Most of last year, the outsourcing industry was focused on Washington and the political debate around offshoring. Ultimately, however, the political rhetoric was a brief distraction from the real story of the growing and overwhelming corporate commitment to global outsourcing. International companies are increasingly turning to global outsourcing to drive down costs and to develop efficient IT and business processes supporting diverse international operations.

Major outsourcing suppliers have expanded to new offshore locations to exploit these opportunities, and many offshore suppliers, including former corporate captives such as General Electric’s now independent BPO provider, GECIS, are also increasingly competing in international markets for global outsourcing deals.

Outsourcing can generate long-term value for global companies, but it also creates significant new performance, cost, and reputation risks that need to be carefully managed. These risks are particularly acute in global deals. Great care has to be taken in executing and managing deals that cross geographical, cultural, commercial, legal, and regulatory borders.

The basic commercial model for these deals is now well established. A general framework services agreement sets out the key commercial terms for the relationship between supplier and customer, and a framework business-transfer agreement provides for the transfer of assets and employees to the supplier: Local requirements are then addressed through local implementation agreements for each country. This approach means that the deal can be negotiated and managed centrally and with considerable consistency. It also should mean that specific local requirements are accommodated within the general framework. However, in practice, these local requirements are often ignored until it is too late. Global outsourcing deals are mistakenly treated like national deals, creating significant and unnecessary project risk. In some cases, deals are delayed because local tax, legal, and regulatory issues are only addressed at a later stage. Of even greater concern are the deals where these issues are not addressed at all before contract signing, giving rise to significant tax and employee liabilities, regulatory compliance issues, and ineffective legal terms.

Planning Scenarios

Different national legal and regulatory requirements will impact on a number of key issues: the transfer and use of personal data; intellectual property licensing; tax structuring; the transfer of property and other intangible assets; employee transfers; and limitations and/or exclusion of warranties, indemnities, and liability. All of these issues can be effectively managed if they are addressed early enough in the negotiation and structuring of the deal. Once the overall strategy for the deal is understood, a detailed review is then required, explaining how the legal and regulatory requirements in the key jurisdictions will impact on the deal and what regulatory consents are required.

Some of the local requirements will simply involve compliance with specific national terminology and procedure—for example, to make operative the transfer of assets or the exclusion of certain categories of liability. Other issues will require more detailed consideration, particularly for U.S. companies where very different local requirements will apply, most notably in relation to employee transfers and data protection. The parties must always consider whether there is an automatic transfer of employees (which will often be the case in Europe); what information and consultation is required; how dismissals need to be managed; and what terms, particularly pensions terms, apply on a transfer. In relation to the use and transfer of personal data, the parties will also need to consider what data can be transferred and to what jurisdictions; what consents are required; and whether implied consents are sufficient or if express consents required.

These legal and regulatory issues are not the only local issues impacting global outsourcing. Cultural barriers and geographical distance, impacting in particular on governance arrangements and exit strategy, are no less important and are often more intractable to handle.

Effective governance and relationship management is critical to the success of any outsourcing deal. In a global deal, this requires relationship building and institutionalizing relationships at local, regional, and global levels. It is not possible to rely just on central management to build trust and effective governance in such a complex global relationship. Senior management involvement and shareholder commitment is required for each major jurisdiction and region, and this must be embedded in the agreement.

Finally, in setting out on a long-term global relationship, the customer must be prepared with an exit strategy in case things go wrong. The parties need to agree not only in what circumstances can the agreement be terminated but how the customer can bring the service back in-house or transfer to a new supplier. In global deals, this presents significant logistics issues, and consideration must also be given to local legal constraints on the transfer of assets and employees. Several offshore jurisdictions impose restrictions on transfer of assets and employees, and problems will arise if this is only identified when the customer terminates the agreement. It is clear that global outsourcing will continue to grow, but if it is going to generate real shareholder value, central control and management must be combined with greater sensitivity to local issues during the negotiating and delivery of these deals.

John Halvey and Laurence Jacobs are partners in the Global Technology and Outsourcing Group of Milbank, Tweed, Hadley & McCloy LLP. John Halvey is in the firm’s New York office; Laurence Jacobs is in the London office.