Tech lawyer’s guide to Mitigating Risks when Outsourcing Transactions

Outsourcing can offer many benefits to your business, such as cutting costs, increased efficiency, risk management, as well as many others, and is especially popular for startups.  

While outsourcing can be very advantageous, there are risks and requirements that need to first be considered. As outsourcing becomes increasingly more popular, it is important as a tech startup that you are aware of the various elements of outsourcing your business activities and the consequent effect on your business. 

Here we will go over everything you need to know about outsourcing transactions for your technology business. 

What is the procurement process of outsourcing transactions?

The procurement process depends on the specific transaction, however, usually consists of:

Request for proposal 

The customer will set out a process for which it intends to appoint a supplier. Therefore, they will include their requirements, legal terms and conditions that will be subject to the contract, and any other information that prospective suppliers need, or that they need from the suppliers.

Any potential suppliers will need to provide their proposed solution, price and provide any areas of the request for proposal that they would like to make changes to.

Due Diligence workshops 

Often as due diligence, workshops will be held so that customers can gain a better understanding of the supplier’s proposed solutions, and also so that suppliers can gain a better understanding of what is required of them. This will ensure that both parties are able to meet the expectations of the other. 

There are no laws in Australia that specifically apply to outsourcing, however there are certain regulations and rules that apply to specific sectors, that must be considered depending on the sector in which you work.

Outsourcing in the financial services sector  

There is an Australian Prudential Standard that provides rules on financial services institutions outsourcing their material business activities.

Material business activities meaning those that have the potential, if disrupted, to have significant impact on the business operations or its ability to manage risks effectively. 

Several factors will impact whether a business activity is considered material, including:

• Financial, operational and reputational impact of a failure of the supplier;
• The cost of outsourcing as a percentage of the total costs of the business;
• The degree of difficulty in bringing the activity in house, or finding an alternative service provider.

There are three main categories of obligations of a financial services institution that is outsourcing business activities 

Policies and procedure

Financial services institutions must have in place policies and procedures to manage outsourcing of material business activities

Procurement process

Must meet the Australian Prudential Regulation Authority’s (APRA) standards when selecting the supplier

Outsourcing contract

There must be a legally binding contract that contains matters set out in the Australian Prudential Standard.

If the outsourcing activities involve delivery of any services from outside of Australia, then the APRA must be consulted before entering into the contract. You must ensure that the risks involved in offshoring are managed in order for APRA to approve the contract. 

Telecommunications Sector 

Any telecommunications and internet service provider is required to notify the communications access coordinator if there is a change to their systems that could have an adverse affect on its ability to secure its systems. This includes forming an outsourcing agreement. 

Public Sector 

The commonwealth public sector and all non-corporate Commonwealth entities are governed by a number of legislations and rules. Each state also has regulations governing outsourcing by the public sector. 

What if I need to transfer or lease assets as part of the agreement?

Often under an outsourcing agreement, it will be required that a party must lease or transfer their assets to the other – usually the customer to the supplier. You may find yourself in the position that you need to lease or transfer one or more of the following:

• Real estate – Any transfer of land must be registered, but each state has specific laws on the transfer or leasing of land;
• Intellectual Property – Under an outsourcing contract you may want to grant a license in respect of copyright or for any patents or trade marks;
• Moveable property – Usually can be transferred under the agreement without registrations;
• Key contracts – If either party wishes to transfer all of their obligations and rights under the contract, consent will be required by all parties to the agreement; 
• Data – Data that is not subject to copyright cannot be transferred as property, however contracts can provide for the transfer of data and information.

Can employees be transferred in an outsourcing agreement?

Sometimes in an outsourcing agreement employees may need to be transferred between parties, this usually occurs from the customer to the supplier.

The employees of the customer do not become employees of the service provider, and the law does not permit employees to be individually assigned to the supplier. 

The employees can be transferred to the suppliers where:

• the supplier makers an offer of employment; 
• The employee accepts the offer. 

In this case, the employees will cease employment with the customer, and become employed by the service provider. 

How are data and privacy protected under outsourcing agreements?

The Australian Privacy Principles (APPs) are found within The Privacy Act, and these contain rules in regards to the collection, use, storage and disclosure of personal information. Most private organisations are required to comply with the Privacy Act, except for some small businesses with a turnover of $3 million or less. 

The APPs will need to be following in regard to the collection, use, storage and disclosure of any personal information that arises as a result of the outsourcing transaction. Check out our guide on complying with data privacy legislation here.

Final note:

Outsourcing business activities can provide many benefits to your tech startup, however it is important that you are aware of the rules and regulations that apply to outsourcing, as well as the elements of an outsourcing contract, and seek the advice of legal services when engaging in an outsourcing transaction.

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