In recent years, in Mongolia outsourcing is becoming a common practice that enables small, medium and sometimes even large businesses to get access to skills and services that they would otherwise find hard to achieve either because of manpower or financial restrictions. So, let’s look into what outsourcing is.

Outsourcing is a business practice of hiring services of another company or individual, either internationally or domestically to perform tasks, handle operations or provide services for your business. The outside company, which is the service provider or a third-party provider, arranges for its own workers and resources to perform the tasks or services either on site at the hiring company’s facilities or at external locations. Outsourcing can also involve hiring individual independent contractors, temporary office workers and freelancers.

There are several models of outsourcing, and depending on the process, one may be preferable over another. Broadly there are three models based on the distance between the hiring company and the third-party provider. These are onshore, offshore and nearshore outsourcing. Onshore outsourcing is when the third-party provider resides in the same country as the hiring company. Offshore outsourcing is opposite of onshore outsourcing, which means the third-party provider resides in another country. Nearshore outsourcing is to hire a third-party provider that resides in neighboring countries or bordering regions.

Companies can outsource a number of tasks and services. Many companies often outsource information technology services, such as software development, infrastructure solutions, software support, as well as technical support. Also, many companies frequently outsource HR tasks, tax accounting and bookkeeping, legal services, customer service and call service, and delivery service (food and goods). For certain processes, like programming, content creation or translation, hiring freelancers on job-to-job basis is becoming more appropriate option.

Companies often outsource as a way to lower costs and improve efficiencies. Companies that decide to outsource rely on the third-party providers’ expertise or innovative technologies, that they don’t have in-house, in performing the outsourced tasks or services to gain such benefits. The underlying principle is that because the third-party provider focuses on that particular task or service, it is able to do it better, faster and cheaper than the hiring company could. Given such benefits, companies often decide to outsource supporting functions within their businesses so they can focus their resources more specifically on their core activities or the areas of the business that are most critical, thereby helping them gain competitive advantages in the market.

Outsourcing, however, can produce challenges and drawbacks for companies. For instance, companies that outsource could face heightened security risks, as they exchange with their third-party providers the company’s proprietary information or sensitive data that could be misused, mishandled or inadvertently exposed by the outsource provider. So, for a company to effectively outsource tasks and services, it is important to focus on the business partnership as much as the logistics. Maintaining and securing a trusted partnership relationship is essential in outsourcing. Therefore, companies engaged in outsourcing must adequately manage their agreements and their ongoing relationships with third-party providers to ensure success. Some might find that the resources devoted to managing those relationships rivals the resources devoted to the tasks that were outsourced, thereby possibly negating many, if not all, of the benefits sought by outsourcing.

There are some important things to remember when drafting an outsourcing agreement. Having the right legal agreement is the central core of a good outsourcing agreement, so seeking expert legal advice ahead of time might be a smart decision. The agreement needs to be fair and clear from the start, in addition to clearly defining what services are being outsourced. While they can be complex, good outsourcing agreements should contain following important information: detailed description of outsourced tasks and services, deliverables/service expectations, payment schedule, terms and conditions, inspection and acceptance, any potential penalties and/or awards, expected timeframe, and potential exit strategies. Formally agreed-upon targets, like service levels, can be a list that is as long or short as the business requires. They should be formed using detailed schedules so neither side has confusion or doubt about what is required of the service provider.  It is important for companies to know when the contractual agreement inevitably times out and ensure that the involved parties fulfill their obligations and stick around until the agreement is up. Therefore, good termination clauses or exit strategies should be in place from the start and continue after the end of the agreement.

There is a variety of other sections a good outsourcing agreement should include: confidentiality clause, independent contractor clause (if the third-party provider is independent contractor or freelancer), warranties, insurance requirements, force majeure, severability, dispute resolution, and governing law (if offshore or nearshore outsourcing). The agreement should discuss retained rights and the fact that each party retains all rights, interest, and title to its own pre-existing intellectual property. The provider should not use pre-existing intellectual property unless it has the right. Also, the clause on confidentiality should be detailed and discuss what constitutes confidential information and how sensitive information is to be handled. It should include specific details on customers’ confidential information and what is not to be disclosed to third parties.