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IT Outsourcing Contract: Crucial Elements To Include

Feb 28, 2023 | Managed IT Services

You will discover many benefits to outsourcing your business’s IT needs. When you choose to take the leap, you have to sign an IT outsourcing contract with the service provider. However, before you sign an outsourcing agreement, you must ensure the contract won’t cause you additional headaches in the future.

As San Francisco’s managed service provider, we have seen our share of the legal and technical aspects of outsourcing contracts. We’ll look at the important components you should watch for in this article.

The Main Components Of A Robust IT Outsourcing Contract

You will encounter different types of outsourcing contracts, but most feature similar components. The following information describes the major elements of a comprehensive IT outsourcing agreement:

Detailed project scope

The defined project scope explains your organization’s service needs. This part of the contract also typically contains the Request for Proposal (RFP) and the response of the outsourcing service provider during the initial bidding process. You must ensure all parties involved understand the full scope of the project.

Service level agreements

A service level agreement (SLA) establishes a standard for the level of service you can expect from the firm.

Some outsourcing agreements contain clauses to penalize the outsourcing firm if they fail to meet the expected or agreed service levels. It will help keep the firm motivated enough to help achieve your company’s objectives.

Asset transfer to service provider

When you agree to an IT outsourcing arrangement, you’ll likely need to transfer several IT assets to a third-party company. Some of the assets you may transfer include the following:

  • Equipment leases
  • Computer hardware
  • Communication equipment
  • Software licensing
  • And more

You’ll need a sales agreement in the contract to legally complete the transfer to the outsourcing firm. Fixed price contract terms often cover the asset transfer section in detail.

Warranty cover

Outsourcing your IT needs to an IT services firm comes with many uncertainties. Even when you perfectly understand and agree with their outsourcing models and overall business practice, plenty can still go wrong.

Including warranty cover in the IT outsourcing contract helps ensure you stay protected if the vendor breaks any part of the outsourcing arrangements and you end up needing to spend time and money on lawsuits. The contract should discuss how you’ll reclaim damages.

Product ownership or governance

Will your business completely control the product or software, or will you share ownership with the IT outsourcing firm? For example, some IT firms can help expand existing software during or after the development process in return for a share of the ownership.

In the outsourcing industry, a common practice involves the outsourcing partner commissioning a development team to make any improvements or push any new features recommended by the client’s internal IT department.

What happens when a feature developed by the outsourced team becomes an industry game changer? How about new software projects they conceptualize from scratch? Will the contract terms remain the same or change?

Negotiating contracts without discussing this aspect can lead to conflicts down the line.

Customer intellectual property rights protection clause

One of the biggest concerns for businesses that embrace IT outsourcing stems from the risk of an outsourcing firm using its ideas without consent. The IP protection clause can help safeguard your intellectual property from piracy by an outsourcing business.

This part of the outsourced service agreement should cover pre-existing intellectual property and new ones your company will add during the outsourcing relationship.

This part of the legal document also includes where you can consider adding clauses geared toward ensuring provider compliance with patents and other such elements.

Cost and payment structure

You need to include the cost and payment structure in the contract, especially if you operate a fixed-price outsourcing model. The contract should provide clear answers on who is responsible for the payment, when the charges are due, how they will be paid, and the total cost of the charges.

Dispute resolution

When you work with an outsourcing firm, consider the high possibility that disagreements will arise. To avoid legal conflicts, you must prepare for such disputes by including an arbitrator in the outsourcing contract.

Agreement timeline or completion duration

If you sign a fixed-price outsourcing contract, you want to set a timetable for the contract. The situation is the same for time and material contracts.

But even with other outsourcing models, it’s important to specify how long the arrangement with the outsourcing company will be in effect in the contract.

Subcontracting clause

Will you allow the outsourcing firm to subcontract services to other companies? You have to decide your position on subcontracting ahead of time and ensure the contract reflects it.

For example, many software development outsourcing businesses do not have a dedicated team to manage every facet of their business and client business. Thus, they subcontract services like project management, business operations, web development, and more that they can’t assign to in-house staff.

Such a team adds a new layer of complexity to the outsourcing agreement. Your agreement with the services provider should reflect their responsibilities concerning the management of the subcontracting team.

Indemnification clause

The indemnity clause ensures any losses due to the outsourcing firm’s negligence will be solely borne by the outsourcing partner.

Many legal contracts in the IT space contain indemnity contract clauses to ensure all parties know their obligations when problems arise.

An exit strategy in your IT outsourcing contract

This section will determine how you will end the IT contract with the outsourcing vendor without any unwanted outcomes.

Get Expert Advice On IT Outsourcing

Outsourcing has bridged the gap between small and big businesses. Establishments no longer need to hire people with the requisite technical skills to chase business growth. Whether you want to have software developed or maintain a round-the-clock help desk, you will now find it easier to hire the providers of such services.

Do you want to enjoy managed IT services benefits without worries? You need to seek professional advice from a company that understands your IT needs. Our team can advise on outsourcing needs and provide guidance with the IT outsourcing contract.

Call Renascence IT Consulting today at (510) 552-6896 to schedule a consultation.

Our History


With over 20 years of industry experience under his belt, the company's CEO possesses a degree in Computer Science and a number of certifications, including MCSE, MCSA, A+ and Network+. From an early age, computers were always a part of his life; dating back to the days of the Apple II. Since that time, he served as everything from system administrator to IT business director within well-established companies, before deciding that consulting was his passion. Leveraging years of technical recruiting, he personally handpicked a select group of specialists proficient in Linux, customized web applications and databases, telephony and cross-platform devices, to ultimately bring your organization to the next level.