Small businesses account for nearly half of the economic activity in the United States. To successfully compete with bigger competitors, small businesses are increasingly outsourcing to improve their efficiency and lower costs. Outsourcing allows companies to expand their competencies in key areas without taking on additional full-time, in-house employees. This is a growing trend among small businesses looking for professional yet cost-effective support.
Outsourced business functions are governed by service agreements. These agreements are contracts between businesses and independent service providers. Like all business contracts, service agreements must be carefully written to ensure effectiveness, accountability, and legal protection. Service companies usually provide standard agreements, but since they tend to favor the provider, small businesses should review and modify an agreement with the assistance of their legal counsel before signing it.
Common Areas for Outsourcing
Small business owners often prefer to keep money inside their business and do things themselves. But economies of scale in a global marketplace have made it necessary for many small businesses to take a page from the playbook of larger companies and outsource some functions.
Outsourcing statistics indicate that approximately two-thirds of companies with fifty or more employees outsource, as compared to around one-third of businesses with fewer than fifty employees. Roughly half of all small businesses say they plan to outsource business processes in the future. The most commonly cited reasons for small business outsourcing are increased efficiency, expert assistance, and freeing up employees to do other tasks.
The functions most likely to be outsourced are noncore functions. Deloitte notes that small- to medium-sized companies lack the office space or budget for in-house departments that handle functions such as finance and payroll. Small businesses most often outsource technical tasks like accounting and information technology (IT) services. They may also choose to outsource the following roles:
Due to technology and the increased prevalence of remote work, almost any aspect of a business can be outsourced these days. It is even possible to outsource a company’s C-suite executives, such as a chief financial officer (CFO), chief marketing officer (CMO), and chief technology officer (CTO).
Important Provisions in a Service Agreement
A services partnership is only as strong as the agreement underlying it. Service agreements have much in common with standard business contracts. Among other points, they should identify the parties to the contract, the contract’s duration, the responsibilities of each party, and mechanisms for resolving disputes. The following additional provisions should also be addressed:
Other Considerations for Service Agreements
Any contract you enter into with a service provider needs to be well thought out. Service agreements should align with your company’s broader business aims, set clear expectations and goals for contractors, and include precise definitions of key terms and concepts. Here are some points to keep in mind as you negotiate a service agreement:
Well-written service agreements set clear expectations for both parties and are the foundation of a strong business relationship. A service provider may have a standard contract, but you should not sign it without first reviewing it with a business attorney. Our law office helps small businesses with all aspects of business contracts, from reviewing and drafting to enforcement and dispute resolution. To schedule an appointment with our team, please contact us.