Reducing black box service provider risks for your business

By Vivian Michael | Startup Contracts

Delegation & reducing black box service provider risks at your business

As a founder, you’ll likely delegate to a service provider at some stage so you can effectively run your core business business activities.

Your service provider might be an accountant, marketing agency, designer, a lawyer or someone else. 

What you should delegate is up to you.

However, most business gurus would agree that for efficiency and productivity reasons, you should start with non-core business activities. 

In a rush to find your answer? No worries, jump ahead.

What you should delegate is up to you. However, most business gurus would agree that for efficiency and productivity reasons, you should start with non-core business activities. 

Non core tasks

And what exactly is non core?

Non-core tasks are the ones that you don’t have expertise to produce in-house regularly. And, even if you do, they cost you too much time and money to learn and perform and are therefore not worth keeping in-house do you need to delegate them.

The black box service provider 

For the purposes of this article, we’re dealing with service providers only.

Now, you’ll want to stay away from a black box service providers and I’ll explain why below.

A black box service provider will deliver the outcome you want, but may not readily give you visibility of the workings behind the outcome.

And, if they do give you the workings, its an additional charge, hard to check over and just a pain to manage.

They may be accountants, marketing agencies, lawyers and… really anyone else that’s supplying you with a service.

Black box example

A classic example is an accountant that may ask you to put your expenses into an excel spreadsheet, uploads the numbers to their system and tells you how much to pay the tax office for your BAS without giving you the workings, unless you ask for them.

Further, you may not have ready access to your financial reports on an ongoing basis unless you pay for a report to be pulled or built from the accountant’s system - whatever that is.

I don’t like blackbox service providers because they increase your business risk.

How?

Here’s my list: 

  • Tracking - If you cannot periodically track a service you’ve delegated, you may not know what’s going on until it’s too late and you’ve sunk too much money into the business.
  • Confidence - You lose confidence because you aren’t familiar with the subject matter.
  • Dependance - You are totally dependant on the black box service provider because without them you cannot track what’s going on. A dangerous move if you decide to change the service provider, they hold your records and you may have difficulty moving to another service provider.
  • Legal problems - if you don’t have the other 3 in the list, you could run into some legal trouble. I’ll explain below.

Why is it important to reduce delegation risks?

Even if you delegate, you are responsible and liable for how your business is run.

And, this responsibility and liability applies regardless of whether you are running your business as a sole trader, company, partnership and trust - the 4 Australian business structures you can choose from. 

Let’s look at responsibility under each business structure.

Sole trader 

A sole trader is legally responsible for everything. They are personally liable.

Partnership 

Similar to the sole trader structure, each partner is liable because the partnership is not a seperate entity. 

Company 

For those of you running a company, here’s what the Corporations Act 2001 says about delegation. 

Under section 198D, directors are able to delegate their powers to either: 

  • A committee of directors
  • A director
  • An employee of the company
  • Any other person.

And, the delegation must be recorded in a minute book.

However, while delegation is possible, the director remains responsible for the exercise of the power as if they power had been exercised by that director themselves: section 190 Corporations Act. 

There are some exceptions to this, these are listed below:

  • The director believed on reasonable grounds that the delegate would exercise their powers in compliance with company rules
  • The director believed on reasonable grounds, in good faith that the delegate was reliable and competent in relation to the power delegated.
Trust

If you operate your business as a trust, the trustee is legally responsible for its operations.

The ideal outcome

Here’s the ideal outcome:

You’ll want to either be confident with the processes you are delegating or know the right questions to ask the person to which you are delegating tasks. That’s how to reduce delegation risk.

Here’s a checklist to reduce delegation and black box provider risks

Here’s a checklist that you can apply for delegation to reduce delegation risks 

  • Business insurance which may include director’s insurance if you have a company structure
  • Standard operating procedures (SOPS) if could request the service provider to supply you with updated SOPS that are currently being used, or just make sure you have them saved in a central place so you know where to find them if you need them. For example, if you’ve off-shored some of your accountant work. This may not be appropriate in some instances.
  • Access - secure your access to systems that are used to track the task you’ve delegated. Coming back to the accountant example, this may include access to the cloud based accounting software used by your accountant, ensuring that you have reporting access as well so you can see your P&L, balance sheet, statement of cash-flows
  • Termination protection - if you terminate your agreement with your service provider, you should at the very least be able to get the work you have paid for to date and any other access codes that you’ll need.
  • Handover period - your businesses should not come to a grinding halt because you’ve ended a relationship with a service provider. Have a notice period in place to allow for a handover or move to another service provider.
  • Industry bodies - finally, various industry bodies can handle complaints about service providers that have not supplied you with what you’ve paid for. And I would recommend these always before taking formal legal action.

Taking formal legal action 

Formal legal action should always be your last resort because its time consuming and expensive. However, if you do need immediate relief to stop or get your service provider to do something, you may want to get legal advice about an injunction which can help you do this.


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About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to entrepreneurs launching in Australia that would otherwise DIY, rely on legacy contracts or go without.

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