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Outsourcing?
Then make sure
your due diligence
is thorough
Mason Birbeck, Head of the Corporate, Commercial and Trust
team at Parslows, examines key due diligence considerations
when outsourcing business operations
OUTSOURCING IS ON the rise across a large
range of industries. Recent figures show
the value of UK public and private sector
outsourcing rising from about £35bn at the
turn of the millennium to a current figure
of around £88bn. A significant increase.
Unsurprisingly, businesses in the Channel
Islands have also embraced outsourcing as
a means to lower costs, increase efficiency,
expand resources and expertise, and
ultimately improve customer service. This
can, however, open the door to operational
and regulatory risks. As a result, before
committing to outsourcing arrangements, a
business should carefully consider carrying
out appropriate due diligence in order to
avoid, or at least mitigate, those risks.
Here are some of the key points that
need to be considered:
● Establish a risk management
framework and risk register enabling
the outsourcer’s and service provider’s
teams to identify and assess the project
risks, their current status and any action
needed to manage those risks.
● Look inwards as well as at the
prospective service provider. Start by
considering what target services are
currently being provided in-house,
the service delivery model and the
service levels being met, as well as the
transaction volumes. This includes
the number of employees engaged in
providing those services, and if changes
could affect staffing levels, or require a
review of employment terms.
● If cost is a key driver, the process should
include a detailed review of current
expenditure on the earmarked services.
● Examine intellectual property rights
used in the existing services (software
products, for example). If those IP
rights aren’t owned by the business,
will the terms of use enable the business
to make them available to the service
provider if necessary, and is there any
associated cost for doing so?
● Are there any third-party contracts
currently in place to deliver the services?
If those will cease to serve a function,
can the business terminate the contracts
without penalty or before expiration
of a set notice period? If there will be a
continued need for third-party services,
but on amended terms, can the business
unilaterally vary those terms?
● Assessment of a prospective service
provider requires a comprehensive
analysis of all the services it is offering,
how it will tailor those to the aspects
the business wishes to outsource, and
how it will deliver those services.
● Fixing the detail of those services will
inform the service provider’s proposals
on pricing, which should make it easier
for the business to price any changes to
volumes and service levels.
● Include an examination of the service
provider’s corporate status and wider
group structure, and its own (and its
group’s) financial standing. Also, its
insurance coverage and the risks covered.
● Investigate the service provider’s
compliance history, the existence of
complaints, litigation or regulatory
actions, and evaluate its track record in
delivery of similar services.
● Analyse the service provider’s disaster
recovery and business continuity plans,
its system of internal quality and
other controls, its security history,
and the extent to which it is audited,
financially and otherwise.
● If the business is a data controller and/
or data processor for the purposes of the
Data Protection (Jersey) Law 2005, and
data is to pass to the service provider
under the outsourcing arrangement,
adequacy of data protection will be a
key consideration.
● Adherence to the six core principles laid
down in the Jersey Financial Services
Commission’s Policy Statement and
guidance on outsourcing will be a critical
factor for businesses in the regulated
financial services sector.
If, following the due diligence process, the
decision is to proceed, the parameters of
the outsourcing, and a detailed description
of the services, should be set out in a
comprehensive outsourcing agreement.
This should, among other terms, include a
precise description of the functions to be
outsourced, and a clear delineation of the
respective responsibilities of the service
provider and the outsourcer.
An early-stage and comprehensive
evaluation of any proposed outsourcing
arrangement is highly advisable.
Failure to identify strategic, market,
reputational and (to the extent
applicable) regulatory risk could not
only fundamentally affect the project’s
economics, but also be potentially
damaging to the outsourcing business. n
WANT TO KNOW MORE?
For advice on due diligence as part of an
outsourcing process, contact Mason Birbeck
at mason.birbeck@parslowsjersey.com
or call +44 1534 630530
www.parslowsjersey.com
www.blglobal.co.uk january/february 2016 57