Offshore outsourcing has become the darling of big business, with an estimated EUR58bn spent on major outsourcing contracts across the globe last year alone. Its popularity looks set to continue - and it is not just big business which will reap the benefits in future.
Clearly, huge numbers of international firms realise that they can employ outsourcing providers in other countries to handle a range of business functions without a loss of quality, and at far lower prices. However, the trend has recently attracted some negative publicity in the UK, after newspapers focused on some British workers losing their jobs and revealed potentially damaging security lapses.
The benefits
Carried out professionally and for all the right reasons, offshore outsourcing can provide a unique and highly cost-effective solution to a company's problems - and importantly, need not result in negative headlines. One of the main drivers for its success is cost; indeed some providers say it can reduce operational overheads by as much as 80%. This is due to large differences in wages overseas. For example, a call centre seat which costs £18 per hour to operate in the UK costs just £6 in India, while Chinese scientists' wages are only a quarter of those earned by their British counterparts.
But offshoring brings far more benefits than simply financial ones, such as tapping into a deep pool of talented workers, and potentially opening up new markets for a company's services. In addition, by outsourcing non-core areas to an expert, the firm can access more specialist skills and technologies than it might possess itself, while leaving itself free to focus on the aspects of its business that it does excel in - meaning that its customers benefit from a much higher quality of service.
Managers do need to carefully consider factors such as their customers', shareholders' and employees' possible perceptions of the move. However, much of the negative publicity about job losses in the UK has been proved to be exaggerated. In fact, outsourcing rarely results in redundancies in growing companies, and research suggests that among the IT sector, offshoring has not caused a net loss of jobs. Indeed, nearly 60% of UK call centres are actually increasing their staff numbers at the moment.
However, besides cost, another important reason for offshore outsourcing should be to maintain or improve the level of service that a firm is currently providing. It is essential that the company is clear on its reasons for offshoring - and the reasons should not be purely financial.
Target areas
The four main sectors which are currently most likely to be outsourced are IT and software development, call centres, manufacturing, and research and development. Major UK companies such as BA, HSBC, Norwich Union and Standard Chartered Bank have sent some of their operations overseas to India, and many more firms are set to follow in their footsteps. According to the National Outsourcing Association (NOA), an independent, non profit-making body which promotes effective outsourcing in the UK, even SMEs are now looking to outsource offshore in a bid to remain competitive.
The IT sector in particular has been swift to recognise the benefits of outsourcing, as countries such as India offer a large and readily available supply of highly skilled, English-speaking graduates who will work for wages far lower than those demanded in the west. Other regions such as China, South Africa and Eastern Europe are also rapidly gaining in popularity, although any company considering offshoring must take account of the geo-political environment, cultural differences and local working practices, as well as factors such as time variations, currencies and public holidays.
Minimising risk
Once a company has decided to outsource part of its operations, how does it choose an outsourcing provider, and ensure that the highly complicated transition is undertaken professionally and with the least possible amount of risk? That is where the experienced outsourcing legal specialist comes into play, for expert knowledge and guidance is vital to make sure the process runs smoothly.
When considering offshoring, it is extremely important to appoint a law firm with experience in a wide range of relevant areas, such as tax, intellectual property, IT, employment law and corporate transactions, and which has a great deal of experience in this sector. Many of the difficulties encountered by one project will crop up in another, regardless of industry sector, so a law firm with specialist knowledge will be able to guide its client through the maze much more effectively.
Outsourcing should be treated much like a corporate transaction, and your lawyer should be there to do whatever needs to be done. This includes project management, financial due diligence and commercial advice, as well as the legal aspects.
One of the first roles of the outsourcing lawyer is to conduct a considerable amount of due diligence work - both into the potential providers as well as into the effects upon the outsourcing company, just as they would for any corporate deal.
A further major activity is to draw up the agreements covering such things as transition responsibilities, key performance indicators, and action to be taken if the targets are not reached. In addition, issues such as the duration of the contract and pricing, data protection, IT systems, security, allocation of risks, dispute resolution, disaster recovery and exit terms must also be addressed.
However, the outsourcing agreement must be flexible enough to allow both parties to change the terms to cope with dynamic environments and technological advancements - a pertinent fact as demonstrated by a recent survey, which found that 55% of companies with IT infrastructure outsourcing arrangements renegotiated the relationship during the life of the contract.
Lack of preparation can be fatal to a fledgling outsourcing project, so it is absolutely imperative for the firm and its lawyer to take the time to scrutinise the minutiae of the proposal. Many people in the industry say that outsourcing is like a marriage. It needs goodwill, a strong relationship and an ability to adapt to survive in order to stay together.
Therefore, regular meetings and communication are a must to allow changes to take place if necessary and to iron out any problems as soon as they arise. Most contracts will stipulate a set period of at least two years, where early termination will probably be extremely costly for the outsourcing company, so it is vital to do all possible preparation before signing the agreement. And of course, none of this can be rushed into; in fact an outsourcing deal can take up to a year to go live if it is to be carried out thoroughly.
Many firms make the classic mistake of thinking that once an operation is outsourced, it needs less management, but in fact the opposite is true, particularly when the service is located overseas. Increased management will certainly be needed, at least in the beginning, and constant ongoing supervision is vital if the project is to be a success.
Difficulties can also be experienced when data protection and security are not given enough priority. There is always some legal risk where personal data is processed, as was graphically demonstrated recently when an Indian call centre apparently sold the private bank details of 1,000 British customers to a newspaper reporter.
It is impossible for any company to guarantee that all of its employees are 100% trustworthy all of the time. However, every offshoring company must ensure that it does all it can to minimise risks by having the best possible security procedures.
Other potential pitfalls of offshoring can include the negative publicity involved when jobs are relocated to foreign countries. But if the issue is handled as sensitively as possible with the company taking the initiative rather than being caught out by rumour, employee dissatisfaction and damage to the company's public image can certainly be lessened. Employee representatives should be involved at the earliest opportunity, and HR staff kept well-informed. Where job losses cannot be avoided or the staff redeployed elsewhere, the company must also be fully aware of the legal rights of its workforce and will undoubtedly need specialist guidance from an experienced employment lawyer.
Improving competitiveness
Offshore outsourcing certainly has its dangers for those who enter into it without the proper preparation and legal advice. However, for those who do their homework, it can be a route to greatly improved competitiveness as proved by NOA research which found that 83% of companies which outsourced offshore reported high satisfaction with their overseas service delivery.
Many companies are now realising that they cannot continue to compete effectively on an international scale without using the increased efficiency and flexibility that outsourcing can bring. In the 21st century, most firms are under pressure to lower their overheads while maintaining quality, and with new computer technology, many jobs can now be carried out from anywhere in the world.
Ian Wallbank is offshoring specialist at law firm Shoosmiths, Tel: 08700 868413, E-mail: ian.wallbank@shoosmiths.co.uk
IMPORTANT DO'S AND DON'TS
The most important advice to firms taking the offshoring route is to:
- make sure the outsourced service is of truly high quality
- do not underestimate the preparation. Go to the detail
- do not underestimate management time and training, both initial and ongoing. It is the key to maintaining good quality customer service
- do not treat offshoring as a short-term project. Expect to spend at least six months setting up the outsourced service and then stick with it.
INSOURCING THREATENS OUTSOURCING CONTRACTS
Insourcing is a growing trend and could have a significant impact on outsourcing, with big organisations pulling operations back in-house, according to NOA research released in October. Sixty per cent of those questioned believed that insourcing posed a significant risk to outsourcing contracts and was not a passing fad.
In the research that surveyed over 60 of the UK's top outsourcing professionals, 30% of respondents felt that insourcing was a knee jerk reaction to bad outsourcing experiences. Recently it has been reported that some outsourcing contracts have failed to meet expectations. This is usually down to a number of reasons: hidden costs that reduce cost efficiency of the contract, relationship breakdowns between the supplier and the end user; and failure to meet agreed SLAs.
Commenting on the research, Martyn Hart, chairman of the NOA, said: "If suppliers are going to retain and win business with the threat of insourcing looming, it is essential they take steps to understand their customers' needs and wants. Past failures give suppliers the opportunity to see what went wrong and make sure it doesn't happen again."
The trend to insource first became evident last year. In September, JP Morgan Chase announced its intention to cancel a deal with IBM, bringing help desks back in house. More recently Prudential announced that it is bringing part of its IT operations in house from Capgemini.
Hart summarised: "To prevent this kind of major contract collapse, suppliers need to do all they can to avoid any kind of panic response. Constantly reviewing and evaluating the progress and the success of the relationship and the contract and making the necessary improvements will go a long way to achieving this. We need to ensure that outsourcing problems of the past don't shape the outsourcing industry of the future."
