An Information Technology (‘IT’) and services outsourcing agreement usually involves the transfer of all, or part of the IT and related services functions of a customer’s undertaking to one or more third party service providers.
More often than not, an IT outsourcing agreement will involve the transfer of assets and frequently, staff (either employed by the customer or now, more commonly, by an incumbent third party provider) that were previously used to support the activity or operation, to the provider.
Where assets are transferred, they may for a time then be used to provide IT and related services back to the consumer, to the agreed levels of service. These contracts are most commonly referred to as “information technology outsourcing’ contracts”, or often abbreviated in the technology industry to “ITO” to distinguish them from business process outsourcing or “BTO” contracts.
IT functions that are now frequently outsourced include one or more of the following:
- Data centre and systems infrastructure;
- Voice and data networks;
- Applications development;
- Applications support and maintenance;
- Server and desktop environments;
- Support, help desk and call centre;
- Disaster recovery;
- Research and development;
- Auditing; and
- IT procurement.
Reasons for outsourcing
The reasons for outsourcing are varied. The most frequently quoted incentives in the private sector are the added value that third party expertise and experience can bring together with equal cost savings.
In the world of technology in recent years it has become highly competitive and it continues to grow at a rapid rate, as the modern economy becomes increasingly reliant on IT related products and services. Consequently, staff costs in this sector have spiralled upwards, including in the cost arbitrage, offshore centres. In the circumstances, outsourcing obviates the need to recruit and, crucially retain IT staff and enables the business to focus on its core competencies.
The IT outsourcing agreement
The essence of an IT outsourcing contract is a commitment by the provider to deliver services to predefined service levels. The contract will then go on to define what happens in the event these service levels are not met.
A failure to meet given service level will often result in the payment of service credits, a specified sum of money which becomes payable automatically in the event of a breach. In the absence of service credits being stipulated, the customer would need to prove on each occasion that any failure to meet the service levels is a breach of contract.
The service credit regimes differentiate the IT outsourcing contract from other similar IT contracts, such as system supply contracts, where such schemes are found more rarely.
The constant expansion of the IT outsourcing markets is testament to its popularity. The disadvantages and risks of IT outsourcing seem rarely, in practice to outweigh the perceived benefits. For those contemplating an outsourcing contract, it will therefore be comforting to know that many of the risk can be controlled or mitigated through appropriate contractual provisions.