7 Outsourcing Contract Clauses to Avoid at all Costs

By Allan Watton on

7 outsourcing contract clauses avoid at all costs

Outsourced relationships can sometimes be punctuated with opportunities for controversy. Among them, should you already be part-way through such a relationship, would be to ask yourself how much you trust your vendor, or for that matter how much they trust you. But ask this you must, for only once you know the answer can you then decide whether you did enough due diligence on your written outsourcing contract before you signed it and each time it was amended or updated throughout your relationship.

Don’t get bitten by your outsourcing contract


It would be wonderful to imagine that all vendors and clients were honest, reliable and driven by the same goals as you, that quality comes before profit and clarity before deliberate ambiguity. However, in reality, while most may be led by these high standards, there will always be a few who are less scrupulous. It is because of the existence of such organisations and individuals, and the difficulty identifying them as such, that it is of vital importance that you protect yourself from the possibility of being caught out by one of them.

Then again, it is not just the unscrupulous that you should protect yourself from – you should also be mindful that a lack of time, care and relevant skills in either camp can cause unplanned contractual issues and subsequently project problems. Wariness of such things should be extended to any point when you negotiate or renegotiate your outsourcing agreement.

Here are our top seven:

1. Terms related to exit

A blanket ‘buyer pays’ is what to avoid here. Should you wish to transfer an outsourced service to another vendor or bring it back in-house mid-term or at the end of your agreement, it’s important that your exit clauses are in good order. There are many reasons why you might wish to exit your contract, and yes, some of them should rightfully incur full liability for the costs of doing so, but there will be instances when costs should be shared and others where the vendor should take the lion’s share. Clauses relating to exit management should be clear, and they should be fair, but they are all too often ignored. It is equally important that the costs involved in an exit are discussed and agreed at the outset. You would not want to come to the end of your partnership and discover a surprisingly large fee request for service transfer in your final invoice from your vendor.

2. Terms that exclude advice and representations

It has been known for vendors to quote for work based only on a client’s agreement to use their standard contract terms. While not always the case, but certainly enough to warrant a mention here, these terms can seek to exclude or reduce any liability for advice or representations made by the vendor pre-contract. Be very wary of this, as it is this advice and their assertions that will have shaped your decision to use them and the direction the project is likely to have taken to this point. Contracts should always be accompanied by a bundle of emails, meeting notes, brochures, web materials, and any other documents that passed between you containing information pertinent to the project.

3. Terms that present KPIs that are misaligned from project objectives

Your outsourcing contract should specify the project’s key performance indicators (KPIs) and any bonus payments that will result from meeting or surpassing them. Problems occur when contractual clauses present KPIs that are misaligned with the objectives of the project. In such circumstances, you could end up paying bonuses for transactional outcomes, rather than hitting objectives aligned with the expected project outcome. This should be avoided as it incentivises incorrect action.

4. Terms that limit a client’s remedial capabilities

Clauses are often included in outsourcing contracts that limit a client’s ability to withhold payments, even if the vendor is not meeting their agreed targets. There are many excuses for their inclusion, such as disruption to the work flow, but the freedom to sue your vendor at the end of an agreement does not take into account the disruption that is allowed to go unchecked if you have no right to employ financial penalties against a lacklustre service provider. Vendors have a right and a responsibility to their shareholders to limit their liability, but only so far as is fair to the client.

5. Terms that do not limit suspension of service

The other side of the remedial capabilities coin provides us with terms that allow a vendor to temporarily suspend or permanently remove their services due to your non-payment. You’ll likely do your utmost to always pay on time, but what if you have a legitimate dispute with your vendor that necessitates a delay of payment until they reach a milestone? Such things should not be limited as it weakens your position in the relationship.

6. Terms that exclude client’s costs should outcomes not be met

As with the limitation of a client’s remedial capabilities, exclusion of client costs should the project go wrong should be handled in a fair and reasonable way. A blanket exclusion through contractual terms would be unreasonable, but also so would be a blanket inclusion clause. It would be most sensible for different scenarios to be reviewed and quantified, then included within the contract as reasonable assessments of loss under specific circumstances; therefore, liability will be limited, but reasonable costs will be reimbursed.

7. Terms that denote service credits as THE remedy for poor performance

Service credits are the store vouchers of the outsourcing world, and everyone prefers cash when they take something back. While service credits may be a legitimate tool for ensuring productivity levels, to contract for them to be the only remedy for poor performance can limit your ability to incentivise your vendor and to encourage the right behaviour.

Conclusion


A written agreement between ‘partners’ can say so much more about the parties than the words alone convey. Each side’s desire to weight clauses in their commercial favour, and the degree to which they insist on this, offers a good indication of where the relationship may be headed in the future. Mutual trust and respect can only be achieved when a contract that suits everyone’s needs, is written in plain English and focuses more on the goals of the project than the aspirations of one side of the agreement.

Outsourcing contracts need to be clear and effectively communicated, and they should always be adapted to the reality of the relationship, the project and the environment in which the objectives of the project are to be employed. Every time that the agreement is assessed and updated there is an opportunity for one or both sides to build on commercial trust or lean more towards selfish goals. Always be wary, always ask for clarity, and always be mindful of the motivations of those who create or adapt your agreements.

To get the best results, insist on a ‘fair’ agreement, one that supports the needs of all concerned, that encourages innovation and will effectively steer the relationship. Become proficient at recognising ‘issues’ with clauses, whether in standard terms or in those you are asked to sign, and be demanding in your need for clauses to be unambiguous in both tone and content.