Do what your Business does Best: Outsource the Rest


Outsourcing is an important aspect of the business strategy of many Irish businesses. Outsourcing can exist in a myriad of ways, extending from quite basic arrangements (e.g. outsourcing payroll services, archive storage etc.) to sophisticated business operations (e.g. outsourcing manufacturing and distribution functions).

What is Outsourcing? - Outsourcing is an arrangement whereby one party (the “Contractor”) disposes of a non-core part of its business to another party (the “Supplier”), and the Supplier then integrates that transferred business, together with its own resources, to provide services to the Contractor.

The Rationale The Supplier achieves economies of scale by combining the outsourced business unit into the Supplier’s business as a specialist provider of the relevant services. Those economies of scale translate into reduced costs for the Contractor. Outsourcing provides the Contractor with a predictable stream of service charges.

The Supplier’s business provides greater expertise and better quality services to the Contractor, than the Contractor could provide for itself.

The Contract Outsourcing arrangements involve detailed and complicated documentation that must by its nature clearly allocate risk and responsibility between the Contractor and Supplier, while retaining flexibility to allow for an ever-changing relationship over the course of the agreement (which can last from anywhere between 2-10 years typically).

The principle concerns when outsourcing include:

  • the transfer of assets (and often personnel) from the Contractor to the Supplier be managed effectively without disruption to on-going services;
  • that the services are performed to an acceptable standard by the Supplier, measured by reference to specified performance criteria and service levels;
  • that charges for the services are controlled, typically based on pricing models;
  • the services are updated and adapted to meet the Contractor’s changing requirements,
  • that the Contractor may resume provision of the services, or transfer the responsibility to another supplier, if the agreement is terminated.

Particular legal issues arise in outsourcing in relation to staff and data protection.

Staff Issues Staff issues play a vital role in any significant outsourcing arrangement. Communication with employees is vital. Under the Transfer of Undertaking Regulations, employees of the Contractor assigned to the activity that is to be outsourced may have the right to transfer to the employment of the Supplier, with their then current terms and conditions and prior service period maintained by the Supplier. Similar employee rights may also arise upon the termination of an outsourcing arrangement, for example, where a new supplier is appointed for further outsourcing of the business activity concerned or where the service is reintegrated within the Contractor’s own business operations.

The Contractor or new Supplier may be reluctant to take on some or any of the staff concerned. In certain circumstances if can be controversial and unclear as to whether the Transfer Regulations apply. It depends on whether there is a transfer of a part of a business. One must consider:-

  • the type of business being outsourced;
  • what assets (if any) transfer from the Contractor to the Supplier, whether tangible or intangible (example premises, equipment, facilities, trucks);
  • whether some or all of the employees who worked in the business being outsourced are transferring with the outsourced business. This is particularly significant in labour intensive businesses such as cleaning, security, maintenance etc where the core attribute of the outsourced business is its people.
  • whether the outsourced business will be organised in a similar manner to how it was organised before being outsourced.

Data Protection Data Protection issues must also be considered carefully to ensure that the transfer of personal data from the Contractor to the Supplier is compatible with Data Protection Legislation. The Contractor is required to ensure that a written contract exists between it and the Supplier whereby the Supplier agrees to process the data solely in accordance with the instructions of the Contractor and to comply with the data security obligations under data protection legislation.

Is it Worth Outsourcing? The legal obligations may appear to be rather onerous, causing businesses to wonder if outsourcing is really worthwhile. However, when one thinks of the irresistible benefits that outsourcing may bring, the legal hurdles can easily be surmounted.

Breda O’Malley
Bomalley@hayes-solicitors.ie