This article has been written by Gauri Atreja, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.
Table of Contents
Introduction
Not too long ago, the recruiter, the companies that were looking to hire skilled talent were restricted or limited to the human resource available within a certain radius of the office location. In high technology hubs like New York City or San Diego: one of the leading tech hubs in the US or Silicon Valley, where the talent was unchallenging to find but exorbitant to hire.
Today any corporation can hire any person or team to work on a project even if the person if located halfway around the world. All the credit to modern technology and the brilliant minds of the tech experts is easier and more affordable than ever.
Outsourcing has been a hot trend since 1989 but for almost the past three decades, it has emerged as an integral part of businesses on a global scale. Outsourcing now has stepped up and has revolutionized the way business is done in almost all sectors.
Functions that are not efficient if measured in terms of costs if performed by the corporation itself, or which do not ally to the core competence of a business, or are labour intensive are preferred to be outsourced to countries that are cheaper or companies which perform the same task more cost-effectively.
However, in the current scenario, one thing is certain, the gig economy still has to emerge out of the global pandemic as do some of the big industries in the world.
As per the statistics, almost 54% of all companies use third-party support teams to connect with its customers. Globally 75.2$ Billion was spent by businesses on outsourcing security. About 300,000 jobs get outsourced out of the US each year. In 2017, Deloitte reported that 31% of all IT services were outsourced and Statista confirms that the global outsourcing industry generated 88.9 billion U.S. dollars in revenue.
This article will further answer the following questions: what is an outsourcing agreement, what are the important clauses under an outsourcing agreement, what are outsourcing contracts, etc.
What is outsourcing?
Outsourcing is a business practice of appointing another party outside a company for performing services and creating goods that traditionally were to be performed in-house by the company’s own staff. Outsourcing is a general practice undertaken by companies as a cost-cutting measure.
Outsourcing was initially recognized as in 1989 as a business strategy and later became an integral part of business throughout the 1990s. The practice of outsourcing is a controversial subject in many countries. Those who opposed argued that it has caused the loss of jobs in domestic countries, particularly in the manufacturing sector. Supporters say it creates incentives for companies and businesses to allocate resources where they are most effective.
The two main types of outsourcing structures that generally exist are:
- Offshore outsourcing; and
- Onshore outsourcing.
Offshore outsourcing is outsourcing where the work is assigned to an outsourcing service provider that is located outside the domestic country of the company’s registered office.
Onshore outsourcing on the other hand is the type of outsourcing where the work is assigned to an outsourcing service provider which is generally located in the same country of the company’s registered office. It is also called domestic outsourcing.
Why is India the preferred and favoured country as the outsourcing service provider?
Generally speaking, a corporation or an entity feels the need to outsource its work when it needs to focus on its main business, in such a situation talented foreign skill of any country proves to be beneficial in the long run.
Outsourcing is a common practice for large as well as small start-ups. The reason is because of numerous benefits that are delivered by the third-party business partners in simple terms outsourcing service providers. Out of many countries that are chosen to outsource their work, India is preferred by many of them.
India is an ideal choice for many foreign multinational corporations to outsource its work because of the following reasons:
Language advantage
India in terms of population is the second-largest and the majority of its population is well fluent in the English language. With more than 100 million people speaking English fluently, remove all the language barriers for western countries from choosing India as its outsourcing destination.
Sufficiently equipped
India is well equipped with the latest technologies and infrastructure which plays a vital role in the completion of the outsourced tasks for their clients. India has the highest number of ISO certified third party service companies that secure the enhanced quality of the services.
Inexpensive service costs
Other nations choose India as their outsourcing destination as they benefit not only in terms of high-quality service but also in terms of huge cost-effectiveness. There is a visible income gap between western countries as compared to that of India. Choosing India as their outsourcing destination saves money for them. Furthermore, the client has not to worry about activities like training, development, leaves, insurances, etc.
Highly secured data
The client can absolutely be sure about data privacy as Indian laws are very strict with regard to data protection. With the growth of the IT sector and the launch of the latest software, data is secured.
What are outsourcing contracts?
In simple terms, an outsourcing contract is an agreement made between the company and the outsourcing service provider, placed over a legal document that states what work will be handled to the outsourcing service provider i.e., the third party, it includes what are your expectations, what timelines are to be achieved, and certain things of that nature.
The different sectors that often use outsourcing are the following:
- Engineering Services Outsourcing
- Healthcare BPO Services Outsourcing
- Data Entry Outsourcing
- Financial Services Outsourcing
- IT service Outsourcing
- Call Center Outsourcing
- Knowledge Process Outsourcing
What Indian laws govern outsourcing in India?
Following laws govern outsourcing in India:
- Department of Telecommunications (DoT) policies and guidelines
- Information Technology Act, 2000
- Foreign Exchange Regulations
- Foreign Trade (Development Regulation) Act, 1992
- Indian Contract Act, 1872
- Specific Relief Act, 1963
- Companies Act, 2013
- Intellectual Property Laws
- Transfer of Property Act, 1882
- Competition Act, 2000
- Labour laws
- Income Tax Act, 1961
- Indian Evidence Act, 1872
- The Code of Civil Procedure 1908
What are the important clauses that form part of an outsourcing contract?
Below discussed are the key clauses and points that should be kept in mind when entering or drafting an outsourcing agreement especially in the case of IT outsourcing.
Generally, and typically an outsourcing agreement includes provisions such as pricing and payment, transfer of assets, information security, intellectual property matters, monitoring provisions, termination, service level etc.
The above clauses are discussed in detail below:
Scope
This is the main and the essential clause on which the success of the whole contract rests. Any kind of uncertainty or ambiguity in this clause might lead to confusion and conflicts in the future. This clause should be drafted with utmost precision and care, there should be utmost clarity in the scope of services. The content of the clause should clearly mention what services will expressly be covered under the agreement and what services are expressly excluded, what services are responsible or dependent on the third party. Sometimes it is not possible to describe all the services to be offered by the service provider in the main agreement, in such cases a detailed schedule might be annexed to the agreement.
Having lucidity regarding the scope will also aid in formulating the pricing policy, rights and liabilities of the parties to the agreement in an effective way as per the nature of the contract.
Transfer of assets
In certain cases, the assets of the client are transferred to the service vendor – these could be telecom equipment, hardware, maintenance equipment, software licenses, etc. In such a case a separate ‘transfer agreement’ which represents assignment or transfer of the assets is executed between the parties.
Transfer of personnel
When the employees of the client are transferred to the service vendor, it is important to ensure that the transfer of the employees is completely legal and does not provoke retrenchment or other legal provisions which might have a financial impact on parties. It must be ensured that the transfer of the personnel thereby happens on the same terms on which they were originally working.
Information security
Outsourcing of a contract usually involves a large chunk of information being shared between the parties to the contract, the information might include personal information of the customer, business-sensitive information or any data related to the third parties. In case of breach of such information both the parties to contract might have to suffer harm with regard to their goodwill.
It is thereby important that a contract should clearly specify and lay down the standard of care that is to be taken by the Service vendor in the handling of the data, which might include provisions like the signing of a non-disclosure agreement with employees, provisions for physical security, compliance procedures as per the industry standards like ISO standards for data security to eliminate and minimise the risk of breach of such valuable information
There are certain sectors of businesses that are required to maintain higher levels of security and have to comply with additional regulations due to the type of information they collect from their client.
The contract should specifically and clearly define what is personal information, what is confidential information, what constitutes a material breach, employees that will have access to data.
The agreement should also lay down the obligations and remedies of both parties if a breach happens. The contract should also have provisions, to notify the customer against an event of a breach.
Warranties and liabilities
Risk is associated with many transactions; it is thereby necessary to foresee the most obvious risk in advance and their effect on the contract should be specifically mentioned in the contract. No contract can be risk-free therefore it is very important that the risk is either shared or pre-emptive steps are taken in advance. All the warranties and liabilities agreed between the parties should be specifically incorporated under the contract.
Term, termination and exit clause
The termination clause of the agreement should clearly specify and mention the term of the contract, conditions to be followed in case of extension of the contract and the provision for the mutual termination of the agreement.
The termination clause must specifically lay out the events happening of which the contract may be terminated by one party or either of the parties.
Generally, the exit clause should be drafted in a staged manner however it can be drafted in a way where immediate notice for termination is given. The exit clause should mention a minimum time period of service or quantum of service and whether the payment to the service is made or not however that would completely depend upon the reason for the termination.
Jurisdiction
Under the jurisdiction clause, the parties may select the venue and the court where a dispute can be resolved between them. It is important to mention the specific court and not just the country.
Jurisdiction clauses may be classified as exclusive i.e., the dispute may only be brought in the courts agreed between the parties, and non-exclusive i.e., where parties are free to decide where their dispute may be brought to resolve.
Dispute resolution
Many times this particular clause is overlooked, however it is pertinent to note that a strict Alternative dispute resolution may save you from huge costs within a short span of time. Here ADR does not only mean arbitration it includes mediation, conciliation, expert determination and other mechanisms.
Conclusion
Outsourcing is a must strategy for cutting out on costs, saving time for more important tasks, getting the talent from around the world and shortening the development time. It is very important for the companies to be eagle-eyed while entering into an outsourcing contract as one mistake may land back them down. As an initiative, many IT companies now have their contracts and terms of service ready that may be customised as per the new upcoming project.
References
- https://medium.com/@Intetics/why-and-what-do-companies-outsource-the-state-of-software-development-outsourcing-for-2019-5b098fe53694
- https://www.hiboox.com/india-popular-destination-software-development
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