Outsourcing - expert tips on iron-clad protection

Breaking up is always hard to do, especially when you and your partner are knee-deep in a multimillion-pound deal to transform back-office processes.

But these messy divorces are not inevitable, with a bit of forethought and good contract discipline, outsourcing specialists at law firm DLA Piper say it is possible to avoid acrimonious staff custody battles and costly termination payments.

Duncan Pithouse, partner for the technology, sourcing and commercial group at DLA Piper said that spelling out your expectations when drawing up the contract is the key to a happy outsourcing relationship.

"Getting the balance right at the outset is the key for long term success," he said, adding that by the time there are serious problems with service delivery it is "almost too late to put it right".

To avoid this customers are increasingly looking for ways to spot early signs of financial distress at suppliers, Pithouse said.

Here are Pithouse's tips on the clauses and checks at the heart of a cast-iron outsourcing contract:

Due diligence
When choosing a supplier it is no longer sufficient to rely on audited accounts, owing to time lags such accounts can be out of date as soon as they are published.

Companies need to seek extra reassurance by asking for unaudited/management accounts and testimonies on the liquidity of the supplier, such as opinion letters from auditors, comfort letters from banks and affidavits from CFOs.

Multi-sourcing
By choosing multiple suppliers to fulfil a single business function, say finance and accounting, companies avoid putting all their eggs in one basket.

This way if a single supplier goes under, the worst that can happen is the temporary loss of one part of the process rather than the entire chain.

It can also make it easier to swap in an alternative supplier from this group of outsourcers to take the place of the failed one.

Performance bonds and guarantees
Both can help provide an insurance policy against the supplier failing to deliver.

Performance bonds are money that is put to one side by the supplier that can be claimed by the customer in the event that the supplier defaults on a contract.

A guarantee is a contractual obligation that the parent company of a supplier will step in to deliver a service or pay damages if its subsidiary becomes unable to do so.

Notification obligations
Building notification obligations into a contract provides transparency as to the financial health of key suppliers.

Notifications can be set up for events such as staff attrition rates hitting a certain level, a suppliers' unrestricted cash dropping below a set level, breaches of banking covenants or when there are changes to the company board.

This insight can flag up problems at an early stage, for instance a high attrition rate usually does not indicate that a company is a happy place to work.

Softer obligations can be fixing regular meetings with CxOs to discuss the supplier strategy going forward.

Renewing these obligations every 12 months can help create a greater focus in the supplier.

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