Of clients, outsourcers, contracts and shredders

When entering into an outsourcing arrangement, it pays to remember that your outsourcer may intend to subcontract some of the tasks to other parties acting behind the scenes. You never know what surprises you might find when you peek behind the curtain. The following is a disturbing example of what can happen.

One of the concerns associated with outsourcing arrangements is the external custody of your data. You need to ensure that the outsourcer does not discard draft print-outs into a bin where dumpster divers can forage through confidential personal and financial information. Usually you simply require them to engage a document shredding service. However, if not properly managed, the resolution of one problem can create another, more serious situation.

It started out as a cost-effective idea, but ended up going terribly wrong. Documents from Ontario government ministries including Corrections, Labour and the Attorney General were sent out for shredding and recycling. As a cost saving measure, inmates at the Mimico Correctional Centre in Toronto were engaged to perform the shredding in preparation for recycling.

The problem surfaced when police discovered an inmate negotiating with a motorcycle gang to sell them a list of personal addresses and telephone numbers for retired and sitting judges and other court staff The list was one of the documents that had been sent to the prison for shredding.

In most IT outsourcing situations, prohibiting subcontracting is not likely to be a commercially acceptable approach. However, if subcontracting is permitted, your contract should provide for notification and a right of review and approval of proposed subcontracting arrangements. You might consider prescribing minimum standards for subcontractors. You may also require that specific provisions be included in all subcontracts, as a condition of acceptance.

Dispute resolution provisions are a common example of a subcontracting problem. As an alternative to a formal lawsuit, your outsourcing contract often contains a clause referring disputes to mediation or arbitration in accordance with a prescribed set of rules. However, resolution of a dispute may require the participation of subcontractors who performed the services concerned.

Unfortunately the subcontract may not contain a dispute resolution clause, or the language and procedure in the two clauses conflict. Consequently, you are unable to compel all of the necessary parties to participate in a single proceeding. The result may be that the parties are forced to incur the added expense and delay of a lawsuit. Accordingly, consider prescribing that a uniform dispute resolution clause be included in all subcontracts.

Be aware that competitive fixed cost outsourcing arrangements provide an incentive to adopt low-cost, subcontracting solutions. The low cost of a proposal may be based on your document shredding being processed at a prison, or your information being transmitted out of the country by satellite for low cost data entry on a Caribbean island.

If you were aware of these risks, you might reasonably withhold approval to the proposed subcontracting arrangement or agree that a higher price is acceptable.

Simply inserting obligations into a contract is not sufficient. You need to actively follow up to ensure compliance. Your rights to review, approve, audit and inspect, are like muscles. Don't neglect to exercise them periodically.

David M. Robinson, LLB, is executive direc

tor of The Techknowledgey Group, advisers on negotiating and documenting complex IT transactions. Tel: 000-973-3833, E-mail: info@tkygeup.com.

Copyright Plesman Publications Ltd. May 2000
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