So, you have taken the decision to outsource part of your services or functions? You have undertaken your internal due diligence and determined the benefits that outsourcing would bring to your business. Completed your requirements and your request for information document, you are now considering the list of potential suppliers to whom that request may be addressed. You have narrowed down your potential suppliers based on their experience and among the potential are some “offshore” suppliers. What does this mean to you, your business and the outsourcing project? 

Offshore outsourcing includes countries such as India and China where the average salaries are rather low but the workforce is usually well educated and highly motivated. So there is an apparent financial benefit to use suppliers in offshore countries.  There are, however, also some potential risks, such as:

·         Deterioration in service quality.

·         Poor operational management, leading to a failure to realise the planned cost-savings.

·         Damage to the reputation of your business. 

Whether the outsourcing is directly with the offshore supplier or indirect (where the customer appoints a UK supplier who then subcontracts to the offshore supplier), offshoring gives the customer a low level of control and it may be difficult (especially in the direct offshoring) to enforce its contractual rights. Also in the indirect offshoring which gives the customer greater control, the resulting level of management and risk-sharing erodes some of the potential cost-savings. 

So, let’s take a look at the potential risks involved.

·         Transition and ongoing service management and exit costs. Travel and internal time costs make physically transferring relevant services/functions from the UK to an offshore location (and then back to the UK upon termination of the outsourcing agreement) significantly more expensive than undertaking the transition domestically. In addition, a greater time and expense is invested in visiting and overseeing offshore services during the life of the contract.

·         Redundancies and other economic factors. It is likely that UK redundancy costs will need to be taken into account. TUPE is not limited geographically and this may mean that TUPE will be interpreted as applying to offshore outsourcing. Also the employment laws of many countries commonly used for offshore outsourcing can be rather restrictive, particularly regarding dismissals, flexible hours and leave policies.

·         Licensing and intellectual property rights. Sophisticated IT users and FTSE companies have usually foreseen the future likelihood of outsourcing IT functions and/or applicable business processes, and have often managed to negotiate contracts with the third party owners of intellectual property rights that permit and facilitate any outsourcing. However, the contracts often fail to consider any outsourcing outside the contract territory (for example, the UK or continental Europe). Obtaining the required consent from third party intellectual property rights owners of intellectual property rights to avoid potential intellectual property infringement claims can add potential cost (and time delay) to the outsourcing process.

·         Telecommunications. Connectivity between UK and offshore operations will be required. A significant amount of bandwidth may be needed (at potentially substantial additional cost) to ensure that there is no degradation in the quality and functionality of the offshore service.

·         Reputational and business continuity risk. Offshoring activities have the effect of transferring business away from the domestic economy. While making good business sense for the company, offshoring may be viewed negatively as a lack of support in the domestic market or as the exploitation of developing countries by developed countries. Many of the countries popular for offshoring (including India) may be more likely targets for terrorism or having ongoing tensions with bordering countries. They may also be more prone to natural disasters, which can affect vital utility or other business-critical services.

·         Data protection. The Data Protection Act prohibits the transfer of personal data to countries outside the EU, Iceland, Norway and Liechtenstein, unless the country in which the party importing the data is situated ensures an adequate degree of protection for the privacy rights of the individual concerned. Generally, personal data may be transferred:o    to countries which the European Commission has defined as "adequate" countries;o    to companies in the US which have signed up to the "safe harbour principles" agreed between the European Commission and the US government in 2000;o    where the individual to whom the data refer has consented to the transfer or where the transfer is necessary to perform a contract with the individual, or for reasons of substantial public interest; ando    in practice, the international transfer of personal data will most commonly be justified by means of the consent route, or by the parties entering into a contract that incorporates contractual clauses approved by the European Commission in 2001.

All articles are for general purposes and guidance only and do not constitute legal or professional advice. Copyright 2011 Anassutzi & Co Limited. All rights reserved. Information may be shared or reproduced only if accompanied by the author’s name and bio.