The business world continues to move faster, and your business needs to keep up. Deciding to outsource is crucial to helping your business remain competitive and flexible. To outsource work, you need an effective and enforceable contract that governs the business relationship. An outsourcing agreement sets the terms of the work, protects your company from liability, and helps you stay aligned with your goals.
Creating, editing, and managing outsourcing agreements is far more effective with contract management software. Maximize your return on investment (ROI) by following these tips.
What is an outsourcing agreement?
An outsourcing agreement is a binding contract between a company and a third party to perform certain services on its behalf. Many companies outsource specific aspects of their work to other companies or individuals. Outsource agreements help protect your rights and set clear expectations for your service provider.
The three most common types of outsourcing contracts are:
- Fixed-price contracts: The service provider contracts to deliver certain services at a predetermined price.
- Cost-plus contracts: The client pays the service provider’s actual costs plus some additional margin or fee.
- Time and materials contracts: The service provider charges for its actual hours worked and the cost of materials during the project.
Outsourcing contracts are standard in several industries, including human resources, manufacturing, and customer service. Using them correctly can enhance your business and help you stay competitive.
Test your own contract maturity
How to unlock the full potential of outsourcing agreements
You might already be using outsourcing contracts, but are you unlocking their full potential? These agreements are critical to your company’s success and protecting yourself from liability. You can maximize your ROI by taking these steps:
Clear objective setting
An effective outsourcing agreement sets clear expectations for the service provider that aligns with your business objectives. You can design your contract to support your objectives and reasons for outsourcing. Perhaps you want better flexibility or reduced costs. Your contract should set clear boundaries for your service provider so they stay on track and help you meet these goals.
Your contract can set clear objectives by:
- Outlining product or service expectations for the service provider
- Placing limitations on the scope of work
- Creating specific benchmarks aligned with your business objectives
- Setting a detailed timeline
- Defining each party’s obligations under the contract
When setting objectives, design key performance indicators (KPIs) to help you measure the contract’s success. KPIs set quantifiable measures of progress and performance for specific contract objectives. They give your service provider a clear target to shoot for and insights into your expectations.
Clear objectives also help you measure a contract’s return on investment. Has the service provider added actual value to your company? Do measurable benefits outweigh the cost of their service? Clear objectives can help you maximize your ROI and make intelligent business decisions.
Meticulous partner selection
Picking the right partner is critical to maximizing your ROI, so research service providers to determine the best fit for you. Consider what you expect from them and what they already offer. Determine whether the company has the specific skills you require and whether they hire competent staff.
Pick a partner that fits your business needs by considering whether:
- You need short-term or long-term services.
- The service provider can adapt to changing requirements.
- The service provider is well-rated by past customers.
- The provider has sufficient staff to meet your needs on time.
- The partner communicates effectively and promptly to your inquiries.
- The service provider has a history of breaching contracts.
Be meticulous in picking your partner. Do your research and learn as much as you can about this company. By avoiding companies with a poor reputation for their work or professionalism, you can reduce your business risk, litigation risk, and costs. All of this can help maximize your ROI with outsourcing partners.
Detailed contractual agreements
A detailed contract is critical when using outsourcing agreements. Vague contracts leave room for interpretation, miscommunications, or even companies that will exploit you. Too many businesses do not understand the importance of a well-drafted contract and what it can do to prevent litigation and risk exposure.
Outsourcing contracts should be highly detailed and include all salient aspects of your partnership. Your contract should include details such as, but not limited to:
- A detailed explanation of the services provided and the scope of work
- Specific timelines and due dates
- Price and payment details
- Parties that are clearly named and identified
- A contract renewal clause explaining how the agreement may end, be renewed, or terminated
- An indemnification clause to limit risk from working with third parties
- A confidentiality clause to protect your valuable information
- A copyright, trademark, or trade secrets clause to guard your valuable intellectual property
- Warranties and disclaimers
- Breach of contract provisions and dispute resolution clauses
Many companies find this challenging, especially if they use antiquated contract management methods. Managing hundreds or thousands of detailed contracts via old-school servers or email can feel impossible. AI-based contract management software streamlines the drafting and managing of complex agreements so that you get the full benefits they can offer.
Effective risk management
Outsourcing agreements are a critical part of effective risk management. The right contract acts like a shield against profit loss or costly litigation. They provide clear guidelines and enforceable terms that keep your third-party service providers on track.
Your company likely spends a lot of time on risk management—most companies do. Often, however, companies fail to reach their full risk management potential when using outsourcing agreements. Many companies outsource business aspects they do not want to handle and sometimes fail to recognize the potential harm their service provider could cause.
So, what is a contract risk? A contract risk might include:
- Out-of-date language: Legal teams often pull provisions from old contracts and might miss significant changes. This might fail to meet your business needs or expose you to financial liability.
- Contract bottlenecks: Bottlenecks occur when contracts slow down. When you send a contract for approval, you want it signed quickly. Waiting costs time, and time costs you money.
- Missed deadlines: Missed deadlines can be costly. You outsource services to make your life easier and your business more efficient. If your service provider misses deadlines, this can greatly harm your company.
- Contract renewal and termination dates: Many companies miss contract renewal and termination dates. This could result in extending a contract you did not want to or missing your chance to continue a contract you value.
- Data breaches: Hacking, phishing, and other data breaches are increasingly common. Your contract should include specific confidentiality requirements, and your contract management system should be fortified against data breaches.
Outsourcing gives you a great deal of flexibility. You can outsource particular aspects of your services, get the products you need, or supplement your existing capabilities.
Your outsourcing agreement can be just as flexible. Certain contract types are better suited for specific services; some fit limited-duration relationships, while others are better for handling long-term ventures. You can draft the outsourcing contract to adapt to changing business conditions and new needs. These highly flexible contracts help boost your ROI by giving you the options you need when you need them.
No business should settle for status quo. You want to continuously improve across all business sectors, including with your outsourcing agreements. Effective contract management makes that possible and easy. You should constantly track and manage your agreements to ensure they give you the best possible return on investment.
This management does not have to be challenging. You can streamline it with the right software and management strategies. These strategies empower you to see the positives and negatives of your contract processes to make positive changes for the future.
How you communicate is a critical aspect of your ultimate ROI. Internal communications have a direct impact on your contract’s effectiveness. Drafting, managing, and executing contracts should be quick and efficient. Your employees should have the tools they need to redline contracts and quickly get approval.
Your communication with your service providers is also critical. Effective communication reduces contract bottlenecks and other limitations that cost you money. It also sets clear expectations so your provider gives you precisely what you want.
Contract governance is how you manage your outsourcing agreement to ensure you receive the agreed-upon outcomes. The outsourcing agreement lets you set clear goals, assess risks, and select KPIs to define your relationship with the service provider. Clear contract terms help ensure obligations are met, and costs do not escalate.
Unlock maximum ROI with your outsourcing agreements
Outsourcing agreements are a powerful tool for growing your business and offerings. They give you the flexibility to compete in this fast-paced and ever-changing marketplace. These contracts reduce your legal exposure and help you streamline your processes to enhance the value of your business relationship with service providers.
Drafting and managing your contracts is easier with effective contract management software. The right tools give you a single source of truth for outsourcing agreements, templates, and editing tools. You can leverage contract lifecycle management tools to optimize contract performance and maximize your ROI.
- What is an outsourcing agreement?
- Test your own contract maturity
- How to unlock the full potential of outsourcing agreements
- Unlock maximum ROI with your outsourcing agreements
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Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.