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This
summary is the synopsis of an interview with William Bierce in the January 2006
edition of HRO
Europe
, available at www.hroeurope.com
Biggest
Outsourcing Legal Issues of 2006
Copyright
2005. William B. Bierce
All rights reserved.
Prescient lawyers and sourcing advisors need to focus on
emerging business and regulatory issues for 2006.
Legal issues mirror the business, social and political issues of
international sourcing and delivery of niche business process services.
The biggest legal issues stem from the biggest business issues.
Business executives engage in outsourcing as a strategy to
pursue multiple goals for a distributed globalizing enterprise.
In this environment, modern supply chain management dictates the biggest
business requirements: cost management, pricing predictability, scalability and
reliability. Thus, outsourcing
lawyers need to meet the business imperatives to implement a multi-sourcing and
multi-silo approach, with appropriate retained resources in-house to manage
complex sourcing programs. Consider
the new title (which I have seen in a multinational enterprise) of "Vice
President, Business Transformation."
Business Goals.
In best-of-breed outsourcing contracts, these business goals will be
reflected in carefully structured and negotiated deal terms involving pricing,
quality, risk management, process design, termination and privacy rights.
·
Pricing structures will shift from FTE-based compensation to transaction-based
compensation. This shift will
depend on increasingly automated or structured service delivery models.
·
Quality assurance shows up in many clauses. These
cover process transformation, service transition, training requirements for
externally-facing service agents, process integration and improvement (leading
to complex issues relating to intellectual property streams) and sole source
liability of vendors for process integration.
Enforceability of QA clauses requires careful vendor selection and drafting.
·
Risks will be shifted. Every
outsourcing agreement will contain provisions to allocate risks.
Ordinary commercial risks include certain legal compliance, performance
measurement, exchange rate fluctuations and human resources life-cycles.
Extraordinary risks include force majeure, disaster-recovery services,
third-party litigation and major shifts in market dynamics for both the service
provider and the enterprise customer. Outsourcing
contracts need to map out and allocate emerging risks in both ordinary and
extraordinary categories.
·
Process design needs management.
Intellectual
property conflicts increasingly pit the enterprise customer's desire to own and
exclusively control the proprietary processes (and improvements made during the
outsourcing relationship) that it has historically used against the service
provider's desire to build a library of re-usable business processes that
support the enterprise customer's entire industry.
As seen in the ERP software suites, long-term efficiency might be best
serviced by permitting some form of standardization on processes, particularly
those that are mandated by law or accounting rules.
Assuming such standardization, enterprise customers could reap lower unit
costs by banding into buyers' consortia. (I
would like to discuss buying consortia with potentially interested enterprise
customers. Please contact me.)
·
Terminations require planning. The
contracts need to set up a plan for post-termination transitions, will require
greater attention to portability of services as "liquid" solutions,
pourable into a new drinking glass for future consumption.
The termination plan needs to be ready for implementation midstream, so
phase analysis (with appropriate financial charges) should be built into the
contract.
·
Individuals need protections of privacy rights. Privacy
and data protection continue to be fulcrum for political activism and compliance
risk. Protectionism for labor may
persist, but protectionism for personal data and privacy will get more traction.
It may no longer be enough to simply exclude any third party beneficiary
rights.
Regulatory
Issues.
A review of legislative, regulatory and political issues from 2005
suggests that 2006 could see more regulation of both outsourcing and offshoring.
Key issues include:
1. Privacy, data protection and offshoring:
-
whether offshoring violates privacy rights under local law
where the data subjects (individuals with protected health information or
personally identifiable information) have no choice and cannot opt-out; and
-
whether
India
,
China
and
Russia
will adopt, or enforce, clear privacy rights laws, and apply criminal
sanctions to protect the privacy of foreign nationals and foreign data.
2. Anti-terrorism:
-
extraterritoriality of anti-terrrorism laws and the erosion
of individual privacy rights; and
-
whether offshoring to a foreign country that has
anti-terrorist laws will violate the domestic law on personal privacy;
3. Taxation:
-
whether importation of services is subject to special taxes
(as it is currently under Brazilian law); and
-
tax optimization strategies in a world of tax treaties,
global services delivery teams and exports of services via the Internet.
4. Intellectual property:
5. Employment rights, including pension rights:
-
whether service providers are acting in a fiduciary capacity,
and
-
to what degree they will be liable for performing services
that have historically been done by an enterprise's employees;
6. Extension of regulatory regimes to outsourcers:
-
the degree to which service providers are to be regulated as
such, to protect regulated industries;
-
insurance of risks in outsourcing, particularly in regulated
industries.
We are actively following these issues.
If you would like further information, please contact
us.
Related
further reading:
Offshoring
to the
United States
- Impact of Anti-Terrorist Laws and
U.S.
Laws on Foreign Data Privacy
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