of similar goods.

Most favored customer

This clause ensures that the price the customer receives from the supplier is as least as low as the price the supplier charges other customers for the same or broadly similar goods and services. If the supplier offers a better price for the same product to someone else during the term of the contract, the price is adjusted downwards accordingly. Without such cost control measures, a customer may be stuck with uncompetitive prices for the duration of the term.

Audit rights

Comprehensive audit rights will allow the customer to check that the supplier is complying with the terms of the contract. Audits are time-consuming and expensive for both parties. As such, the supplier will usually be unwilling to pick up the tab for the audit. An often used solution is to state that the audit is undertaken at the customer’s cost unless a major discrepancy is found, in which case the supplier picks up the tab.


By definition, services and functions that are outsourced are no longer dealt with in-house. As such, if the service provider is unable to perform for whatever reason, the customer should retain the right to “step-in” for the duration of the incapacity, and either perform the services itself, or appoint an alternative third party to provide the services. This ensures continuity of critical, outsourced services. However, careful thought should be given as to the “step-out” process if the original provider is to resume its obligations.

Security and Confidentiality

Where confidential data – whether company secrets or personal data – is sent out to a third party, the contract should specify the processes and procedures that the service provider must follow to keep such information safe and secure. These should include warranties that he provider will comply with relevant legislation, especially if the data crosses borders into other jurisdictions.

Length of contract

Most service providers prefer long-term contracts so that they can spread the cost of their upfront investment over the term of the agreement, and ensure that they turn a tidy profit. However, from a customer point of view, keeping the supplier on a short leash has many advantages, not least of which are the ability to renegotiate costs when the contract comes up for renewal, and keeping pace with changes in the market and developing technology.

Finally, it is crucial for the customer to give proper consideration to exactly what is being outsourced, and to carefully define the scope, obligations, assumptions and expectations in the outsourcing contract.