Outsourcing to overseas contractors (‘offshoring’) is often seen as an attractive option for businesses wishing to remove the cost burden of non-core activities. Low wage costs mean that overseas contractors can often provide services at a significantly lower cost than either an in-house team or a local provider of similar services. The use of contractors within different time zones enables businesses to increase productivity by having their overseas contractors provide services after Australian business hours.
Further, outsourcing such functions as payroll, IT support and bookkeeping will enable organisations to operate with ‘leaner’ structures, minimising the number of employees required by the business and avoiding the burden that comes from managing staff.
Although there are definitely many positive benefits that arise from this method of operating, the use of offshore outsourced service providers can present some genuine risks for your business unless care is taken at the outset, during and at the conclusion of such arrangements.
We have set out below some of the key considerations for businesses considering offshoring non-core functions as a guide.
Pre-contract
When choosing an overseas outsource provider, businesses should approach the potential candidates with the same vigilance that you would when considering doing business with any new major contractor.
Care should be taken to ensure that the potential provider has the capability and the systems in place to deliver the services to your business of standard you require. This may involve:
- conducting due diligence on the provider by requiring them to demonstrate their understanding of the service;
- by providing examples and testimonials from other businesses to whom they provide similar services; and
- by providing copies of the processes and policies that they have in place.
You need to be satisfied not only that the provider can provide the services to the standard required but also that there is a system or process that can be incorporated into the arrangement which enables you to monitor the provision of the services and if necessary, to take action to require the provider to remedy any service level deficiencies promptly.
It is also important where the service they provide involves the use of sensitive personal information (such as payroll or HR functions), that they can demonstrate the systems that they have which ensure confidentiality and privacy.
The contract
The contract between your business and any outsourced provider with whom you contract must accurately reflect the needs of your business and not that of the outsource provider.
Ensure that the contract properly defines the services that are to be provided, contains measurable KPIs that address your business needs and offers certainty as the price you are required to pay for those services. The procedure for monitoring performance should be workable and adequately set out in unambiguous terms.
The contract should make it clear who is responsible for what and contain provisions for your business to be indemnified in the event of a failure to deliver services to the standard expected.
It should require the outsource provider to confirm that they are complying with the laws in their jurisdiction when providing the services to your business and will continue to do so for the duration of the business. It should also provide indemnity to you in the event of their breach.
As with any contract, it is important that the law governing the contract is identified and a provision is contained that specifies how disputes are to be resolved. A well-drafted clause will also address how the services will operate in the interim pending resolution of any dispute.
As a matter of good practice, you should identify potential sources of local legal support prior to contracting that may provide assistance should a dispute arise. It is always beneficial to have someone on the ground who can assist in the event of problems.
The contract should also address the need for confidentiality, privacy and where appropriate, protect the intellectual property of your business. Documents, designs, etc. produced through the provision of the services should become your property and not that of the outsource provider.
Exit mechanisms
As with any good contract, it is important to prepare for the end from the very start.
Consideration should be given as to how the service is to be either transferred to an alternate provider or to be brought back in-house. Care should be taken to include the support required of the existing provider during any transition period and penalties should be identified for non-compliance.
It is important that the contract clearly addresses the ownership of data and enables you to recover this at the end of the arrangement.
Offshore outsourcing continues to be popular and subject to the correct checks and measures can provide a cost effective option to many businesses.
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Disclaimer
Ashbrooke Law publications are intended to provide guidance and general information. They should not be relied upon as legal advice. Formal legal advice should be sought on matters of interest arising from this article.