A&L Goodbody LLP
  April 12, 2005 - Ireland

Nearshore/Offshore Outsourcing – Part II - Implementation

In part two of his article on Near and Offshore Outsourcings Dominic Conlon of A&L Goodbody sets out a list of issues which should be considered by any company looking to outsource its service requirements to a provider based in a foreign jurisdiction. Implementing Your Near or Offshore Outsourcing If you have taken the decision to nearshore or offshore your outsourcing requirements then it is important that the following steps are also considered: (i) Competitive Tendering As with any outsourcing, you should consider the possible benefits of conducting a competitive tendering process when selecting your provider. Competitive tendering when properly managed, with all the necessary flexibility and safeguards for the potential services user, can result in significant cost savings for that user. However, if badly managed and run, a competitive tendering process can add significant delay and increase your external advisor, and management time costs; (ii) Due Diligence It is vital that you thoroughly examine both the legal framework and political stability and attitude of government in the target jurisdiction, and the track record and stability of your potential service provider. It is self evidently important that the legal and regulatory framework of the target jurisdiction is conducive for doing business. You must also establish that the target service provider has the ability and experience to do the job contracted and ensure that they will be there for the long haul; (iii) Do a test run Staggering the handover of responsibility for provision of the relevant business process over a reasonable period of time may enable you to sort out teething problems and get a clear sense of the service provider’s abilities and whether the relationship will in fact work, before you have passed the point of no return. (iv) Data security Requirements for data security and privacy for your systems and procedures can significantly increase as a result of a near or offshore outsourcing. Make sure that your own technical people are happy with and continually monitor the security procedures implemented on any outsourcing where data is travelling across significant distances and national boundaries; (v) Service level testing It is vital that you quickly make your performance expectations clear with your foreign service provider and establish baseline service levels for agreed services before you become wholly dependent upon the foreign provider for those services; (vi) Reporting and audit rights Having your service provider located at a distance from you increases the need for you to have clear and enforceable information rights against that service provider. You must have the right to regularly obtain all information, financial or otherwise, which you require from your service provider to enable you to monitor his performance and to be able to comply with your own auditing and reporting requirements in a timely and intelligible fashion; (vii) Contracts Management You need to establish a competent management team within your own organisation with responsibility for implementing the contract before commencement of service handover. We would also recommend that that dedicated management team include financial, HR and IT specialists. That team should be prepared to move to the near or off shore location for a potentially significant period of time immediately prior to and following commencement of provision of the services to deal with integration problems which will arise. You also need to be happy that the service provider will, in accordance with the terms of your outsourcing contract, provide you with quick and easy access to competent management in the service provider, which management have authority to deal with and remedy problems if and when they arise; (viii) Contingency Planning It is also extremely important that you have considered and put in place a robust contingency plan to deal with problems which may arise if, for whatever reason, the service provider can’t deliver the services for a period; (ix) Contract Performance and Enforcement As mentioned above, companies who have near or offshored their service requirements have to their cost, sometimes experienced difficulties in enforcing their contractual rights in other countries. When considering a foreign outsourcing you should perhaps consider mechanisms to minimise the risks that (a) the provider will fail in its obligations and leave you without required services for any material period, and (b) you may end up pursuing entities for redress in those near or offshore locations. The whole issue of contract enforcement and legal compatibility is an area which gives Ireland a competitive advantage over other foreign near or offshore locations. Ireland has a legal regime extremely similar to that in England and a sophisticated and owner friendly approach to IP rights. Make sure, so far as is possible, that you get a good clear, robust and enforceable contract signed with your service provider before you hand over responsibility for service provision. If you are outsourcing offshore that contract should of course, be governed by the law of your own jurisdiction, and subject to the judgment of those courts, rather than the law of the relevant offshore jurisdiction. This of course is not a real issue where for example a US or UK company is near shoring to Ireland because as, mentioned above, our legal and regulatory regime are very much pro business. Be aware however, that the courts in some foreign countries will claim jurisdiction over such contracts despite what the parties have agreed in writing. You could also consider insisting that the offshore provider puts a performance and/or financial guarantee, or performance bond in place, which is backed by a local company, third party financial institution or insurer. Alternatively you should consider only entering into indirect contractual outsourcing arrangements where the locally resident service manager has financial responsibility if things go wrong and has the financial wherewithal to make good any losses suffered by the recipient of services; (x) Have a good exit strategy in place It is probable that at the end of the outsourcing arrangement disengaging from the foreign service provider, which will probably involve him handing back data, equipment etc, may be a little more difficult than if the service provider was locally resident. Again near shoring, rather than offshoring minimises these issues. It is therefore additionally important that, at signing, you have agreed a clear exit plan with the offshore service provider which sets down clear timescales for handing back responsibility for the provision of the services, clearly apportions exit costs between the service provider and service user and clearly details each party’s confidentiality and other obligations after the contract has terminated; (xi) IR/PR Strategy Be prepared for and have in place a well thought out and rehearsed strategy to deal with industrial relations and publicity issues which may arise on your proposed near or offshore outsourcing. The industrial relation issues which can arise, and the impact of employment law on your strategy, needs to be carefully costed and managed; (xii) Tax Planning Near and off shore outsourcings, involving complex cross border arrangements require careful tax planning. Again, the near or offshore structure needs to adequately deal with tax laws in each of the target location, and local tax laws, to minimise tax charges arising. Additional tax planning is particularly important where people or assets move from the user to the service provider or vice versa. Here again Ireland has managed to leverage its extensive network of tax treaties to become a destination of choice for near shore outsourcings. (xiii) Currency Risks You should also give careful consideration to currency exposure risks which can arise on a near or offshore outsourcing and make sure that you have an appropriate strategy in place to minimise potential costs in this regard. Conclusions Moving to a near or offshore location requires additional planning and management time to execute your outsourcing successfully. Make sure that hidden costs and legal and other complexities don’t turn the advantages of a lower cost location into a cost negative. Be aware that certain offshore locations are not as business friendly as more developed economies, and may have a more lax attitude towards issues such as protection of Intellectual Property which can be particularly problematic. Ireland, with its relatively lower cost base and open market economy, together with its well developed legal system, is well placed to continue to attract interest from foreign companies looking to “offshore” their service requirements and should continue to maximise its head start in this area as against other higher risk offshore locations for the foreseeable future.


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