10 Things You Must Focus On In Your IT Outsourcing Agreement

For businesses, cooperating with an IT outsourcing company is more affordable than building an inhouse IT team. But IT outsourcing risks should be carefully concerned; and to reduce them, you must prepare an IT outsourcing agreement carefully. This article will define IT outsourcing agreements, describe the 2 IT outsourcing contract types, and go through the 10 articles that every IT outsourcing contract must have.

What is an IT outsourcing agreement?

An IT outsourcing agreement is a legally binding contract between you as the client and the IT outsourcing company. It specifies what you anticipate from the outside service provider.

The IT outsourcing services provider can require access to your private data, intellectual property, or even commercial assets. To protect your intellectual property, you should request your partner to sign an NDA (Non-Disclosure Agreement).

But first, let's take a look at 2 IT outsourcing contract types, then choose the most suitable one for your business.

2 IT outsourcing contract types

Lab-type contract

Lab-type IT outsourcing contract is used for software development with a team consisting of fixed individuals. A lab-type IT outsourcing project is planned for a specific timeframe and budget. Lab-type contracts are famous for significant benefits, including strict personnel and budget control

Project-based contract

A project-based IT outsourcing contract is signed between a company and an independent employee. He/she is not regarded as an official employee because their jobs often don't have expiration dates. This type of IT outsourcing agreement is significantly beneficial to independent contractors because they can set work hours flexibly and work for many projects simultaneously.

10 articles you must pay attention to in your IT outsourcing agreement

Description of IT Outsourcing Services

One of the must-have articles in every contract is a detailed description of the IT outsourcing project and its scope. 

You can also include the Request for Proposal (RFP) and the subsequent response by the IT outsourcing service provider here.

This section must include: 

• All IT services requirements. 

• Detailed description of each part of the required services. 

• Service standards, such as adherence to international standards. 

You can add a sentence describing duties that are intrinsic to the services, but are not mentioned in the description of work.

Once you’ve defined the general description of the IT outsourcing agreement, you can go into the specifics, such as the expected output after a period of time.

Payment Terms

You, as a client, need to know the total amount payable to your partner for the IT services. 

The actual amount depends on many factors, including the project scope and the requirements. 

For IT offshore outsourcing, you need to consider exchange rate fluctuations. You can fix a rate, or allow the rate to depend on the exchange rate at the time the transaction is carried out.

Additionally, you should specify whether the IT outsourcing company is responsible for all tax payments in their nation, or whether they take responsibility for staff payment. 

There should be terms involving changing market conditions. It may be the compensation for variable components such as new technologies or additional infrastructure. 

IT Outsourcing Contract Duration

The duration of an IT outsourcing contract mentioned clearly helps two parties effectively monitor budget and resources.

Important to bear in mind, this duration article should involve early termination. You can avoid getting stuck in a long-term agreement that doesn’t benefit you. It is recommended that you begin the outsourcing relationship using a short-term contract with quite a small budget and achievable output. It allows you to test if things work well and decide whether to extend the same IT outsourcing services with that vendor.

Transfer of Assets

Your IT outsourcing partner might require you to transfer or grant them access to particular business assets in order to carry out a crucial delivery. For example, certain assets, like software licenses, may be transferred with additional taxes and stamp duties attached. Make sure these transfer expenses are taken into account in your IT outsourcing contracts.

Product Ownership

Intellectual Property Rights must be carefully concerned during IT outsourcing. 

To protect your company’s intellectual property, you can ask the IT outsourcing services provider to sign an NDA (Non-Disclosure Agreement) and a Non-Compete Agreement. The Non-Compete Agreement ensures that the partner won’t work for your rival for a certain period of time. 

Some other ways you can protect your resources: 

• Copyrights your Intellectual Property.

• Trademark for software and other goods. 

• Patents. 

When working with an IT outsourcing company, you should ensure all their employees working on the signed NDAs. This will help legally protect your trade secrets.

Data Protection

Your IT outsourcing services provider may require access to confidential information such as internal data. To ensure data security, both you and the partner must comply with the laws in your regions. 

For instance, you must adhere to the GDPR in the EU. What a company's data processing agreements must contain is defined by the General Data Protection Regulation (GDPR). These agreements ought to specify how the third party will handle the processing, upkeep, security, response to demands for access, and deletion of personal data. According to the GDPR, the outsourcing provider is prohibited from hiring a subcontractor without the client's express written consent. Similar data protection clauses apply to the subcontractor if the client allows them.

IT Services Outsourcing Performance Controlling

Monitoring the performance of your IT outsourcing services is a crucially regular activity. These performance tracking can unexpectedly help you take necessary corrective measures. 

You need to keep records of: 

• Reporting duties. 

• Frequency of audits. 

• Service delivery disruption procedures. 

• Increased monitoring of whether services fall below the agreed standards. 

However, if the IT outsourcing company can’t meet these requirements even after increased monitoring and auditing, this article allows your firm to step in and take over management control. 

Warranties and Liabilities

The IT outsourcing services provider generally gives a representation of its ability and competency to provide the necessary deliverables. Similarly, your company represents that you’ll carry out timely payments on time. 

Both parties should generally give the following warranties: 

• The IT outsourcing company gives a warranty that their services will comply with industry-specific regulations and demonstrate reasonable skill.

• Your business gives warranties for its assets or equipment.

Contractual liability outlines the obligations that the outsourcing firm would be held accountable for, such as payment in the event of data loss, obligations of subcontractors, etc.

The direct and/or indirect liability is often constrained to an insurable amount by the written agreement. This is done in order to more clearly define the obligations that could result from any breach or failure to deliver, also known as limitation of responsibility.

Indemnification

Both compensation and an exemption from liabilities and damages can be referred to as indemnities. They are given by both the contractor and you.

The indemnity language in your contract must be clear that the contractor is liable for any losses you suffer as a result of their carelessness or failure to deliver. It guarantees that the IT outsourcing services provider would make up for any losses while also protecting your business.

For damages suffered both during and after the project, the indemnity provision is applicable.

IT Outsourcing Project Termination and Exit Management

If an IT outsourcing agreement fails, especially if it costs more money than needed, it should have a clear escape option.

You can regain control of the IT outsourcing project by terminating the contract early. You have two options: bringing it in-house or giving it to a different vendor.

But the process takes time. Therefore, the contract should have a strong exit article to make sure that termination doesn't harm either two parties seriously.

You should make it clear how many days the written notice must be given before the termination process can start. The termination provision should specify: 

• procedures for returning company property and machinery.

• any cancellation obligations.

• penalties imposed on the service provider for failure to fulfill.

• Intellectual property after termination.

How you end the IT outsourcing connection has an impact on your company's reputation as one of the most important provisions of the contract.

Final Thought

The key to a good IT outsourcing agreement is being careful and doing your research. It makes it simpler for your IT outsourcing partner to clarify expectations and deliverables. A new IT outsourcing contract needs to be formally specified and routinely handled. Utilize the details we discussed here to easily write a strong IT outsourcing agreement by comprehending what goes into one!

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