gordon & glickson llc chicago, illinois...sep 29, 2003 · (iii) clearing houses (firms that...
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CROSS-BORDER OUTSOURCING
GORDON & GLICKSON LLC CHICAGO, ILLINOIS
SEPTEMBER 29, 2003
I. CROSS-BORDER OUTSOURCING: A GROWING PHENOMENON
A. Est. 3.3 million U.S. service jobs (and up to $136 billion in service business wages) will move out of U.S. over next 15 years1
(1) Factors
a. cost benefits
b. strong capital-market support of foreign vendors
c. improved technology
d. declining telecom costs
e. record of success
B. Impact in U.S.
(1) Local Reverberations—Job Loss
(2) U.S. legislative backlash (pending in Maryland, Washington, Rhode Island, Connecticut, New Jersey, Missouri)
a. restricting offshore outsourcing by public bodies
(i) to combat loss of jobs
(ii) security risk of building back-door access into software developed offshore
b. requiring “transparency” by private companies who outsource offshore (call center operators must id themselves, their employers, and their locations)
1 Twitchell, E., Will the Great Shakeout Take Its Toll, Baron’s Online, dated June 26, 2003 (describing prediction of John McCarthy of Forrester Research); http://online.wsj.com/barrons/article/0,,SB105663319289188500,00.html
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c. India protests for “free trade” and has hired lobbyists
C. Types of Services
(1) IT Services
a. data entry/conversion/application maintenance
b. help desk
c. design/architecture
d. product and software development
e. strategic consulting
(2) General IT-enabled business processes (“back office” tasks)
a. human resource and payroll processing
b. accounting
c. customer service/call center
(3) Industry-specific IT-enabled business processes
a. health care (e.g. medical transcription)
b. insurance (e.g. claims processing)
c. financial services (e.g. credit card processing, mortgage processing, check processing)
d. travel (e.g. reservation systems)
D. Places
(1) India
(2) China
(3) Russia
(4) Philippines, Poland, Mexico, Ireland, Canada, etc.
E. Benefits and Costs
(1) Benefits
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a. U.S. company can focus resources on “core” competencies (activities that create a competitive advantage or market differentiation)
(i) shifting view: outsourcing some “core” competencies
b. cost savings
c. round-the-clock services
d. high quality service (compared to “complacent” in-house providers)
e. competitive advantage
(i) U.S. companies over Europeans, who face union resistance if they shift jobs abroad
(2) Costs
a. delayed/mistaken communications
(i) due to time difference and language difference
b. need for remote oversight
(i) risk of schedule and/or budget overruns
c. local political backlash
d. legal uncertainties
(i) governing law
(ii) dispute resolution
(iii) IP rights
(iv) remedies
e. up-front costs
(i) travel costs for tech personnel and managers to go back and forth
(ii) for training and knowledge transfer
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f. quality control
g. political risk (e.g. India-Pakistan)
h. security/confidentiality
i. currency fluctuation risk (especially with long-term contracts)
F. Offshore Outsource vs. Offshore Affiliate
(1) Offshore Outsource
a. service levels/service quality
(i) vendor’s core competency
b. relatively easy to ramp up or down
c. U.S. customer not subject to local laws
(i) hours of services
(ii) termination/severance
(iii) pension/social security
(iv) tax
d. accounting treatment (expense item vs. capital cost)
e. risk of loss
(i) intellectual property
(ii) trade secrets/security
(iii) know-how experience (when you outsource, you give away IP assets, that is, the intellectual capital that your technical staff learns every time it completes a project—eventually, an outsource vendor will know your business better than you)
(2) Offshore Affiliate
a. long-term requirements
b. accounting treatment/cost to start-up
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c. customer retains control
(i) intellectual property
(ii) quality (personnel, work)
(iii) security and confidentiality
(iv) export law compliance
d. employees (vs. contractors)
(i) loyalty/reduced turn-over
(ii) better knowledge of business
(iii) uniformity of training, culture, practices, processes, with rest of company employees
(iv) U.S. company subject to local laws
1. termination
2. closure of business
3. statutory holidays/hours of employment
4. tax
5. pension
(3) Affiliate Outsource
a. U.S. customer and offshore vendor set up offshore service company together, with customer sometimes having right to buy out vendor
b. set up offshore sub, but have offshore vendor work with sub out of sub’s offshore facility
II. PLACES
A. India
(1) Big (but narrowing) cost advantage
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a. IT specialist working for outsource vendor earns $20 to $30/day vs. $50 to $90/hr. by U.S. counterpart2
(2) Educated workforce
a. Produces as many college grads as U.S.
(3) English speaking workforce (though Indian English is pretty different)
a. Advantage over Russia, China, Eastern Europe, Mexico
(4) Presence of major vendors
a. Indian companies
(i) Infosys, Tata, Cognizant, Wipro
(ii) major customers (America Online, Microsoft, Lucent, Dell, Amazon)
(iii) big investment/capitalization
1. Infosys has bigger market cap than EDS
2. vendors have big margins and cash flows, helping them to execute
(iv) services evolving upstream3 (began as providers of “niche” capabilities and body shops—have evolved to BPO, etc.)
1. architecture
2. design
3. product development
4. tech-strategy
2 Id. (citing research of Frances Karamouzis, Gartner Research) 3 Moore, S., IT Trends 2003: Offshore Outsourcing, ComputerWeekly.com, November 18, 2002; http://www.computerweekly.com/articles/article.asp?liArticleID=117585&liArticleTypeID=8&li Categor
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(v) downstream outsourcing of lower-value services
1. China
b. U.S. companies with India outposts
(i) outsource vendors (EDS/IBM/Computer Sciences Corporation) and IT consultants (Accenture/Cap Gemini—E&Y)
1. understand U.S. market well
2. offer wide scope of services
3. proven track record
4. have hired tech personnel in low-cost countries
5. good for complex outsource (e.g., development, maintenance, and server farms), but not so low cost
(ii) “Back-Office” processing of large companies (General Electric, American Express)
(5) Government support
a. tax incentives (tax breaks for companies in sector may be passed through to customer)
b. telecom deregulation
c. investment in infrastructure (high-speed telecom links)
d. negative factor: Lack of infrastructure knowledge and skill. 1977 IT industry nationalization by government—forced multinationals like IBM to leave India and resulted in shortage of mainframe infrastructure and skills, that persists today
(6) Political risk (India-Pakistan)
a. address by business continuity planning and redundancy of sourcing
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b. guarantee of onsite personnel
c. political risk insurance sometimes possible
B. China, Russia
(1) large pools of technical expertise
(2) lower labor cost even than India
(3) poor English skills
(4) less cultural commonality with U.S.
(5) less developed management skills
(6) culture of IP infringement
C. Latin America
(1) Spanish language: advantage for addressing large U.S. Spanish-speaking market (e.g., call center services)
(2) lower cost
(3) growing tech proficiency and infrastructure
D. Canada
(1) low political risk
(2) highly educated labor pool
(3) language and culture match to U.S.
(4) highly developed infrastructure, linked to U.S.
(5) easy to supervise, same time zones
(6) less cost effective
III. LEGAL CONSIDERATIONS
A. Data Protection/Privacy
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(1) U.S. Gramm-Leach-Bliley Act 1999 (GLB Act)4 [part of Act relates to privacy]
a. applies to financial institutions
(i) banks
(ii) mortgage lenders
(iii) retailers who issue credit cards
(iv) leasing companies
(v) investment advisors
(2) U.S. Health Insurance Portability and Accountability Act of 1996 (HIPAA)5
a. applies to health care industry
(i) providers of health care services (hospitals, physicians)
(ii) health plans that pay for medical care (HMO’s, medical insurers, and employers who sponsor group health plans)
(iii) clearing houses (firms that act on behalf of providers or health plans)
(3) offshore outsource
a. offshore vendor may not be familiar with law and regulations
b. contract should be drafted to conform to legal requirements: e.g.—if HIPAA requires a patient to be able to review, and revise errors in, the patient’s records, then a hospital that outsources its database support to an Indian vendor should ensure in its outsource contract that vendor promptly responds to record access enquiries and amends records to correct errors, as needed
c. contract should have compliance with laws clause
4 Gramm-Leach-Bliley Act (Financial Services Modernization Act of 1999) Pub. L. 106-102, Nov. 12, 1999 5 Health Insurance Portability and Accountability Act of 1996 Pub. L. 104-191, Aug. 21, 1996
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d. contract should have indemnity
e. contract should have mitigation of damage clause
f. contract should require vendor to develop policies and procedures to conform vendor to legal requirements [e.g. to safeguard data against alteration or deletion]
g. contract should allocate responsibility for monitoring changes to law and cost of compliance
h. exception to typical confidentiality carve-out
(4) European Union Data Protection Directive 19956
a. requires E.U. members to implement conforming laws according to Directive’s minimum standards
(i) different E.U. members have different implementing legislation
b. regulates processing of personal data collected with respect to a resident of an E.U. country (“processing” includes collection, organization, storage, use, retrieval, and disclosure of data)
c. restricts transfer of any such data collected in an E.U. country, to a non-E.U. country that lacks “adequate” privacy protection
d. Offshore Outsource Vendor
(i) example: European company transfers human resource data to its U.S. affiliate (who is “data controller”) then U.S. affiliate further transfers the data to offshore outsource vendor
(ii) vendor may not be familiar with the Directive
(iii) contract between U.S. company and offshore vendor must ensure vendor’s use of data conforms to the restrictions to which U.S. company is subject (for
6 Directive 95/46/EC of European Parliament and European Council, October 24, 1995
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example, vendor must provide access to database so data can be reviewed and corrected if it is erroneous; take steps to protect data from loss, misuse, alteration, etc.)
(iv) contract should have “compliance with laws” clause
(v) contract should have indemnity
(vi) contract should require vendor to develop policies and procedures
(vii) allocation of responsibility and cost
(viii) local counsel advisable
(ix) exception to confidentiality carve-out
B. Intellectual Property
(1) Typical Issues
a. licensing of parties’ pre-existing IP used under outsource contract
b. ownership of IP created by vendor under outsource contract
(2) Governing Legislation
a. International Treaties—minimal level of protection in most vendor countries
(i) Paris Treaty
(ii) Berne Convention
b. National Laws—define IP rights distinctly
(i) United Kingdom
1. “joint ownership”: neither party can license IP without other’s consent (vs. U.S. concept, where both parties have full right of use and to license to third parties)
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2. no “work for hire” concept
3. software patents hard to obtain (less desire to fight over such rights in contract negotiations)
A. but copyright for “factual database” is easier to obtain
(ii) India
1. broad “fair use” concept
2. “work for hire” only applies in employer-employee context; in independent contractor relationship
A. author owns copyright
B. assignment required
3. no software patents
(iii) moral rights concept
1. right of creator to be recognized as author of work
2. right to protect work’s integrity (e.g., to resist subsequent changes to software)
3. may be non-assignable in some countries, so vendor should waive these rights in favor of customer (but no waiver in Russia)
(3) Best practices
a. carefully specify in contract any license terms and precisely define any ownership rights over IP (without contractual safeguards, different IP laws in difference countries can affect parties’ rights in outsource transaction)
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(i) examples
1. United Kingdom
A. joint ownership
2. India
A. problem: work developed in India, e.g., for use in U.S.: law governing copyright ownership could be country with closest nexus (i.e., law of vendor)—so customer needs to ensure he gets ownership under India copyright law
aa. under India law, author of work owns copyright
bb. so, a specific contractual assignment would be needed
cc. under India copyright law, there are presumptions about assignment (5-year duration; only for Indian territory; work must be used by assignee within a year; work must be identified carefully), that one would need to draft around (e.g., grant a worldwide, perpetual, license that does not lapse)
B. restricted use over customer’s proprietary software (to prevent “fair” use that would
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otherwise be allowed by law)
aa. one can presumptively copy software or adapt it for use or backup purposes, or interoperability, so long as such actions are connected with the purpose for which the software was obtained
(ii) some jurisdictions do not allow “drafting around” laws, i.e.—they will not enforce certain contractual provisions for public policy reasons (get local counsel opinion of this risk)
1. IP rights
2. indemnities
3. non-compete
4. warranties
b. ensure offshore vendor has valid title to software developed by its employees (check employment agreements)
c. engage local counsel
d. make contract’s governing law/venue that of the jurisdiction whose laws best support parties’ intentions
e. practical steps
(i) have copy of source code held by customer in U.S. or held in escrow in U.S. (subject to an escrow agreement governed by U.S. law)
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(ii) regular duplication of development process and results on computer in customer’s office
(iii) no outsourcing of sensitive work
(iv) deal only with vendors that have a U.S. presence
(v) limit vendor ability to make local copies
(4) Enforcement of IP rights varies by country
a. India/China weak enforcement, piracy common
C. Export Controls
(1) U.S. Law
a. Export Administration Act of 19797
b. Export Regulations
(i) implemented by various agencies within U.S. Government departments
1. Department of Commerce
2. State Department
3. Department of the Treasury
(ii) apply to persons
1. executive branch lists natural persons and organizations subject to export restrictions (relating to national security, drug trafficking, nuclear proliferation, etc.)
(iii) apply to places
1. restrictions based on trade sanctions or embargoes (include countries, governments, terrorist organizations)
7 Export Administration Act of 1979 (EAA) Pub. L. 96-72, Sept. 29, 1979
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2. terms of the restriction vary on case-by-case basis
(iv) apply to designated things
1. requires government license for export
2. includes many “dual use” items with commercial and military uses
3. there is a product numbering system (Export Control Classification Number) to facilitate understanding what type license required for each product
(v) apply to deemed exports
1. any release of technology/software subject to regulation, in a foreign country
2. any release of technology/software subject to regulation, to a foreign national (not including lawful permanent residents in U.S.)
3. “release” includes visual inspection by foreigner, oral exchanges of information in U.S. or abroad, and application abroad of knowledge acquired in the U.S.
(2) Application to Offshore Outsource
a. U.S. import/export law and regulations may be triggered if certain software or technical data transferred abroad during outsourcing
(i) offshore developer use of tools/programs containing encryption
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(ii) U.S. Commerce Department recently lifted rules that prevented U.S. citizens from bringing laptops equipped with encryption overseas, without a license
b. foreign import/export laws may also be triggered
c. laws subject to frequent change
(3) Contractual protection
a. allocation of responsibilities for compliance and monitoring changes (including cost of compliance)
b. audit rights (give customer, auditors, and regulators access to all data and right to perform financial, internal control and security reviews)
(4) Rules are complex: Get an expert to analyze applicable export laws
D. Labor Laws
(1) Employee Transfers—when U.S. customer transfers its offshore employees to offshore vendor, or one offshore vendor transfers employees to another offshore vendor
a. statutory protection
(i) U.S. Warn Act8
1. requires certain employers to make advance notice of plant closings and layoffs
(ii) E.U. Acquired Rights Directive9
1. governs transfers of “business,” but transfer of in-house services to an outsource vendor may be deemed a “business” transfer
2. generally provides that employees get comparable employment terms and benefits, including severance
8 Worker Adjustment and Retraining Notification Act (WARN) Pub. L. 100-379, Aug. 4, 1988 9 Council Directive 2001/23/EC of 12 March 2001
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b. situations
(i) vendor takes over business unit of customer or hires employees of a previous offshore outsource vendor of customer
(ii) customer, after working with offshore vendor, wants to move to sub model and wants to hire vendor personnel
(iii) potential liability of customer
(2) Co-Employment
a. customer has right to select vendor employees and supervise work
b. too much control could make vendor employees qualify as the customer’s employees under local law
(3) Terminations
a. national laws vary, termination (even for cause) may be hard, and terminated employees in some countries may file claims based upon termination, and may have right to notice, severance, other benefits
(4) Contractual Protections
a. customer of offshore vendor needs to be mindful of local labor laws because customer could find itself responsible for severance, etc., to which vendor employees may be entitled under local law (e.g., in Philippines)
b. warranty
c. indemnity
d. local counsel advice is recommended
E. Governing Law and Dispute Resolution
(1) Governing Law/Jurisdiction
a. contract should provide choice of law and venue (best to match)
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(i) contracting with U.S. affiliate of offshore vendor
1. better enforceability
2. financial risk
b. consult local counsel
(i) whether local court will honor choice of law and jurisdiction
(ii) enforcement of contract
1. substantive provisions (non-compete, confidentiality, etc.)
2. remedies
A. specific performance
B. injunction
c. if litigation is chosen, good to have clause allowing one to approach courts in other party’s country in case a court ruling must be enforced abroad
(2) Litigation vs. Arbitration
a. litigation
(i) customer lack of familiarity with courts in country of outsource vendor
(ii) hostility of foreign courts
(iii) delay of foreign courts
(iv) potential difficulty of enforcing judgment from U.S. court
b. arbitration
(i) can be held in neutral, third country location, with arbitrator chosen by parties
(ii) easier to enforce than foreign judgments
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1. 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards
2. enforcement of judgment in jurisdiction where loser has assets; winner can confirm the arbitral award and attach the assets
(iii) generally faster and cheaper than litigation
(iv) confidentiality
c. contractual exceptions to arbitration
(i) injunction
1. Indian courts grant these pretty quickly
(ii) equitable relief
(3) Liability
a. national judicial systems have distinct damages concepts
(i) India (no large damages culture)
1. only damages that parties knew would result from breach
2. no indirect damages
3. liquidated damages provisions
A. no need to prove actual damages to support liquidated damages
B. liquidated damages just need by “reasonable” (good to add in contract words explaining reasoning behind SLA credits)
(ii) currency restrictions
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(iii) performance bond
F. Other Contractual Provisions
(1) Scope of Work
a. more of a challenge than in domestic deals
b. specs must be clear and comprehensive, and there must be clear, customer-defined rules of acceptable performance
(2) Security/Confidentiality
a. service levels relating to security/vulnerability
b. right to do security/operational audits with no notice
c. vendor requirement/customer right to do good background checks on personnel working on the account
d. strong confidentiality provision
(i) may be better to have separate confidentiality agreement
1. so a single, discrete suit is before court
2. avoids confusing counterclaims based upon main agreement
3. can cover information exchanged pre-contract
e. practical steps
(i) U.S. customer should do thorough security evaluation and test for any regulatory compliance of an offshore vendor before signing contract
(ii) break up key pieces of work that are sent offshore, so no one vendor can assemble the pieces
(iii) maintain customer documents at customer office (scan them into vendor system)
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(iv) have data reside on U.S. servers with offshore workers accessing data remotely—so servers cannot be tampered with
(v) do not use Internet to transmit data (use proprietary lines and relays, and encryption)
(vi) prevent offshore workers from copying data by not having removable drives on computers, and disable email capability, and no connection to printer, no pens at work stations
(vii) no visitors to offshore facility, restricted access
(viii) have U.S. supervisors on-site at offshore premises
(3) Currency Fluctuation
a. if vendor pays its employees or subcontractors in local currency and invoices customer in U.S. dollars, parties should determine who bears currency risk
(4) Change Management
a. contract should have a clear, well-defined change management process for proposing, agreeing upon, and implementing a customer’s systems changes or requirements changes
b. offshore resources will often need to be integrated in this process, and since many changes done at off-hours, IT managers will leverage offshore support
(5) Personnel
a. offshore team may need much training; best to require vendor to keep same team for project’s duration, so you don’t have to keep training new people
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b. require vendor staff to be qualified so they don’t bait-and-switch, i.e., sell you on their experience, then staff project with recent college grads
c. require vendor to assign on-site project leader in U.S. to ensure project requirements and specs translate to right coding and maintenance work (as opposed to a customer intermediary)
d. contract should be explicit on things that would be implicit in domestic deals
(i) education
(ii) job experience
(iii) training levels
(iv) permitted employee turnover rate
(6) Taxes
a. India—Indian IT companies are mostly tax exempt now, but could change; best to have clauses protecting customer in the event a tax is ever imposed
IV. PRACTICAL CONSIDERATIONS
A. Six-month “pilot” program with vendor
B. Contingency Plans—“Near”-Shore
C. Offshore Onsite Oversight
D. Vendor Personnel Onsite at Customer
(1) Job shadowing, etc. will help with knowledge transfer, and improve vendor’s knowledge of company
(2) Visa Requirements
E. Diversification and Redundancy of Sourcing (customers should balance workloads, vendors, facilities, in different countries; should have multiple teams, networks, and telecom providers)
F. Centralized Management of Sourcing
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(1) To avoid different divisions having relations with different vendors (better to take advantage of existing knowledge, processes, metrics, SLAs, master contract terms, pricing)
G. Plan for in-house staff to shift work hours so as to be able to communicate with offshore vendor’s managers in real time
H. Prepare Thoughtful Outsource Strategy
(1) Keep “in-house” IT leadership, project management, business analysis, policy and strategy setting
(2) Keep “in house” some IT development and support staff (they know how much a project should cost and will help to prevent vendor overcharging)
(3) Examine customer’s business structure (easier to outsource if IT department is centrally located, vs. having IT personnel scattered at various locations throughout company)
(4) Keep “in house” sensitive work (e.g., military), where tight security needed
I. Taxes—may vary depending on factors
(1) Where services performed
(2) Which party gains title to IP created under the contract
(3) Whether IP is assigned or licensed under contract
(4) Where invoices are paid
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Cross-Border Outsourcing
Gordon & Glickson LLC(312) [email protected]
www.ggtech.com
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• • • Legal services to the information technology markets . . .• • • Legal services to the information technology markets . . .
NegotiatingTechnology Outsourcing
Agreements
September 29-30, 2003
Law Seminars International
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Who is GGTech?
GeneralRepresentation
IT Industry
M&A and Corporate Finance
E-Commerce Domestic & International Commercial
IntellectualProperty
Litigation & Disputes
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Practice Mix
64%
22%
14%
Special Counsel
General Representation
Litigation & Disputes
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Global Experience
Israel
North America
Europe
South AfricaVenezuela
Australia
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Cross-Border Outsourcing:A Growing Phenomenon
?Est. 3.3 million U.S. service jobs (and up to $136 billion in service business wages) will move out of U.S. over next 15 years*
* Twitchell, E., Will the Great Shakeout Take Its Toll, Baron’s Online, dated June 26, 2003 (describing prediction of John McCarthy of Forrester Research); http://online.wsj.com/barrons/article/0,,SB105663319289188500,00.html
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Factors
?Cost Benefits?Strong capital-market support of foreign
vendors? Improved Technology?Declining Telecom Costs?Record of Success
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Impact in U.S.
? Job Loss?U.S. legislative backlash (pending in
Maryland, Washington, Rhode Island, Connecticut, New Jersey, Missouri)
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Types of Services
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IT Services
?Data Entry/Conversion/Application Maintenance
?Help Desk?Design/Architecture?Product and Software
Development?Strategic Consulting
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General IT-enabled business processes (“back office” tasks)
?Human Resource and Payroll Processing?Accounting?Customer Service/Call Center
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Industry-Specific IT-Enabled Business Processes
?Health Care (e.g. medical transcription)? Insurance (e.g. claims processing)?Financial Services (e.g. credit card
processing, mortgage processing, check processing)
?Travel (e.g. reservation systems)
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Places
? India?China?Russia?Philippines, Poland,
Mexico, Ireland, Canada, etc.
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Benefits and Costs
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Benefits?U.S. company can focus resources on
“core” competencies– Shifting View: Outsourcing some “core”
competencies?Cost Savings?Round-the-Clock Services?High Quality Service ?Competitive Advantage
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• • • Legal services to the information technology markets . . .• • • Legal services to the information technology markets . . .
Costs?Delayed/Mistaken Communications?Need for Remote Oversight?Local Political Backlash?Legal Uncertainties
– Governing Law– Dispute Resolution– IP Ownership– Remedies
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Costs (Continued)
?Up-Front Costs?Political Risk?Security/Confidentiality?Risk of Currency Fluctuation
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Legal Considerations
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Data Protection/Privacy
?U.S. Gramm-Leach-Bliley Act 1999 (GLB Act)
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GLB Act (Continued)– Applies to financial institutions– Banks– Mortgage lenders– Retailers who issue credit cards– Leasing companies– Investment advisors
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U.S. Health Insurance Portability and Accountability Act of 1996
– Applies to health care industry• Providers of health care services (hospitals,
physicians)• Health plans that pay for medical care (HMO’s,
medical insurers, and employers who sponsor group health plans)
• Clearing houses (firms that act on behalf of providers or health plans)
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European Union Data Protection Directive 1995
– E.U. members must implement conforming laws according to Directive’s minimum standards
– Regulates processing of personal data relating to a resident of an E.U. country (“processing” includes collection, organization, storage, use, retrieval, and disclosure of data)
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European Union Data Protection Directive 1995 (Continued)
– Restricts transfer of any such data collected in an E.U. country, to a non-E.U. country that lacks “adequate” privacy protection
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Intellectual Property
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Typical Issues
?Licensing of parties’ pre-existing IP used under outsource contract
?Ownership of IP created by vendor under outsource contract
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Governing Legislation
? International Treaties—minimal level of protection– Paris Treaty– Berne Convention
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Governing Legislation (Continued)
?National Laws—define IP rights distinctly– United Kingdom
• “Joint ownership” example• No “work for hire” concept• Software patents rare
– India• Broad “fair use” concept• Limited “work for hire” concept• No patents on software
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Governing Legislation (Continued)
?National Laws (Continued)– Moral rights concept
• Right of creator to be recognized as author of work• Right to protect work’s integrity• May be non-assignable
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Best Practices
?Carefully specify in contract any license terms and precisely define ownership rights over IP– Examples
• United Kingdom– Joint Ownership
• India– Assignment– Restricted Use
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Best Practices (Continued)
?Confirm Vendor’s Rights Vis-à-Vis Vendor Employees
?Engage local counsel?Make contract’s governing law/venue that
of the jurisdiction whose laws support parties’ intentions
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Best Practices (Continued)
?Practical Steps– Have copy of source code held by customer in
U.S. or subject to escrow in U.S.– Regular duplication of development process
and results on computer in customer’s office– Do not outsource sensitive work– Deal with Vendor that has U.S. presence– Limit Vendor ability to make local copies of
work
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Export Controls
?U.S. Law– Export Administration Act of 1979– Export Regulations
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Export Regulations• Implemented by various agencies within U.S.
Government• Apply to Persons• Apply to Places• Apply to Designated Things
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Export Regulations• Apply to “Deemed Exports”
– Any release of technology/software, subject to regulation, in a foreign country
– Any release of technology/software, subject to regulation, to a foreign national
– “Release” includes visual inspection by foreigner, oral exchanges of information in U.S. or abroad, and application abroad of knowledge acquired in the U.S.
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Application to Offshore Outsource
– U.S. import/export law and regulations may be triggered if certain software or technical data transferred abroad during outsourcing
– Foreign import/export laws may also be triggered
– Laws subject to frequent change
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Contractual Protection– Allocation of responsibilities for compliance
and monitoring changes – Audit rights– Subject Matter Expertise
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Labor Laws?Employee Transfers
– Situations• Transfer of Customer’s offshore employees to
offshore Vendor• Transfer of offshore Vendor employees to Customer• Transfer of offshore Vendor’s employees to
subsequent offshore Vendor– Employees may be entitled to comparable
employment terms and benefits (including severance)
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Labor Laws (Continued)? Co-employment
– Where customer has right to select vendor employees and supervise work
– Liability for salary, bonus, pension, severance, etc.
? Terminations? Contractual protections
– Local Counsel review of Contract– Warranty– Indemnity
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Governing Law and Dispute Resolution
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Governing Law/Jurisdiction?Contract should provide choice of law and
jurisdiction (best to match)?Consult Local Counsel
– Whether local courts in Vendor’s country will honor choice of law and jurisdiction
– Enforcement of contract
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Litigation vs. Arbitration
?Litigation– Customer lack of familiarity with courts in
country of outsource vendor– Hostility of foreign courts– Delay of foreign courts– Potential difficulty of enforcing judgment from
U.S. court
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Litigation vs. Arbitration (Continued)
?Arbitration– Can be held in neutral, third country location,
with arbitrator chosen by parties– Easier to enforce than foreign judgments– Generally faster and cheaper than litigation– Confidentiality
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Litigation vs. Arbitration
?Arbitration (Continued)– Contractual exceptions to arbitration
• Injunction• Other equitable relief
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Liability
?National judicial systems have distinct damages concepts– India
• No Indirect Damages• Liquidated Damages Provisions
– Currency Restrictions
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Other Contractual Provisions
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Scope of Work
?More of a Challenge than in Domestic Deals
?Specs must be clear and comprehensive
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Security/Confidentiality
?Service levels relating to security/vulnerability
?Audit Rights?Background checks
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Security /Confidentiality (Continued)
? Strong confidentiality provision? Practical Steps
– U.S. customer should do thorough security evaluation and test for any regulatory compliance of an offshore vendor before signing contract
– Break up key pieces of work that are sent offshore– Maintain customer documents at customer office (scan
them into vendor system)– Have data reside on U.S. servers with offshore workers
accessing data remotely
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Security /Confidentiality (Continued)
?Practical Steps (Continued)– Do not use Internet to transmit data (use
proprietary lines and relays, and encryption)– Prevent offshore workers from copying data No
visitors to offshore facility, restricted access– Have U.S. supervisors on-site at offshore
premises
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Currency Fluctuation
? If vendor pays its employees or subcontractors in local currency and invoices customer in U.S. dollars, parties should determine in contract who bears currency risk
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Change Management?Contract should have a clear,
well-defined change management process for proposing, agreeing upon, and implementing a customer’s systems changes or requirements changes
?Offshore resources will often need to be integrated in this process, since many changes done at off-hours
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Personnel? Require vendor to keep same team for project’s
duration? Require vendor staff to be qualified? Require vendor to assign on-site project leader in
U.S. ? Contract should be explicit on things that would
be implicit in domestic deals– education– job experience– training levels– permitted turnover rate
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Taxes
?Contract should include a forward-looking tax provision; e.g., Indian IT companies are mostly tax exempt now, but could change; best to have clauses protecting customer in the event a tax is ever imposed
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Practical Considerations– Six-month “pilot” program with Vendor– Contingency Plans—“Near”-Shore– Have a customer manager be onsite at Vendor facility
to provide oversight– Vendor Personnel Onsite at Customer
• Job Shadowing• Visa Requirements
– Diversification and Redundancy of Sourcing– Centralized Management of Sourcing– Plan for in-house staff to shift work hours
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Practical Considerations– Prepare Thoughtful Outsource Strategy
• Keep “in-house” IT leadership, project management, business analysis, policy and strategy setting
• Keep “in house” some IT development and support staff
• Examine customer’s business structure• Keep “in house” sensitive work