Key points for outsourcing agreements (for a start-up)

If you are a new company considering outsourcing to a foreign partner, there are a couple of points to keep in mind when drafting your outsourcing agreement. This article highlights some of the clauses that need to be critically reviewed.

In general, outsourcing agreements are very standard. But the problem is that most of them are written for a large established company environment where some peripheral work is outsourced. A start-up environment is radically different and so is the build-operate-transfer (aka BOT) outsourcing model that a start-up must use.
The unique needs of a new business require special care when crafting the subcontracting agreement. Here are the key points to keep in mind:

1. Recruitment procedures
As a startup, you need top-tier talent with good domain experience. You just can’t afford to onboard people and train them. The agreement must have a contract clause in which all members identified for your team must take their qualification test (if you have one), they can be interviewed by you and only when you pass it, they become part of your foreign team . . Do not agree to share only resumes. This can be very misleading.

2. Protection of IPR
The protection of intellectual property and confidential information is of paramount importance in the start-up environment. Make sure that the outsourcing agreement has a clause that all inventions, discoveries or algorithms developed by your foreign team are YOUR exclusive property and the outsourcing partner does not have any rights in them (including intellectual property rights). residual). If, as a start-up, you have a standard employment contract, make sure that each and every member of your foreign team signs the same (or a duly modified copy).

3. Employee performance
Each individual in a start up must be highly effective and high performer. This is even more crucial when running a team abroad that cannot be personally monitored by you on a daily basis. Make sure the outsourcing agreement has strict performance criteria identified and clearly spells out the notice period within which your outsourcing partner must obtain a replacement for a non-compliant person. If the outsourcing partner has a performance improvement plan, critically review it. If necessary, capture clear reporting mechanisms, such as daily or weekly status update reports, bi-weekly calls, etc.

4. Authorized Transfer
As a new company, you need to outsource early to increase resources at a relatively lower cost. But what if you really succeed? What if you are the next Google? Would you like to continue to outsource core R&D, which is your competitive advantage? The answer is a clear NO. If you are successful, it is best to set up your own design center abroad and keep all the knowledge in-house. For this transition to be smooth, you should insist on a transfer clause in the outsourcing contract that authorizes you (as a start-up) to transfer your outsourcing partner’s entire foreign team to your direct affiliate, when the latter is set up.

If there is no such clause, you will have to hire fresh talent for the direct subsidiary and all the know-how with the off-shore team will be lost. This can be very painful and will lead to a substantial delay in making the direct subsidiary effective.