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contract through poor performance or missed delivery dates, it might be best to terminate the
agreement and move on to an alternative.
Despite the best intentions, sometimes the agreement between the two parties breaks down and
results in a lawsuit. What are the possible damages? Frequently, there will be a limitation of liabilities
clause in the agreement. The vendor will try to limit its liability to the amounts paid to the vendor
under the contract. It is not unusual for a company to pay a vendor $500,000 and also, as a result of
the contract, incur additional expenses of several million dollars in equipment, personnel, and
software—potentially in addition to lost revenues and profits. If there is a limitation of liability clause
in the agreement, then the company is out of luck and potentially several million dollars. This clause is
a difficult one to negotiate, and the vendor will resist increasing its liability. Also, do not assume just
because the vendor might have breached the agreement that the damages can continue accruing and
that the company need not remediate its situation. The company has an obligation to mitigate its
damages. Once it realizes that it is being damaged, it must do whatever is necessary to stop incurring
damages.
Last, assuming there is litigation, where will it be litigated and what will the governing law be? The
vendor, being the author of the agreement, will attempt to make its local state the venue for any
litigation and that state‟s local laws the ones that govern. Many companies do not think this provision
through carefully, and some jurisdictions have idiosyncratic local rules that can prove problematic.
What should be clear is that outsourcing, while it might be the correct strategy for the company to
follow, must be carefully planned. It requires a team that includes all of the project‟s stakeholders,
along with financial and legal representatives from the company.
Summary
A word of caution: Outsourcing is not a panacea for all ills. A company cannot outsource all of its
processes. A number of companies made this strategic error in the e-commerce boom at the beginning
of the millennium. Too many companies believed that they existed virtually and did not have any
physical facilities or presence. Their strategy was to outsource practically all functions, including Web
site development, Web hosting, distribution, customer service, delivery, and customer support.
Companies learned that this did not work as planned. Amazon, the most successful e-commerce
company, attempted to outsource almost all of its functions. Ultimately, it developed its own
distribution centers to store and ship merchandise, and that, along with its developments in
technology, became the company‟s core competency.
As economist Michael Munger states in his article “Bosses Don‟t Wear Bunny Slippers: If Markets
Are So Great, Why Are There Firms?”:
In this essay, a serious question has been asked, and I want to make sure the reader sees why it is
important. Outsourcing, either across town or across a huge ocean, is a form of transforming a
transaction from one organized within a firm to one organized through a market. All firms use
some combination of in-house work and outsourcing (no computer company makes its own
furniture, grows the wheat for bread in the employee cafeteria, or makes waste paper baskets).
Where is the line? How does the company decide what to buy and what to produce?