For any startup, and perhaps especially early stage startups, outsourcing business processes has the potential to be a strategic lever that can be used with great success. However, the benefits of outsourcing do not come without risks or costs: outsourcing is only effective if utilized correctly. Moreover, outsourcing, like everything else, come with its own legal considerations. But don’t worry: we’ve got you covered. This is what you need to know.
The Benefits of Outsourcing
The most apparent benefit of outsourcing is a substantial one: outsourcing business processes allows you to focus on what you are best at. It frees up time, and bandwidth. Vendors who perform outsourced business processes are strategically optimized for those processes and have years of experience. Working them allows you to focus time and energy on your competitive advantage, which is unique to your business.
Another benefit of outsourcing directly relates to this: it allows your startup to work with top talent. These vendors are specialized, and (if you find the right ones) hire only the best. Outsourcing business processes can also allow your startup to have more streamlined processes, and accordingly operate more cost effectively. All of this has the potential of allowing your startup to reach its scalability goals earlier than would otherwise have been possible.
These benefits are contingent upon you working with the right vendors and using them effectively, however.
How to Make Outsourcing Effective
The first and most obvious tip in this regard is pertinent and bears mentioning: choose your partners well. The right outsourcing partner will be a key strategic advantage, while the wrong one might hamper and impede your startup’s growth. Ask potential vendors for examples of previous work, interview other clients if possible, and do due diligence.
Another common piece of advice in this regard is to onboard the partners effectively. The best results are usually reached when partners know what your strategic objectives are, work easily and seamlessly with your team, and are aligned with your other business processes.
Finally: be willing to learn from partners. They have niche experience and knowledge that can help you. Look to partners for feedback when you are busy with strategy formulation.
Legal Issues to Consider when Outsourcing Business Processes
When you are planning to outsource a business process, there are a few important legal issues to consider, and (ideally) to contract about specifically. This avoids legal costs and uncertainty down the line.
The vendors that perform your outsourced business processes will likely have to deal with your intellectual property, including patents, copyrighted materials, and even trademarks. They will also be using their own intellectual property. It is important that the lines between these two remain clearly drawn. Stipulate who owns which IP, and enter into license agreements where there will be back-and-forth collaboration using IP that belongs to one party.
Privacy and Confidentiality
In most contexts, your startup has a legally enforceable duty to take reasonable measures to protect the personal information of your clients and partners. For this reason, your agreement with vendors should stipulate that you own all data that you submit to the vendor, and that the data is strictly confidential.
One of the great benefits of outsourcing is that the vendors you use can be anywhere in the world. This often serves to reduce cost and increase productivity. It also means that the jurisdiction within which any disputes will be resolved is usually unclear. Each party will prefer to have the contract mediated in their jurisdiction – be sure to contract about this explicitly to avoid costly confusion down the line. Additionally, many parties prefer to include a contractual provision mandating alternative dispute resolution. This may save on legal costs if a dispute does arise.
It is always a good idea to agree explicitly about the circumstances under which either party may terminate the agreement. Some of the common grounds for termination often included in contracts are:
- Termination for convenience
- Termination for material breach
- Termination for financial risk
- Termination for a change of control in the vendor
- Termination because of a loss of license
- Termination for failure to meet service and (or) performance targets.
You will likely want to secure the right to terminate for convenience, but your vendor will also want that right – and it could cost you down the line. It is important to keep that in mind when negotiating on which grounds for termination to include in the contract.
Get it Right the First Time: Hire a Startup Attorney
Contracts are a normal part of day-to-day operations for all startups. They are necessary, but not without risk: contracts can also expose you or your business to legal or financial liability. A startup attorney can provide valuable advice and guidance for your all your startup needs, including outsourcing contracts. At LawTrades, we provide accessible, affordable, and comprehensive legal advice for startups. Get in touch with one of our experts today!