An Overview of Outsourcing Contracts
Authored by Pulkit Tiwari
Keywords: Outsourcing, price, time, venture, team, aim.
In ancient times when law was not advanced trust on words was considered as the golden rule for the duty promised in the word, but then human nature was such that it like a dish provided the back goings on in its own word and therefore it was proved that promise to perform a duty cannot be solely considered on the words. This was the reason that after the law came into existence a law had to be creating which forced the party to complete the promises either spoken or written.
The official term coined for the exchange of promise was ‘contracts’. Contracts are a proof that a task was to be done by a certain party and you can force the law to make the person execute the contract or gain compensation for non-completion of the task. Contracts have evolved at a major scale since it has originated and now contracts involve not only an individual but a large organisation too and are not just restricted to two parties. Due to such complexities there exists different type of contract depending on the relationship between the two people. Outsourcing is one such specie.
An organization that has huge goodwill or at the verge of establishing a good name for itself has a chunk of work to be done in small shreds. Sometimes situations such occur that due to some reasons the target the company has set for itself cannot be achieved but it has to be done anyhow because if not the organisation would have to face the repercussions of the shortcomings. To save such flow of event outsourcing contracts was invented.
The vital task of this contract is to not let the organisation face losses but provides such a method that not only the organisation wanting to complete the task but other organisations or individuals also benefit. So, outsourcing basically means hiring individuals or organisations to complete a portion of your task in return of some incentives. The reason for it can be different i.e. not having enough manpower or machinery power, not having enough time to complete, etc. Various organisation on large scale use this contract e.g. call centre, knowledge process, data entry, IT service, healthcare BPO services, financial services, engineering services, etc.
Types of outsourcing contracts
To have a clear point of view the specie of contract is further divided into sub-types so that every contract formed under the tag of outsourcing contracts can be put in a properly defined area.
Distinguished on the basis of geographical belonging of the target organisation:
• Onshore outsourcing contract
When the work is contracted to a service provider domiciled in the country same as the organisation providing the work. It is also known as domestic outsourcing.
• Offshore outsourcing contract
When the work is contracted to a service provider domiciled in the country different from the organisation providing the work.
Distinguished on the basis of the elements of the work
• Time & materials outsourcing contract
In this contract, the customer pays the supplier for the agreed work time and used materials. The aim to get into such a contract is to have the testing period of the emerging technologies that the customer has no access to. There is proper budget estimation. It is a short-termed project because the aim of the companies involving in this outsourcing doesn’t have their aims defined because of its complexities and raw conception. It might be short-termed because the idea is too innovative to make advance estimations.
• Fixed price/Managed Project outsourcing contracts
The specialty this type carries is that both customer and supplier agree on a fixed price to achieve their aim. A fixed price shows that the scope of the parties involved is constant. The scope can only be calculated only if the project is simple, not many changed would be carried out and the time required to complete the task is small. The price is designed by the supplier taking into consideration everything that will be used to accomplish the motive, and if the costs cross the barrier of price decided the furthermore price is therefore paid by the supplier.
• Dedicated team outsourcing contract
As the name suggests the customer hires a dedicated team for the task who is working only on the target provided by the customer and nothing else. The details of the goals to be achieved would be clearly mentioned in the outsourcing contract, and the team hired works as an extended part of the in-house team. The team can be asked to work on any motive. This contract is pulled up by the customer knowing the complexities of the aim to be achieved along with the constant modifications, and therefore usually long-term relations are intended.
• Target constant contract
The contract is put to use when the cost to be used to reach the goal intended is uncertain. In such situations, the buyer pays the service provider money in the range mentioned in the contract.
Distinguished based on business models in the outsourcing contract
Outsourcing has various types of business model which is used to achieve different types of aim
• Services agreement
This agreement is based on the model where the third party will perform the designated task offered by the customer.
• Joint venture
In this type of business model, the customer and supplier form a separate legal institution for performing necessary and different functions but linked to each other.
• Captive outsourcing entity
In this type of business model, the customer controls all the assets of the outsourcing service provider.
Advantages and disadvantages of outsourcing contract
Every good thing comes with both pros and cons and the same is the case with outsourcing contracts
• Access to knowledgeable and competent who have the capability to complete the task in quickness.
• This contract allows the company to complete the motives with being able to focus on the main business areas.
• Helps reduce the risks and burdens involved in the business.
• Fear of confidential data and automation being duplicated because of it being shared with the people involved in outsourcing.
• Risk of the work not being carried out properly and therefore is prioritized for the customer to do it itself.
• Primary reasons for low productivity may remain obscure.
Why is India ranked as the most favoured destination for offshore contracts?
Several reasons and benefits founded in India make it one of the most favourable countries to provide offshore contract to. The reasons are as follows:
· Magnificent quality of products
· Excellent touch to the products and optimised costs
· Serving best standard services
As seen in the whole article we can conclude that outsourcing majorly behaved as a boon to the manufacturing sector. It would be erroneous to say that it comes without any shortcomings, there are but the advantages outweigh the disadvantages at large. It creates a rapport between two parties included decreasing the work load on both the parties. If used with a good intention and executed properly the manufacturing industry can flourish a lot.