Clients depend on proper delivery of outsourced services as it impacts the quality of service they can provide their customers.

The region is at last experiencing growth in outsourcing. Traditionally, enterprises in the region have been slow to outsource business functions. Outsourcing means introducing an outsider into the operations of a business, which entails loss of control and dependency on others. In a region which has traditionally been driven by family owned businesses, tightly controlled by the founders, outsourcing entails a significant cultural change.

Times, however, are changing fast. Increasingly, local companies have regional aspirations and regional companies are looking to international markets. This means that the businesses are becoming more sophisticated and a greater level of specialised skills are required to support them. Markets are also growing increasingly competitive and businesses need the efficiencies that outsourcing can deliver. At the same time, international firms and management talent are flooding into the region bringing with them attitudes accepting of outsourcing and skills required to properly manage outsourced services.

In their most common form, outsourcing contracts involve reasonably generic non-core functions such as call centre operations or computer desktop management services. In more developed outsourcing markets, there is a trend towards outsourcing whole business processes such as managing payroll or providing key data entry services. Typically, in more sophisticated outsourcing arrangements, the customer requires that the service provider transform and enhance its current operations rather than simply support the status quo.

Areas of growth

The key areas that are seeing the greatest move towards outsourcing in this region are telecommunications, healthcare, financial services and call centres. Of these, outsourcing in the telecommunications sector appears the most widespread and established. This has occurred as new entrants have been entering the telecommunications market, requiring network specialists to establish and manage their networks, while the company focuses on marketing services and building the 'front end' business. Incumbent telecommunication companies have also been forced to outsource network management as the increasing complexity of technology has forced them to look outside their organisation to obtain necessary skills.

Healthcare is another area where outsourcing is progressively developing in the region. Healthcare involves many patient records that include large electronic files. The management of IT systems is far from a hospital's core business, providing a fertile area for outsourcing. Regional call centres are also springing up, offering capabilities in Arabic and other languages spoken regularly in the region.

The key difference between an outsourcing contract and any other supply contract is the importance of the relationship between the parties. The customer depends heavily on the proper delivery of outsourced services, as it often has a direct impact on the quality of service the customer provides to its own customers. The contracts are often for a long duration, measured in years rather than months. The customer will frequently seek not only specialist skills but also soft benefits for their business, such as transfer of specialist knowledge to employees or the provision of continuous improvement programmes. Service providers may also be expected not only to merely deliver services against a detailed process of delivery which is already known, but also to transform the existing processes to something better.

An outsourcing arrangement therefore needs to be flexible. None but the most basic type of outsourcing arrangement contemplates that the services will be the same at the beginning of the engagement as at the end. The challenge for an outsourcing contract is therefore to establish the framework which facilitates the relationship, without being so vague that it is meaningless or too rigid that it stifles the relationship (or worse still becomes irrelevant to the parties' actual practices). So what are the key features of outsourcing contracts that make them effective in balancing these demands?

Managing change

Change in outsourced arrangements can have cost impacts on the supplier and lead to increased risk of a mismatch of expectations between the supplier and the customer. Outsourcing contracts therefore need to record processes for managing change in the scope of services. These processes include a means for agreeing a scope variation, calculating any pricing adjustments and recording the agreed change.

By nature outsourcing contracts are in a sense incomplete, in that they tend not to specify outcomes but rather the processes through which outcomes can be agreed. Rather than defining all of the services at the outset of the contract to a degree that they can be implemented Ð which often requires the preparation of detailed process manuals and communication protocols Ð outsourcing contracts will concentrate on establishing the processes by which the details of the services can be agreed upon. One way of doing that is by following a process of requirement gathering and formal reviews and signing off.

Facilitating communication

Outsourcing contracts should also contain processes to facilitate communication between the parties. This can be done by agreeing to a schedule of regular meetings between executives and specialists from the supplier and their counterparts from the customer.

The schedule can specify the topics to be discussed and objectives to be achieved at each such meeting. Again, the aim is not to bind the parties to a meaningless process, but to introduce some discipline to the communication between the parties as well as to foster the relationship between them.

Managing performance

Typically, an outsourcing contract will contain incentives for encouraging better performance and establish the processes to facilitate collaborative efforts to improve service delivery. This will include a penalty regime for failure to deliver services of a specified standard. This can be one of the most contentious areas of negotiating an outsourcing contract. The service requirements are, however, not only a means of penalising poor performance, but also establish at the outset the parties' expectations about what is required and what can be delivered.

The key features of an outsourcing contract are therefore not just the hard and enforceable rules, but also the informal relationship-driven terms. The contract needs a subtle balance of flexibility and structure, achieved by establishing processes as well as setting out the basic ground rules. As outsourcing grows in the region, the challenge for lawyers preparing and negotiating suitable contracts will be to provide contracts that appropriately document and help to foster the relationship between the parties.