Software Development Outsourcing Issues

1. Insurance
The outsourcer should have adequate public liability insurance against loss or liability through injury or damage.
2. Third party suppliers
The arrangements as to which party (purchaser or outsourcer) will hold and which party will administer the terms of any agreements currently in place between the purchaser and other third party suppliers. It is advisable to transfer the Maintenance contracts to the outsourcer unless the outsourcer has agreed to provide maintenance services for all equipment and software.
3. Software licenses
Where third parties supply software used to provide outsourced services, the appropriate licenses must be obtained. Any licenses currently held by the purchaser that relate to services being provided may need to be extended to cover the activities of the outsourcer.

4. Ownership of information
The ownership of data and information needs to be agreed. Should a dispute arise and the agreement be terminated, it needs to be clearly stated who owns the information and data.

5. Contract duration and commencement
The commencement date of the contract should be decided as early as possible to minimise transition difficulties when service provision is handed from the purchaser to the outsourcer. Given the complex problems that can arise during the handover of information technology services, it may be prudent to include a defined transition period as part of the term of the contract.

The length of term will depend entirely upon the nature of the outsourced services and the business requirements of the purchaser. From an outsourcer's perspective, the price of the services is likely to be influenced by the capital costs involved in providing the resources required to maintain service delivery. An initial term of three years is typically seen as a minimum term. The terms of renewal should be based on performance and current conditions at the time.

6. System specification
The system specifications should be defined for function, performance and availability as part of the RFI and RFP phases. The service specifications such as response times and system reliability should likewise be defined at the RFI and RFP phases.

7. Service level agreements
Service level agreements are put in place to define the minimum level of service that must be provided. They are, therefore, the basis for measuring the outsourcer's performance. SLAs will typically be included in the contract schedules and cover a number of areas of service including:

system availability and response times
quality standards.

Measuring and monitoring service levels can be achieved through user satisfaction surveys and analysis of performance data such as system response and job turn around times. It is not always easy to identify performance measures that accurately reflect the standard of service required by the purchaser's users. Moreover, SLAs can be ineffective documents unless the purchaser has practical and realistic remedies in the event of non-performance. Such remedies might include the withholding or deduction of agreed rebates from fees otherwise payable to the outsourcer, should the agreed level of performance not be maintained. Both purchaser and outsourcer need to be aware that SLAs are not inflexible and there should be a review period in the SLA to cover changing purchaser requirements and new technology.

8. Reporting and review
Closely linked to the SLA is management reporting and review of performance. Procedures for reviewing the performance of the outsourcer should be defined in consultation between the purchaser and the outsourcer during regular meetings. Each party should nominate dedicated representatives who will be responsible for liaising with the other party's representative and communicating information and decisions. Such meetings should regularly involve the senior management from both parties and include adequate focus on future developments and forward planning.

9. System access and security
Access to the purchaser systems by the outsourcer needs to be considered in the context of current New Zealand privacy legislation, which is intended to protect personal information about identifiable individuals. An outsourcer may only require system access at certain levels to enable them to perform their service.

The level of security measures required to protect the purchaser's system and information from unauthorised access will continue to require rigorous planning, implementation and management. Outsourcing services will bring additional issues of protection, confidentiality and ethics that the parties will need to ensure are documented and agreed with regard to their responsibilities and obligations.

10. Facility ownership and control
If the outsourcer is going to perform certain services using the purchaser's equipment, who will own these assets? The outsourcer may enter into an arrangement to purchase these assets or they may be handed back upon termination of the outsourcing arrangements. In either event a detailed inventory of assets will need to be compiled.
What will be the relationship with suppliers of third party services such as communications or network services? Outsourcers may need to rely on competitors to supply services to enable them to provide service to the purchaser. This may require facilitation by the purchaser.

11. Personnel issues
Although the issue of personnel is often crucial, it is sometimes overlooked by those involved in outsourcing. People are fundamental to a business and are required to maintain business continuity during the transition period.

The arrangements for the retention, redeployment or other options for existing staff must be negotiated. This issue is critical as the outsourcer will require the institutional knowledge of the purchaser's staff. Business continuity must be maintained during the transition, which requires that the purchaser's staff be kept fully informed where appropriate.

Staff may need to be transferred from the payroll of the purchaser to the payroll of the outsourcer and a transition plan should be used to minimise the risk of service disruption and employment-related legal claims.

The employment contracts and/or collective agreements under which the purchaser's staff are employed may require negotiations to be held with the relevant staff or their representatives. The early involvement of professional human resource managers and employment law specialists to advise and assist with contractual and privacy issues is critical to any transition to outsourcing.

The purchaser may also specify that a certain number of staff should be hired by the outsourcer and the outsourcer may require a certain number of people for the purpose of acquiring system and corporate knowledge. In these cases there should be an agreed process for the outsourcer to select, assess and engage the appropriately skilled staff from the purchaser.

The purchaser should also be made aware if any of the outsourcer's staff are being shared with other clients.

12. Intellectual property indemnity
Each party should generally indemnify the other against claims of intellectual property rights infringement arising from the use of facilities and resources that they supply to the other as part of the outsourcing arrangements.

13. Warranties
Appropriate warranties should be provided including:
o warranty of authorisation and title
o performance warranty
o compliance with specifications
o service quality.
14. Disaster recovery
Agreement should be reached between the purchaser and the outsourcer concerning business continuity, should any of the outsourcer's facilities fail.