UK Law and Practice Contributed by: Richard Brown, Louisa Chambers, Adam Wyman and Michael Ross, Travers Smith LLP
3.2 Alternative Contract Models Other contractual models commonly used for out - sourcing include indirect outsourcing, multi-sourcing, joint ventures or partnerships, outsourcing via a cap - tive entity, and build-operate-transfer structures. Indirect Outsourcing An indirect outsourcing is similar to a direct outsourc - ing, except that the customer appoints a supplier (usually domiciled in the UK) that immediately subcon - tracts the services to a different supplier (usually dom - iciled in a foreign jurisdiction). The principal reason a customer may choose this model is that it will wish to interface with, monitor, and enforce its rights against a UK-based supplier, rather than a foreign supplier. Multi-Sourcing Multi-sourcing is where the customer enters into con - tracts with different suppliers for separate elements of its service requirements. An advantage of this model (in addition to those achieved with a direct outsourc - ing) is to avoid being over-reliant on a single supplier – although this only applies where identical services are sourced from several different suppliers. However, maintaining an effective interfacing between the vari - ous suppliers to ensure a seamless overall service (ie, Service Integration and Management or SIAM) can add additional cost and complexity. The outsourcing contract will typically impose contractual obligations on suppliers to co-operate with one another and to participate in a common governance process, involv - ing regular meetings between all of the parties. Joint Venture or Partnership The setting up of a joint-venture company, contrac - tual joint venture or partnership to provide services enables the customer to maintain a greater degree of control than the other legal outsourcing structures, to benefit from the supplier’s expertise and to share in the profits generated by the third-party business of the joint venture. Joint ventures can take many forms and are usually complicated (and expensive) to set up and maintain. Captive Entity A captive entity model is where the customer out - sources its processes to a wholly owned subsidiary to provide the outsourced services exclusively to it and
imposed for data breaches under sectoral regulatory regimes. By way of example, financial services firms have been fined substantial sums for failure to keep customer data secure. The maximum penalty for breach of the NIS Regu - lations is GBP17 million, again for the most serious breaches. As with the Data Protection Laws, compe - tent authorities under the NIS Regulations can issue enforcement notices and also have powers to inves - tigate and audit compliance of organisations that fall within the scope of the regulations. Outsourcing can take a number of forms in the UK. Although there is no “standard” model, a direct out - sourcing is the most common structure adopted by the parties. This allows a customer to streamline its operations to focus on its core activities, taking advantage of economies of scale available to the sup - plier as well as the supplier’s expertise. A direct outsourcing is the simplest of the outsourcing structures, with the contract(s) being directly between the customer and the supplier. However, the outsourc - ing will become more complex if the customer pro - cures the outsourced services on behalf of itself and group companies. In this case, an “agency” model is often adopted, or a third-party rights clause may enable group companies to have directly enforceable rights. 3. Model Outsourcing Contracts 3.1 Standard Contract Model Direct outsourcings typically comprise a single con - tract (or sometimes multiple contracts) dealing with core issues such as service standards, price, duration, and limitations on liability and subcontracting, with schedules setting out (among other things) a descrip - tion of the services provided, service levels, the con - sequences of failing to meet service levels, govern - ance arrangements, and any transferred assets and staff. If the supplier does not have sufficient assets to meet its contractual liabilities or is not the main trading entity in the group, the customer may require a parent company guarantee (see 4.1 Customer Protections ).
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