Outsourcing contracts must adapt amid new digital transformation

While outsourcing activity has historically focused on cost reduction and some targeted service improvement, sourcing teams are now regularly combining outsourcing with very challenging digital transformation projects.

For lawyers, sourcing teams and in-house legal teams, this means that the usual method of reviewing and negotiating an appropriate outsourcing agreement is no longer appropriate. For these complex and ongoing digital transformation programmes, contracts now have to provide savings and tangible benefits while taking continually changing circumstances into account.

Although using technology to make a service more efficient is not a new strategy, the range of tools available at a commercial price certainly is. Previously, outsourcers would try to automate manual processes or move historical, costly IT estates to the cloud. But there are now lots of different ways in which a transformation programme can help an organisation distinguish itself from its competitors and improve the customer experience.

Artificial intelligence

Artificial intelligence (AI) is expected to become one of the top trends in outsourcing programmes in the near future. Machine learning technology has the potential to rapidly improve business operations by taking over functions that were originally performed by employees and processing large amounts of data very quickly. The use of conversational AI-powered customer service tools, like chatbots, can also transform contact centre services, allowing customer support teams to free up time for more complex or bespoke queries.

Organisations are currently grappling with ways to implement AI in a legally compliant way. Businesses must understand how the AI they use is trained and what limitations and disclaimers they will have to put in place for any customer-facing platforms that use the technology. Within the outsourcing contract itself, liability for the output of AI technology between the organisation and the outsourcer must also be considered.

Omnichannel communication

‘Omnichannel’ communication is a term used to describe an integrated experience across every communication channel that customers can use to easily engage with a business, including mobile, email, web and documents. As customers increasingly expect a virtual user experience, omnichannel communication can help to ensure that a business is present on any platform. This allows customers to communicate with agents at any time and give those agents access to all the data they need to resolve issues quickly.

Multiple digital programmes

Outsourcers have been reviewing standard operating processes to simplify them for years and now use well-known approaches, like Six Sigma, to identify efficiencies in both customers’ organisations and their own. The automation of tasks helps eliminate mistakes which can be costly for organisations but carries risks if the new process is not properly tested before implementation. The outsourcing contract should clearly define who is responsible for errors caused by automation, and the extent of that liability.

However, if a transformation programme is projecting savings in the millions but requires significant investment by the organisation’s IT and business teams that the organisation is simply unable to afford, then the programme will likely fail before it is even due to start. A contract with a clear transformation delivery roadmap, milestones and set of customer dependencies – with a corresponding clear process for what happens if timelines or dependencies are missed – is key to helping make the programme a success.

Cybersecurity and data analytics

The growing threat of cyberattacks means that privacy and security is a top priority for the outsourcing industry. Security provisions have not traditionally been the most important or considered part of an outsourcing agreement. Now, however, strict adherence to minimum security requirements, coupled with minimum requirements around encryption, multi-factor authentication and detailed data incident response and escalation provisions are a necessity, alongside termination rights where a breach occurs.

Dealing with the fallout of a cyberattack can be costly, potentially incurring fines from the authorities if personal data is involved, as well as payments to affected customers. Outsourcing agreements should clearly set out responsibility for breach of data protection and security provisions. Generally, liability caps are substantially higher than the parties’ general liability cap for losses, a trend driven primarily by the additional exposure to fines and customer claims.

Data-driven analytics – the mechanism through which data from different sources is analysed to find patterns and trends – is also on the rise. This analysis can provide businesses with insights into customer behaviour, supply chain management and financial performance, helping them to make informed decisions.

Outsourcing deals must include appropriate terms concerning intellectual property (IP) ownership, use of the data, and corresponding analytic results. Traditional IP clauses previously used in outsourcing agreements will not generally be suitable.

Remote working

Remote working has become standard for businesses around the world in the wake of the Covid-19 pandemic, and the outsourcing market is no exception.

Traditionally, organisations have sought to ring-fence outsourced staff and include specific provisions in agreements about the location from which services can be provided. This has been especially important in cases when a service have been outsourced to a region that is outside of the country in which the client organisation is based to ensure the security of customers’ IP and data.

Since 2020, however, outsourcers have been able to demonstrate that they can provide the same level of service from their employees’ homes as from a dedicated location. While some organisations in a regulated environment have concerns, a growing number of businesses are happy to engage suppliers that allow their staff to work from home, provided that the security provisions in the contract adequately cover remote access to IT systems.

Remote working also enables outsourcers to hire and train talent from around the world, as well as allowing for the possibility of downsizing office spaces. When remote working is allowed under an outsourcing contract, customers should seek to gain from any cost reduction that the outsourcer achieves in the operation of the services.

Ongoing service improvement

Organisations are now demanding that outsourcers transform legacy systems and provide ideas and projects for continuous service improvement. But the drive for innovation must have a fully formed business case for it to be considered a suitable project to take forward, and the outsourcing agreement will need to set out what those minimum requirements are. It should also explain what the consequences are of the outsourcer not meeting its service improvement obligations.

The ability for any technology that is introduced to be flexible is key and, increasingly, clients require outsourcers to transform services using generally available third-party products. This means that, on exit, the client does not need to negotiate post-termination licences to continue to use the outsourcer’s technology where it seeks to make a change in its outsourcing arrangements.

The future of outsourcing

The outsourcing market will continue to evolve in the coming years as businesses look for ways to reduce costs, increase efficiencies and improve the customer experience. Creating a robust programme from a legal, commercial and governance perspective is essential to delivering a successful transformation programme.

On Tuesday 6 June 2023, Pinsent Masons is hosting a webinar on technology transformation which seeks to help businesses manage risk and operate an effective programme.  A panel of Pinsent Masons’ technology, cyber and information law experts will consider how financial institutions can implement effective technology change programmes by addressing issues such as governance, oversight and risk management issues, and the role of operational resilience in technology change. Other issues that will be addressed at the event include commercial issues in technology contracts and managing third party risk, data migration risks, the management of supplier disputes, and cyber risks when moving away from legacy systems.

Registration is now open, and the event is free to attend.