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http://www.bizjournals.com/boston/stories/2003/10/20/focus2.html
IN DEPTH: DOING BUSINESS OVERSEAS
Insider View
International outsourcing can spawn a host of legal concerns
Gene T. Barton Jr.
Despite an improving economy, U.S. companies are under enormous
pressure to improve their earnings by driving down costs.
Increasingly, international outsourcing arrangements offer the
potential for significant cost savings in a broad range of business
processes, including information technology services.
Although this kind of agreement can be structured in many ways, a
thoughtful contractual arrangement, with appropriate cost sharing,
pass-through mechanisms, and pricing adjustments, allows the parties
to share certain risks while at the same time establish a productive
and profitable relationship.
International outsourcing agreements present challenges to both the
vendor of outsourcing services and the customer. Typically, the vendor
will be asked to coordinate a staged, worldwide rollout of services
with little time to perform adequate business and legal due diligence
before pricing, much less rolling out, the services. On the other
hand, the customer will be faced with the performance risk, cost risk
and reputation risk of partnering with a service provider. Thus, both
parties must carefully evaluate the ostensible value proposition of
outsourcing: a better, more reliable product at a lower cost.
Practically speaking, as much as the customer wants superior services
at a lower cost, the vendor cannot act as the "insurer" of every
business and legal risk.
Scope of the agreement
First and foremost, both parties should be careful to avoid problems
with pricing and scope of services -- or, as it can be more commonly
described, "scope creep." In most circumstances, the vendor will
charge a base price for services and use separate adjustments and fees
for additional services, such as per project consulting services.
Thus, early in the negotiations, the parties should openly and
honestly discuss the scope of services, especially if the vendor plans
to negotiate subcontracts for any part of the services. For example,
in IT outsourcing agreements, if the customer wants the vendor to
provide ad hoc administrative services or other tasks previously
performed by displaced customer employees, it may be preferable for
the parties to negotiate a hybrid model of fixed and variable fees.
Additionally, if the customer needs to adjust the scope of services at
certain milestones (for example, annual review based on usage patterns
or upon a significant merger or acquisition), both parties should
consider how the elimination or addition of certain services would
affect the margins. If the price for base services combined low margin
and high margin countries into a "blended rate," eliminating
high-margin services could significantly change the value of the
contract.
Structure of the agreement
At the same time, structural problems associated with global contracts
can significantly affect the relationship between the parties. For
example, the mechanism for measuring compliance with agreed-upon
service-level agreements on a per country or global basis must be
clearly understood.
To provide for reasonable penalties in the form of credits or
liquidated damages, the parties must understand the mission critical
performance standards as well as the effect of measuring performance
in different ways. Similarly, when addressing payment issues, the
parties should examine how fluctuations in currency will influence the
contract. If the vendor pays its employees or subcontractors in local
currency and invoices the customer in U.S. dollars, the parties must
determine who should bear this currency risk. In the big picture, any
ambiguity in international outsourcing agreements will lead to
inefficiency and extra costs.
Aspects of the agreement
The parties must also address the requirements of international law,
including the array of local rules and regulations. For instance,
foreign labor laws could greatly complicate a customer's plan to
transfer its employees to the vendor.
In European Union countries, legislation enacted under the European
Commission's Acquired Rights Directive generally provides that
transferred employees be given the same or comparable employment terms
and benefits, including severance packages. Similarly, legislation
enacted under the commission's Data Privacy Directive could prohibit
the transfer of personal data to non-E.U. countries unless certain
additional notice, consent and security requirements are satisfied.
Because U.S. privacy laws do not provide "adequate" protection under
the E.U. Data Privacy Directive, cross-border transfers involved in
the outsourcing agreement will be prohibited unless the parties take
affirmative steps to satisfy additional E.U. data protection
standards. Other country-specific rules and regulations, such as
intellectual property laws, present a similar challenge -- in this
kind of situation, the parties should negotiate cost sharing or
pricing adjustment mechanisms on a per country basis.
The complexity of international outsourcing agreements requires a
unique blend of business and legal expertise -- but, as companies look
for ways to improve earnings, international outsourcing offers an
opportunity to reduce costs without sacrificing services. By better
understanding the many issues and entering into an appropriate
contractual relationship, U.S. companies can capture the value of
international outsourcing and achieve critical cost-savings.
Gene T. Barton Jr. is a partner in the corporate department at Boston
law firm Choate, Hall & Stewart.
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On 22 Oct 2003 09:07:42 -0700, ybf@ziplip.com (Your Special Friend)
wrote:
http://www.bizjournals.com/boston/stories/2003/10/20/focus2.html
IN DEPTH: DOING BUSINESS OVERSEAS
Insider View
Gene T. Barton Jr. is a partner in the corporate department at Boston
law firm Choate, Hall & Stewart.
YSF.. You left off..
2003 American City Business Journals Inc.
Posting verbatim copies of someone else's published work is a
violation of their copyrights.
I suggest you click on the link..
http://www.bizjournals.com/scoop/reprints_article.html?story_id=848250
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Article chosen: International outsourcing can spawn a host of legal
concerns
Copyright: 2003 American City Business Journals Inc.
Publication: Boston Business Journal
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