E4-E5/Management Outsourcing & Contract Management

3 OUTSOURCING & CONTRACT MANAGEMENT

3.1 LEARNING OBJECTIVES:

At the end of the session, the trainees will be able to learn
 Outsourcing in BSNL.
 Levels of outsourcing
 Advantages of outsourcing
 Criteria for selecting an outsourcing vendor
 Key to outsourcing success

3.2 INTRODUCTION :
Outsourcing: It is shifting a company‘s essential operations to a third party vendor in
order to gain various benefits including better services, low cost and speedy work. The
company that chooses to outsource is known as the customer or buyer while the third party
that provides outsourced services is known as the supplier or vendor.

The vendor may be a firm or a group of individuals, which is generally situated at a

different physical location (sometimes even a different country). In outsourcing, the vendor
has complete control over the process being outsourced as compared to contracting in which
the customer has more control over the process being contracted.

3.3 LEVELS OF OUTSOURCING

Outsourcing has moved from tactical to strategic level and companies have started
pursuing outsourcing as an important business strategy. Companies generally use the
following three levels of outsourcing:

 Project level: Discrete aspects of a project are outsourced

 Program level: Different projects in a program are outsourced
 Division level: The entire operation of a division is outsourced

There are various factors that govern the decision to outsource at a particular level by
a customer. These factors include:

 Critical nature of the work: If the work is critical to a company‘s core business, the
company will prefer to outsource as little as possible and in discrete parts.
 Faith of the customer in a vendor: The higher the faith a customer has in its vendor, the
more it will outsource. In some cases, it will outsource even the operations of an entire
division.

E4-E5/Management Version 3.0 April 2021 Page 29 of 277

For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

 Cost advantage: Cost efficiency is an important deciding criterion, with larger work
being outsourced if cost savings are large.
 Proven track record of the vendor: A proven track record of the supplier inculcates a
feeling of trust and the customer prefers to outsource larger work to the vendor.

Outsourcing at above-mentioned levels is achieved through various modes as detailed

below. Each mode has its own specific advantages. Companies examine their core
competencies and work out the right mix for outsourcing modes to maximize their returns.
Modes of outsourcing are:

Outsourcing Mode Description

On-shoring Outsourcing to a vendor that is located at a destination domestic
to the customer
Offshoring Outsourcing to a vendor that is located in a far-off country
Near-shoring Outsourcing to vendor in a nearby country
Home-sourcing Outsourcing to workers who work from home

Companies are also resorting to the option of multi-sourcing where a combination of

offshoring, on-shoring, near-shoring and home-shoring is used. For example, A small
company may decide to outsource bookkeeping duties to an accounting firm, as doing so
may be cheaper than retaining an in-house accountant. Other companies find outsourcing the
functions of human resource departments, such as payroll and health insurance, as beneficial.
When used properly, outsourcing is an effective strategy to reduce expenses, and can even
provide a business with a competitive advantage over rivals.

3.4 ADVANTAGES OF OUTSOURCING

Outsourcing offers numerous advantages to the customers, some of which have been
elaborated below:

3.4.1 FOCUS ON CORE COMPETENCIES:

Outsourcing enables customers to divert their attention from supplementary tasks
and focus on their core functions. Customer care, documentation, IT up gradation and
administrative tasks such as internal audit and payroll processing are the non-core tasks for
many companies and consume the time of the management if handled in-house. When these
tasks are outsourced, the company management can focus on the company‘s core
competency and bring better services and products into the market. For example Hero
Honda Motors outsources its IT maintenance work so that its staff can focus on user
requirements to deliver better services instead of spending time on routine complaints.

E4-E5/Management Version 3.0 April 2021 Page 30 of 277

For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

3.4.2 COST SAVINGS:

Cost savings is an important consideration in outsourcing decision. Outsourcing
enables companies reduce their costs on resource management, labor, space, etc. According
to Accenture, outsourcing leads to a cost saving of 25 percent to 30 percent. Outsource
Partners International estimates the cost savings to reach up to 50 percent when the
outsourced work is offshored.
3.4.3 QUALITY:
Vendors have expert employees along with specialized processes and technology
that ensure better quality of output for the customer. However, the customer has to carefully
select a vendor that will provide it with the quality of services that it requires.
3.4.4 FLEXIBILITY:
Outsourcing provides flexibility to the customer as the buyer can change a vendor
if required. Changing a vendor in case of poor delivery is much easier than changing a full-
time employee. Many outsourcing deals incorporate conditions for change in requirement or
termination of contract ensuring flexibility.
3.4.5 TIME-TO-MARKET:
Offshore outsourcing offers round the clock work benefits and hence reduces the
time-to-market. Both on-shore and offshore outsourcing may also result in time saving if
the vendor has skills and expertise that are not internal to the customer organization.
Outsourcing also enables faster start-up, development and scalability for new operations.

3.4.6 ACCESS TO DIVERSE TECHNOLOGIES:

Vendors have focus on particular services and play in volume. This enables them
to keep themselves up-to-date with the technology required in these services. The customer
can thus avoid technology obsolescence and leverage the vendor‘s access to diverse and
advanced technologies.

In addition to the above advantages, outsourcing offers other benefits such as

provider alternatives, transfer of risk to vendor, elimination of internal policies, elimination
of recruitment, training and staff retention in non-core functions, and scalability (faster scale-
up or scale-down capability).

E4-E5/Management Version 3.0 April 2021 Page 31 of 277

For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

3.4.7 REASONS FOR OUTSOURCING

Figure 4: Reasons of outsourcing

3.4.8 HOW IMPORTANT IS OUTSOURCED WORK

The notion that unimportant work is being outsourced no-more holds true. The
software development magazine conducted a survey in October 2003 to find what kind of
work was being outsourced. Results compiled from 414 respondents (engineers and
development managers) is given below:

Figure 5: : Importance of outsourced work

3.5 WHAT IS BEING OUTSOURCED?

Outsourced services can be categorized into two groups

1. Technology services
2. Business Processes

E4-E5/Management Version 3.0 April 2021 Page 32 of 277

For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

3.5.1 TECHNOLOGY SERVICES

Companies requires advanced IT and communication technologies for their regular

operations. Rapid changes in the technology sector bring new capabilities to use for
companies that need to select the right kind of vendor to get the best technology at the
cheapest cost. Following technology services are generally outsourced by customers:

 Software and applications

 Infrastructure
 Telecommunications
 E-commerce
 Web security and solutions
 Web hosting, website designing, development and maintenance

3.5.2 BUSINESS PROCESSES

Various business processes are not core to a company‘s main line of business.
Companies outsource such processes and focus on their core competence. The various
business processes that are being outsourced include the following:

 Back office operations

 Customer relationship management
 Sales and marketing (including telemarketing)
 Administrative support
 Payroll maintenance and other transaction processing
 Finance and Accounting
 Human resources and Training
 Logistics, procurement and supply chain management
 Medical transcription
 Security
 Research and analysis
 Product development
 Legal services
 Intellectual property research and documentation

Synonymous with these services are various commonly used terminologies such as
Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO), Legal
Process Outsourcing (LPO), Research Process Outsourcing (RPO), Recruitment Process
Outsourcing (this is also called RPO) and Education Process Outsourcing (EPO). As the
market for each service grows, vendors coin a term for their service to showcase a distinct
presence of their industry.
3.5.3 CRITERIA FOR SELECTING AN OUTSOURCING VENDOR
In an outsourcing deal, buyers want to achieve superior quality service at lower cost
E4-E5/Management Version 3.0 April 2021 Page 33 of 277
For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

and minimum involvement. On the other hand, outsourcing the work to an external agency
exposes the customer to risks of the work being delivered poorly. In such a scenario,
selection of a vendor for outsourcing is a difficult task, which becomes even more complex
while selecting an offshore vendor. Customers generally follow the criteria mentioned below
for selecting an outsourcing supplier:

1. Quality commitment: The vendor should be quality focused.

2. Cost: The vendor should have prices that enable the customer sufficient cost saving.
3. Additional resources and capabilities: The vendor should have resources and capabilities
that are not available to the customer internally.
4. Prior work: The vendor should have experience working with other organizations and
should have delivered satisfactorily to them. Checking with the references help the
customer understand the vendor‘s capabilities properly.
5. Contract terms: The terms of contract should offer flexibility to the client to modify the
requirements or terminate the contract easily, if required.
6. Confidentiality: How secure is the customer‘s data at the vendor site? The vendor should
have well-defined security policies in place.

In addition to these criteria, other parameters such as location, reporting

methodologies, vendor processes, financial stability of the vendor and cultural similarity play
a vital role in deciding the supplier.

3.5.4 KEY TO OUTSOURCING SUCCESS

Outsourcing involves getting work from an external firm which has limited
knowledge about the customer‘s internal processes and operations. Hence, a customers needs
to pay attention to certain considerations, apart from selecting the right vendor, to achieve
outsourcing success. These considerations include the following:
1. Setting the right expectations: The customer needs to set right expectations upfront
about the services that it needs (and will get) from its vendor. It should also have a proper
plan in place with well defined (outsourcing) goals and objectives.
2. Benchmarking methodology: The customer should establish tools or criteria to
benchmark the quality of output required from the vendor. Vendor‘s performance should be
regularly monitored using these criteria.
3. Experience in handling outsourcing projects: If the vendor and customer both have
experience in handling outsourcing projects, the chances of making the outsourcing deal a
success increase significantly. Adequate planning and back-up plans for any foreseeable
pitfalls will help both the client and supplier maintain a successful relationship.
4. Internal resistance: The buyer‘s management should explain the advantages of
outsourcing to its employees and ensure agreement on the outsourcing decision internally
before taking the outsourcing plunge. It should gather support for its decision from the top
management as well as lower ranked employees.

Last but not the least, the customer should exhibit trust towards its vendor, which in turn
E4-E5/Management Version 3.0 April 2021 Page 34 of 277
For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

should ensure transparency in its operations.

3.5.5 OUTSOURCING IN INDIAN TELECOM SECTOR

Outsourcing in telecom continues to evolve. Towers (active and passive components)
constitute almost 70% of the networks. Active parts involve antenna and the electronics that
is installed in the ‗huts‘ next to the tower while passive parts involve power system that is
supporting electronics. This infrastructure used to be managed by the staff of the operators
but in recent years this has been outsourced to an independent tower management companies.
There have been tower management companies providing these services for years in the
North American and European markets. In the Indian markets only recently operators like
Idea, Vodafone (India), and Bharti Airtel created Tower management companies like Indus
Tower. Bharti Airtel also created a company Bharti Infratel for providing Tower
management services. There are number of challenges in this working model as they exist in
a multi-sourcing arrangement.

Average Revenue Per User (ARPU) has been dropping globally as voice has been
commoditized. Telecom services is constantly looking for services which will improve
his/her quality of life at work and at home. Mobility while working is very much required in
number of functions. All this means, operators have to be constantly innovative for creating
new applications and services. This has provided entrepreneurs new opportunities to start up
ventures which focus on designing and developing apps which could be uploaded on telecom
networks for consumers to use. Value added services or data services are expected to
generate additional revenue which operators are desperately looking for. Content generation
is the most important part of providing value added services. Telco‘s are being challenged in
this space by several small to medium size companies who are more nimble, creative, and
agile in bringing new apps faster to the users. Telco‘s have realized their limitations in
content generation hence have started working with number of companies using a revenue
sharing model. Over The Top (OTT) players are also challenging Telco‘s for number of
voice and non-voice services hence yet another outsourced part of the business for operators

3.5.6 OUTSOURCING IN BSNL

Policy has been finalized by BSNL on outsourcing model for maintenance and
provisioning of Landline and Broadband for External plant of Copper Network vide letter no.
77-1/2019/ Outsourcing Model - GEN/19 dated 20.12.2019 and amended from time to
time.

Contract Management
Learning Objectives:
1. Indian contract act-1872
2. Of contracts, voidable contracts, and void agreements.

E4-E5/Management Version 3.0 April 2021 Page 35 of 277

For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

INDIAN CONTRACT ACT-1872

Sec-1 Short Title
 Applicable to whole of India except J&K
 Applicable from 1.09.1872
2.0 Sec-2 Interpretation-Clauses
2.1 Proposal
When one person signifies to another his willingness to do something, with a view to
obtain the assent of another person, he is said to make a proposal.
2.2 Promise
A proposal when accepted becomes a promise.
2.3 Promisor
The person making the proposal is called PROMISOR (Contractor).
2.4 Promisee
The person accepting the proposal is called PROMISEE (Deptt./BSNL).
2.5 Consideration
When, at the desire of Promisor, the Promisee has done something or promises to do
something, such act of promise is called consideration.
2.6 Agreement
Every promise forming the consideration for each other, is an AGREEMENT.
2.7 Reciprocal Promises
Promises which form the consideration for each other, are called RECIPROCAL
PROMISES.
2.8 Contract
An Agreement enforceable by Law is a CONTRACT
2.9 Void
An agreement not enforceable by Law is said to be void.
Chapter – I
Communication, Acceptance and Revocation of Proposals
3.0 Sec-4 Communication When Complete

E4-E5/Management Version 3.0 April 2021 Page 36 of 277

For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

The Communication of a Proposal is Complete:-

The communication of a proposal is complete when it becomes to the knowledge of the
person to whom it is made.
The Communication of an Acceptance is Complete:–
As against the proposer, when it is put in a course of transmission to him so at to be
out of the power of the acceptor; The Communication of a Revocation is Complete:–
 As against the person who makes it, when it is put into a course of transmission to the
person to whom it is made, so as to be out of the power of the person who makes it;
 As against the person to whom it is made, when it comes to his knowledge.
4.0 Sec-5 Revocation of Proposal and Acceptance
A proposal may be revoked at any time before the communication of its acceptance is
complete as against the proposer, but not afterwards. An acceptance may be revoked at any
time before the communication of the acceptance is complete as against the acceptor, but not
afterwards.
CHAPTER – II
Of Contracts, Voidable Contracts, and Void Agreements
Sec-10 – What agreements are contracts (Ingredients of Contract)

All the agreements are contracts.

 If they are made by free consent.
 Parties competent to contract (Sec-11).
 For a Lawful consideration.
 With Lawful object.
 Lawful objects are not expressly declared to be void.
Sec-11 who are competent to contract
Every person is competent to contract who is :
 major
 of sound mind (Sec-12)
 not disqualified from contracting by any law
7.0 Sec-14 Free consent defined Free consent if:
 No coercion (Sec-15)
 No undue influence (Sec-16) o No Fraud (Sec-17)
 No misrepresentation of facts (Sec-18)
 No mistake (Sec-20, 21, & 22)
E4-E5/Management Version 3.0 April 2021 Page 37 of 277
For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

8.0 Sec-24 Agreement void, if consideration and objects are unlawful.

9.0 Sec-25 Agreements without consideration, void An agreement without consideration is
void, unless:
(i) It is expressed in writing and registered and is made due to natural love and affection
between the parties standing in near relation to each other.
(ii) It is a promise to compensate a person who has done something for the promisor.
(iii) If a person promise to pay a debt which is time barred by Limitation Law.
Sec-29 Agreements Void for uncertainty
Agreements, the meaning of which is not certain are void.
Chapter – IV
Of Performance of Contracts, Contracts Which Must Be Performed
Performance of Reciprocal Promises
Sec-51 – Promisor not bound to perform, unless reciprocal promise ready and willing to
perform
When a contract consists of reciprocal promises to be simultaneously performed, no
promisor need perform his promise unless the promisee is ready and willing to perform his
reciprocal promise.
Sec-52 – Order of performance of reciprocal promises
Where the order in which reciprocal promises are to be performed is expressly fixed
by the contract, they shall be performed in the order, and where the orders is not expressly
fixed by the contract, they shall be performed in that order which the nature of transaction
requires.
Sec-53 – Liability of party preventing event on which contract is to take effect
When a contract contains reciprocal promises, and one party to the contract prevents
the other from performing his promise, the contract becomes voidable at the option of the
party so prevented; and he is entitled to compensation from the other party for any loss which
he may sustain in consequence of the non-performance of the contract.
Sec-54 – Effect of default as to the promise which should be performed, in contract
consisting of reciprocal promises
When a contract consists of reciprocal promises, such that one of them cannot be
performed, or that its performance cannot be claimed till the other has been performed, and
the promisor of the promise last mentioned fails to perform it, such promisor cannot claim
the performance of the reciprocal promise, and must make compensation to the other party to
the contract for any loss.
Sec-55 Effect of failure to perform at fixed time, in contract in which time is essential
E4-E5/Management Version 3.0 April 2021 Page 38 of 277
For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

When a party to a contract promises to do a certain thing at or before a specified time,

or certain things at or before specified times, and fails to do any such thing at or before the
specified time, the contract, or so much of it as has not been performed, becomes voidable at
the option of the promisee, if the intention of the parties was that time should be of the
essence of the contract.
Effect of such failure when time is not essential:-
If it was not the intention of the parties that time should be of the essence of the
contract, the contract does not become voidable by the failure to do such thing at or before
the specified time; but the promisee is entitled to compensation from the promisor for any
loss occasioned to him by such failure.
Effect of acceptance of performance at time other than that agreed upon:-
If, in case of a contract voidable on account of the promisor's failure to perform his
promise at the time agreed, the promisee accepts performance of such promise at any time
other than that agreed, the promisee cannot claim compensation for any loss occasioned
by the non-performance of the promise at the time agreed, unless, at the time of such
acceptance he gives notice to the promisor of his intention to do so. Notice under section
55 before expiry of stipulated period is must before granting any provisional Extension of
Time at the request of contractor. Even if contractor does not apply and promisee intends to
continue the contract, su-moto provisional extension of time with notice under section 55
should be given to the contractor. If contractor continues to work, receiving instructions &
accepting measurement & bills, it is implied acceptance of contractor.

Chapter V
Of Certain Relations Resembling Those Created by Contract
Sec-70 –Obligation of person enjoying benefit of non-gratuitous act
Where a person lawfully does anything for another person, or delivers anything to
him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the
later is bound to make compensation to the former in respect of, or to restore, the thing so
done or delivered.
Chapter VI Of The Consequences of Breach of Contract
Sec-73 Compensation for loss or damage caused by breach of contract
When a contract has been broken, the party who suffers by such breach is entitled to
receive, from the party who has broken the contract, compensation for any loss or damage
caused to him thereby, which naturally arose in the usual course of things from such breach,
or which the parties knew, when they made the contract, to be likely to result from the breach
of it. Such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach. Explanation.-In estimating the loss or damage arising from
a breach of contract, the means which existed of remedying the inconvenience caused-by the
non-performance of the contract must be taken into account.
E4-E5/Management Version 3.0 April 2021 Page 39 of 277
For Restricted Circulation
 E4-E5/Management Outsourcing & Contract Management

Sec-74 Compensation for breach of contract where penalty stipulated for.

When a contract has been broken, if a sum is named in the contract as the amount to
be paid in case of such breach, or if the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not actual damage or loss
is proved to have been caused thereby, to receive from the party who has broken the contract
reasonable compensation not exceeding the amount so named or, as the case may be, the
penalty stipulated for.
Sec-75 Party rightfully rescinding contract, entitled to compensation
A person who rightfully rescinds a contract is entitled to consideration for any
damage which he has sustained through the non-fulfillment of the contract.

3.6 CONCLUSION
In outsourcing, the vendor has complete control over the process being outsourced as
compared to contracting in which the customer has more control over the process being
contracted.
An important aspect of contract management is the categorization of contracts for
effective internal and centralized control and every robust contract management system
should address the key elements for central and decentralized controls for contract execution.
A robust contract management system which includes contract strategizing, vetting,
versioning, storage and effective retrieval system, aided by prompting tools that highlight
critical dates and events go a long way in managing a contractual relationship.
Business owners know from experience that managing relationships with vendors,
customers and employees can be a challenging process. The applied theories of contract
management can help you gauge the effectiveness and worth of these relationships, keeping
your business mindful of the law and helping you create value for your organization's
stakeholders.

E4-E5/Management Version 3.0 April 2021 Page 40 of 277

For Restricted Circulation