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Tech & Sourcing @ Morgan Lewis


Jennifer Lonoff Schiff from recently posted advice for small businesses looking to outsource. In her article, “6 outsourcing tips for small business,” Schiff acknowledges the benefits of outsourcing—even for small business—and notes that while “not every small or midsized business can afford to outsource functions . . . it pays to do your homework and due diligence before giving over part of your business to a third party.” 

Schiff spoke with companies and outsourcing professionals to compile six tips for small businesses that are considering hiring an outsourcing partner, which we summarize below:

  1. Know what your company does well (and not so well). By outsourcing functions that are time-consuming and can be performed by a third party without difficulty, a small business is able to focus on its core competencies.
  2. Set goals and expectations in advance. When a company identifies and prioritizes its goals in advance, the company is better suited to select an outsourcing vendor whose capabilities align with those goals. Likewise, defining clear performance metrics during negotiation and drafting of the agreement with an outsourcing vendor allows both parties to better understand expectations for the outsourced services.
  3. Treat the vendor as a partner, and choose carefully. Unlike many other vendor relationships, the relationship with an outsourcing vendor should be approached as a long-term strategic relationship. In addition to typical considerations such as pricing, considering the depth and scope of a vendor’s expertise, and the “fit” with the company are important.
  4. Commit internal resources to managing the outsourcing relationship. Small businesses should ensure that an in-house resource is available to manage the relationship full-time. A dedicated in-house resource can act as the point of contact for the vendor to answer questions and sign off on decisions to promote timely completion of projects.
  5. Maintain control of data. Although outsourcing development work is often beneficial and easy for a small business to outsource, it is important to maintain sufficient control and security during any outsourcing of development work. This is particularly true when the company’s core proprietary code and/or sensitive data are involved. With respect to code or data that the vendor will be creating or storing, the company should ensure that the services are subject to adequate service level and security standards under the agreement. At the same time, it is typically beneficial for the company to maintain significant levels of control of its code or data even when outsourcing work that relates to that code or data. Also, detailed terms governing the process for transition of the code and data back to the company or to a third-party vendor at termination of the agreement should be included in the terms of the agreement.
  6. Pay particular attention to security. Remember that the company generally remains responsible for the security of its sensitive data, including that which is provided to third-party vendors. As part of the vendor selection process, pay particular attention to the vendor’s security practices and safeguards and how they align with any applicable company, industry, or legal requirements.

These tips serve as a reminder that the big issues that need to be addressed in an outsourcing transaction are not exclusive to big companies. Just as small companies can receive similar cost and efficiency gains from outsourcing activities as those that larger companies receive, many of the same issues are presented by small business outsourcing transactions. For that reason, we encourage small businesses to involve counsel with the necessary expertise for as much of the negotiation and contracting process with their potential outsourcing vendors as possible.