19 Clauses of a Winning Outsourcing Contract

How do I make sure the collaboration happens and the company doesn’t get away with my money? How do I protect my company’s data? How do I get the product developed according to my business goals?

These are some of the concerns, trying to resolve which you clicked on our article. You’ve come to the right place! Today you’ll learn how to protect your IT outsourcing with strong outsourcing contracts and embrace its full power instead of getting a major disappointment. Let’s rock.

According to Dun & Bradstreet's Barometer of Global Outsourcing, approximately 20–25% of outsourcing relationships fail within two years, and 50% fail within five. Mostly, it happens due to budget overruns, delays, low-quality services, or sudden contract termination.

Let’s take a look at a vivid example:

Queensland contracted IBM in 2007 to develop an application to administer payroll for its health department. The initial cost was $6 million. However, following several unanticipated technical issues, IBM notified the Queensland government that the project would cost $27 million. Ultimately, the project ended up costing $1.2 billion. And even though the project went on for several years, the payroll platform failed to function properly.

A poorly concluded outsourcing contract is the main reason for hidden costs. Unlike one-off vendor contracts, outsourcing contracts require a detailed scope of all the crucial points.

To avoid this and other hidden traps of software development outsourcing, you can apply some proven tactics to conclude a winning contract. Read on to find out how.

A failsafe agreement may require a lot of time, money, and effort, but for the course of our operation we clearly learned that going through all of this is the only way to ensure both parties stay happy with cooperation.

To facilitate this uneasy task for you, below we have listed 19 points to include in your outsourcing contract that withstood the test of time in our work. Let’s learn what.

The very first clause of your outsourcing contract is a thorough description of your outsourcing affair. This includes a list of:

compiled in close cooperation of both parties, which is important. The main point of this section is establishing clear boundaries and responsibilities while setting up procedures for future work.

Never underestimate this step, as in our practice it helped a great deal to determine our Clients’ expectations from us as well as our expectations from them. Providing specifics helps avoid further disagreements and necessary amendments, ensuring a successful relationship.

Service-level agreements (SLAs) outline the necessary standards to be met. They are needed to set the bar for the level of service that you expect to receive to achieve your goals.

The SLAs should be as precise and comprehensive as possible, covering all essential service levels: the scope of your project, the performance standards, the financial side of the agreement, specified obligations, problem-solving, enhancement, and monitoring and analysis.

This provision should not only specify how long your agreement will exist but also outline the early termination cases.

Let us give you an example of its importance:

Back in 2004, BBC and Siemens signed a 10-year outsourcing agreement. In the first year of the deal, 60% of the important technological projects from Siemens were either delayed or over budget. While it was Siemens’s responsibility, the BBC had to bear the opportunity cost of lost service enhancements. Instead of signing a contract with another vendor, the company was tied with Siemens in a long-term agreement without the possibility of exiting.

Sometimes, IT outsourcing partnerships presuppose certain assets transfer. For instance, our banking & fintech Clients often demand that we work solely on their equipment and send it to us via mail. Other examples can include proprietary software licensing or non-computing equipment, e.g. telcom. This clause formalizes such transfers and regulates their conditions.

Note that some things, such as software licenses, may include additional 
costs, stamp duties, and taxes. So we always make sure this is also mentioned in the outsourcing contract cost.

No contract is possible without this section. But we strongly believe that its second part stays purely theoretical.

The clause protects our Clients, giving them the peace of mind that our services will indeed live up to their expectations and meet industry standards, showing proficient expertise.

It also protects us, granting timely payments from our Clients and warranties on their assets or equipment.

We strongly believe that the “liabilities” part always stays purely theoretical. We are adherent to building long-term partnerships by delivering the best services possible and through it, achieving both our and our Client’s goals. And here are our principles:

Our company’s main goal, as stated in our Codex, is to make the world better. And like each master worthy of producing his goods in a qualitative and timely fashion, we’ve learned to produce value and nest it into our world. We do it via our skill and aspiration, dignity and honor, by that joy that we get from the very process itself.

In certain instances, we can not fully transfer property for the software that we develop to our Client. The typical causes for this is when we:

Whether you are developing new software from scratch or simply modernizing an existing product, outsourcing agreements should clearly express product ownership to avoid potential issues.

Intellectual property rights (IPR) are the biggest concern of the businesses that consider outsourcing, as they fear giving away their sensitive data.

However, these fears can be calmed if you properly protect your IPR. And here’s how to do it:

Upon our Clients’ requests, we are always ready to perform all the range of actions to ensure their IPR and make them feel safe.

Guarding your operational data is as crucial as protecting your patent rights, and we perfectly understand it. For this reason, this section is paid all due respect in our outsourcing contracts.

We ensure your full data protection not only during our collaboration but also after a project’s completion. Whether we house the infrastructure or all development happens on your side, with this meticulously compiled section you can be sure the data isn’t compromised.

Upon mutual agreement, we may also additionally state the terms of return or destruction of everything that you pass to us for development purposes. Ideally, such confidential information should self-destruct after a specified period of time.

In addition to restricting server and data access, you can take extra steps to safeguard your data.

If you are located in the European Union, you are obviously familiar with the GDPR (General Data Protection Regulation), which specifies all the steps a business must take for data processing, maintenance, security, and deletion. All companies that operate within the or with residents of the EU, must comply.

For this reason, if our Client is from this region, we also include this clause in our outsourcing contract.

In case you don’t fall under GDPR compliance, remember to include the subcontracting clause in your contract.

It is mandatory because many untrustworthy IT outsourcing providers wil shadily subcontract without you knowing. This is a bitter reality, unfortunately. So if you don’t state your attitude towards this in your outsourcing agreement, you basically untie their hands.

We have a fantastic article that exposes such filthy players at large, where we go full berserk mode on crushing them: we dive deep into their kitchen and — first in the industry — expose how they operate, what motivates them do so and what signs give away that they’re not the ones they’re disguising themselves as. If you want to learn the inside-outs of this fake IT outsourcing kitchen, how to avoid unknowingly falling into this trap and how to indeed make your IT outsourcing affair work to your benefit — read our article on the fake IT outsourcing vs the real one. In our opinion, this is one of the most valuable pieces that the executives, who are new to IT outsourcing or who have already got burned by untrustworthy providers can only read.

However, If you’re not against subcontracting, make sure to specify the extent to which you accept it in your outsourcing contract. This will solidify that a vendor will keep it within your expectations and won’t play too much with it. In addition, make sure you are able to request the needed resources and find out who will be held responsible in case of subcontracting.

No matter what outsourcing engagement model you choose, an outsourcing contract specifies the cost, payment method, and payment structure of cooperation. It also addresses the issues of when, how, and whom to charge.

Depending on the pricing models adopted, this clause may differ:

The payment structure clause in our contracts also covers software licensing costs, taxes, stamp duties, and any other necessary information. In addition, we ask you to mention all fixed and variable pricing components, including any re-negotiation of charges within a certain time frame.

If your business uses card processing or other payment systems, we include the Payment Card Industry Data Security Standard (PCI DSS) compliance in our outsourcing contract. By mentioning it, we solidify our eligibility to store, process, or transmit cardholder data and sensitive authentication data.

While some filthy agencies, mentioned before, may consider adding this unnecessary, it is important to understand that in the event of data leakage from a vendor with whom you exchange card data, you will bear the financial and reputational penalties.

This is why to create peace of mind for both parties, we always include this clause in our outsourcing contracts.

Our outsourcing agreements also include a clear governance framework to assist communication.

It specifies the following:

We always include software development performance monitoring in our scope of services to help you identify and prevent any unnecessary actions, potential problems, and conflicts without requiring legal intervention.

This part of our outsourcing agreement include:

Even though we always try to do our best, this is life and sometimes, the partnership may not go as planned.

To avoid legal battles, we make sure that a dispute resolution provision is included in each of our contracts to help both sides reach an agreement regarding the matter.

But we always believe that this section stays only on paper.

In addition to the previous point, there is always a chance of something happening and the work not being done on time due to unanticipated conditions.

Some force majeure events may include:

BCDR assures that in case of something similar happening, your business will continue operation with little to no delay.

This is a very important moment as in some cases, outsourcing agreements may generate legal difficulties. Including an indemnification clause in our contracts allows both of us to allocate any risks between the parties and compensate the indemnified party for breach of contract, non-compliance with any laws, negligence, losses, liabilities, or claims.

Indemnification clauses allow us both to protect our businesses from any damages and lawsuits as well as customize the amount of risk during the collaboration.

During some transactions, we or our Clients may put clauses in the invoice or purchase order declaring that our or their own forms replace the others.

Documentation hierarchy allows to map out all the documents so that they can be easily found and used. So, in these cases we incorporate this clause to precisely clarify the framework of all content that will potentially be used during the collaboration.

This helps avoid time delays and unnecessary paperwork that is mailed back and forth to outline the hierarchy.

First and foremost, again, we do believe that this section stays only on paper. But for the completeness of legal documents, including this very important aspect is mandatory. So here’s how it’s compiled.

Firstly, a termination procedure should indicate how many days' written notice is necessary.

Then this clause should include the following information:

It’s also wise to consider whether an exit strategy may influence your company’s image and if yes — come up with ways of minimizing the impact.

Taking your services to an outsourcing vendor requires additional legal steps. It is especially important to research their local legislation, tax laws, and other restrictions that may affect your company prior to signing a contract.

To ensure that your contract covers everything, consider speaking with legal professionals, if you don’t have such on-site, who have experience with similar collaborations.

Filthy vendors insist on using conventional contracts. Such agreements are often one-sided, requiring them only to deliver the same quality of service that your assigned department currently provides.

Failure to ensure that the final contract meets your requirements obviously creates high chances of leaving the door open to future problems. To avoid the issues of poor outsourcing contracts while getting all the advantages, you should draft a new agreement that includes and comprehensively covers all your company’s requirements.

Even though this may seem obvious, there are still occasions where a firm and the vendor get impatient for the partnership to begin, and both may be inclined to stop the discussion early. An dishonest vendor that we’ve talked about a lot in this article, in particular, may put pressure on you to sign the agreement before all of the specifics are worked out.

Since they are not legally obligated to revise the contract afterward, they may never agree to change the original agreement if you forget to mention an essential part. But even if adjustments are made, the approach may end up causing harm to the ongoing partnership.

Again, we insistently recommend you to read our article on the real outsourcing vs the fake one to learn how to distinguish and avoid such filthy IT outsourcing vendors and why such behavior from a vendor’s side as pressure is an immediate red flag.

Therefore, again, to avoid unforeseen problems, we make sure that there are no blind spots left when we put our signature on an outsourcing contract. This is SENLA’s quality mark.

In this helpful handbook, we shared our 10+ years of experience in signing winning outsourcing contracts that brought us what we have and led us to where we are today. We sincerely hope that it will help you build an outsourcing agreement that will correspond to your organization's criteria and helps achieve your project's goals.

Before you begin your outsourcing cooperation, make sure you’ve documented all, even the most minor details to avoid confusion or unnecessary problems. Remember, your agreement should be clear to both parties. Only then will your cooperation be successful and resilient.

As you can see, there is a lot to mention in your outsourcing contract to ensure quality collaboration and obtain the best possible outcome. If you liked our practice and attitude that we laid out in this article and would like to see us on your next software project, SENLA will gladly be that reliable outsourcing partner you’re looking for. Fill in the form below, and we will help you find the most efficient software development solution!