|In any third-party contractual structure, the outsourcing client contracts with an external service provider to carry out a specific set of business processes. Unlike creating a wholly owned subsidiary or joint venture for performance of the outsource work, there is no investment or equity/capital participation by the outsourcing client in the business run by the external service provider.
In outsourcing transactions, careful consideration must be given to the actual parties to the contract. Requisite due diligence must be undertaken to ensure that the contracting party is indeed capable of carrying out the obligations of the outsourcing arrangement and have sufficient assets in case enforcement proceedings against the company are necessitated owing to non-performance.
A third-party contracting arrangement is quicker to execute and takes minimal lead time. The contractor/service provider generally has pre-existing infrastructure and personnel, which can be engaged upon completion of a due diligence exercise and execution of formal agreements. The lead time in operating through this means is also short as there are no formalities, such as setting up a subsidiary or incorporation of a separate company required for commencing the operations besides cutting down set up costs.
Also, the outsourcing client is saving the time and expense associated with scaling up the services or making alterations to cater for the changing requirements of the company.
Issues for consideration
The outsourcing client in a third-party arrangement cannot exercise supervisory control on either the employees or the management of the provider/contractor, hence it is often difficult to enforce and obtain best practices which are followed by the client’s own company. Besides, where proprietary technology, confidential information and processing of a company’s trade-secrets are involved outsourcing to an independent service provider/contractor may have its risks, so strict provisions relating to confidentiality and non-disclosure are essential.
This Contract is drafted for the benefit of the Contractor.