June 10, 1998

OUTSOURCING? CHECK THIS CHECKLIST FIRST

Edited by Dennis Berman

Plenty of low-cost, high-powered hardware and software is available for analyzing operations, keeping the books, and processing orders, usually at a tremendous cost savings. Unfortunately, small businesses (and sometimes their larger counterparts) don't always have the resources to develop and maintain such information systems. How, then, can they manage to stay competitive? Outsourcing, of course.

Simply put, outsourcing means hiring another company to manage certain operations (such as data processing) externally. The most common example of outsourcing is payroll, which is often ceded to companies such as ADT or Paychex. Other outsourcing companies, though, will take on the entire range of data processing for a small business, handling desktop applications, integrating systems with vendors or customers, or backing-up data at remote locations.

As the menu of outsourcing options increases, however, it's important to think about how the arrangements could affect your company. Consider, after all, that you're giving up control over what is likely sensitive business information. Move carefully.

Ideally, an outsourcer will treat your business and its data at least as carefully as you would, but in reality, a small business is just one of the outsourcing company's many clients, and probably not the largest one. Moreover, the outsourcing company's standard contract often doesn't provide for the kind of care and priority that a small business would place on its own operations. It's critical to negotiate those elements that are necessary to ensure your business' survival, including:

Response time: How quickly will the outsourcing company respond to a customer request for service? How quickly will problems discovered by the outsourcer itself be addressed? What is the procedure for identifying and resolving breakdowns in mission-critical systems? These times should be at least as rapid as a business would require of its own IT staff.

Disaster recovery: The outsourcer should provide a written plan detailing backup and switchover plans if the primary data processing site is unavailable because of natural disaster or other damage.

Confidentiality: The agreement should make it clear that the small business' data and information will never be accessible by or shared with the other clients of the outsourcer. Nor should it be vulnerable to outside intruders. Explicit safeguards should be in place to prevent that from occurring.

Software licenses: The outsourcer must ensure that all software licenses are in order, as it is operating on behalf of the small business.

Termination: The agreement should spell out the conditions under which either party can terminate the relationship as well as an orderly process by which operations can be returned to the business or transferred to another outsourcing firm, upon termination.

At best, an outsourcing company can become a ready partner of a small business, providing access to revenue-enhancing technology without incurring up-front training and equipment costs. Done improperly, an outsourcing arrangement can result in delayed operations, unhappy customers, and significant costs. If you're considering such a contract, be sure to keep these concerns in mind. After all, looking after your own interests is one task you can't outsource.

By Jonathan I. Ezor

Ezor (jonathan.ezor@poppe.com) is the director of legal affairs for Poppe Tyson Inc., a multinational strategic interactive services company based in New York City. The opinions expressed here do not necessarily reflect those of Poppe Tyson or its affiliates.