UK Law and Practice Contributed by: Richard Brown, Louisa Chambers, Adam Wyman and Michael Ross, Travers Smith LLP
takes advice from local suppliers on a consultancy basis. This model is sometimes known as a “shared services division” if the captive entity is servicing dif - ferent divisions of the same conglomerate company. Although this structure will give the customer greater operational control, possible tax benefits, and integra - tion with the supplier/group company, the customer will not be passing the risk of performing the services to a third-party provider and the upfront set-up costs and ongoing costs are likely to be significant. Build-Operate-Transfer A build-operate-transfer model of outsourcing is where the customer contracts a third-party supplier to build and operate a facility, which is then transferred to the customer. It is possible that the customer may ask the supplier to operate the facility for the longer term. Although this model is low risk, it can be expensive. 3.3 Digital Transformation Outsourcing to, for example, cloud-based providers is essentially a form of direct outsourcing. As such, this trend has not – in the majority of sectors – pro - duced any radically new contract models. However, it has had a significant impact on the terms on which services are outsourced. Suppliers such as cloud providers are typically unwill - ing to negotiate contracts that are, to a significant degree, tailored to the customer’s individual needs. This is usually because such an approach would undermine their ability to achieve significant econo - mies of scale by offering a broadly standardised ser - vice to a large number of customers. The argument for imposing standard terms is particularly strong for public cloud services (whereas private cloud services are closer to a traditional outsourcing deal). While contract models have tended to become more stand - ardised and customers have more limited scope to secure contractual protections that reflect their own individual needs and preferences, some (still limited) opportunities for negotiation in key areas have opened up as the market has matured and become more com - petitive. That said, cloud service providers are facing increas - ing scrutiny over provisions which make it more dif - ficult for customers to switch to a competitor. In the
UK, the Competition and Markets Authority may take steps to require Amazon Web Services and Micro - soft to amend their contract terms and, in the EU, cloud service providers are required (from 12 Sep - tember 2025) to comply with the EU Data Act. This is designed to prevent vendor “lock-in” and may have a knock-on effect on terms available to UK customers.
4. Contract Terms 4.1 Customer Protections
Common protections for the customer in an outsourc - ing contract include service levels or key performance indicators (KPIs) in relation to the standard of perfor - mance of the services, often linked to a service cred - its or liquidated damages regime if the service levels/ KPIs are not met. These are discussed in more detail at 4.6 Performance Measurement and Management . Customers will usually want to consider additional forms of contractual protection, besides any service credits/liquidated damages regime. These will typical - ly include undertakings given by the supplier, includ - ing an undertaking that it will provide the services with reasonable care and skill, in accordance with good industry practice and all applicable laws and regula - tions. The supplier could also be required to warrant the accuracy of information provided by it as part of the tender process, that it has particular accredita - tions, or that it operates in accordance with a particu - lar quality assurance system. If these undertakings or warranties are breached by the supplier, the customer would then be entitled to pursue a claim for damages. The customer could also seek indemnities from the supplier in respect of specified loss, such as loss suf - fered by the customer as a result of the supplier’s breach of applicable laws (including Data Protection Laws) or against future liability in respect of employees transferred to the supplier as part of the outsourcing (see 5. Employment Matters ). Additionally, the cus - tomer may require a supplier of outsourced services to hold certain insurance – for example, in respect of damage to persons or property – and to note the customer’s interest on its policy. It is also important for obligations to be imposed on the supplier to main -
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