Avoiding the Pitfalls of Outsourcing

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Outsourcing is fast becoming an effective management tool to reduce costs, control outcomes, and focus on core business practices. According to Gartner, the number of businesses starting new outsourcing deals will grow by 30 percent this year globally.

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  • Avoiding the Pitfalls of Outsourcing

    Outsourcing is fast becoming an effective management tool to reduce costs, control outcomes, and focus on core business practices. According to Gartner, the number of businesses starting new outsourcing deals will grow by 30 percent this year globally. Most often, as success here is dependent on foreign cultures, laws, and business customs, it can be replete with pitfalls. Even the most resilient strategic planners are not immune to dangers of a business left exposed by a third-party supplier. Most countries change their regulatory frameworks, and exposures in Intellectual Property laws can threaten competitive advantage, thereby making the risk of data leaks more significant.

    There can never be a 100% bullet-proof plan for ensuring the security of a companys international expansion, but there is always a risk-minimization approach, especially when outsourcing core business and Information Technology processes. For management, careful review of regulatory, IT/data security and process integrity risks can mean the difference between a successful outsourcing relationship that reduces costs, and an expensive legal mess.

    Data securityPrivacy, piracy, loss, security breaches, and theft can erode the value of brands, intellectual property, and other intangible assets that companies have earned and heavily invested in. It is also mandatory to carefully consider privacy laws of the target countries, and weigh them against the cost benefits when outsourcing data storage.

    In Europe, businesses have the benefit of tightly worded contract terms as well as a clearly defined legal framework. It is also a more secure environment as there are civil and criminal penalties for enforcing data privacy where sensitive personal data are concerned. Similar IP and data protection legislation exists in countries like Canada, Australia, Hong Kong, New Zealand and Japan, but in many other countries laws are weaker and offer less protection.

    In the U.S., data privacy is not guaranteed, as security legislation allows authorities access to any data stored in the country. In India, there is a burgeoning level of legislation relating to data privacy. Also, while the legal process is generally slow, it is relatively easy to obtain quick injunctive relief for clear cut breaches of IP for most technologies outside of the health/medical arena.

    Safeguarding Intellectual PropertyIn an outsourcing relationship, any kind of an Intellectual Property (IP) asset trade secrets, trademarks, industrial designs, patents, copyright and related rights, software, etc. may be involved at the different levels of the process. Distinct national laws generally govern the IP assets. And as the laws vary country-by-country, so do the headaches of the executives and managers dealing with their protection.

    A critical concern is the inadvertent, accidental or willful disclosure of confidential information and trade secrets. Once a trade secret is made public, it enters the public domain and is invariably lost. Non-Disclosure Agreements (NDA) can provide broad protection, but this may not be sufficient should litigation arise.

    Being ready for a contingencyThere is a basic risk in any internal audit compliance. The risk in most business endeavors is that it will fail to deliver at some point of time. The stakes are higher when functions outsourced are of strategic importance, and problems with delivery could threaten the reputation or even financial viability of the organization. There should be an assessment that is holistic, encompassing both risks caused by actual interruption to supply as well as risks that could cause reputational damage to the organization

    Whose law is it? A company in San Francisco wants to sue a service provider in England over a dispute. Where should the company file the case? Which countrys laws are applicable? Either party can refuse to file the case in the others legal system as applicable laws in both differ unless their agreement specifies which countrys laws and courts have exclusive jurisdiction. Equally, sometimes non-exclusive jurisdiction may be preferred to enable one party to be able to more easily serve proceedings on the other. All offshore contracts should specifically highlight the system of dispute settlement. Although there are international dispute settlement groups situated in London, Brussels and Geneva, it is essential to clarify the legal aspects of dispute settlement in the outsourcing contract itself.

    Outsourcing does not need to be a roll of the dice or a patchwork of legal battles across continents. Carry out a fault tree analysis right at the beginning and ensure your contract, IT, security and IP protection arrangements adequately cover the adverse scenarios. Understanding how to avoid the pitfalls is important to ensure you gain a business advantage from your international business expansion, and gaining an upper hand.

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