This article is written by Asmita Sabale, pursuing a Certificate Course in Advanced Commercial Contract Drafting, Negotiation & Dispute Resolution, and Sangini Nagpal, pursuing a Diploma in Intellectual Property, Media and Entertainment Laws from Lawsikho.com.
Today, both large and small business entities use outsourcing for the only reason that Technology, the internet has made it possible. For small businesses, opting for outsourcing is a big leap, even in the early stages of the business growth cycle and go global. The time spent on outsourced functions can be more precisely allocated, which offers more efficient use of resources required for productive work. The outsourcing market is vast covering a variety of vendors readily available to do the job, you name it and it is made available.
In India, there is no definite law to regulate outsourcing transactions. Depending on the nature of the outsourcing services that are being procured and the industry to which the e-customer may belong to, the transaction would be subjected to multiple laws.
Outsourcing and its Working
These days, you can contract out everything from housekeeping to internet security — a practice widely termed as “outsourcing”. Outsourcing certain tasks can indeed help to free up the company’s time and help to get on with developing its business centre brand in line with its own definite skills or talents. It can be cost-effective, as you only pay for what you need, and you can recruit niche talent too.
In simple terms, ‘Outsourcing is a business practice called contracting out or business process outsourcing in which one company hires another company or an individual i.e. a, service provider or vendor or a third party to perform tasks, handle operations or provide services that are either usually executed or had previously been done by the company’s own employees. This service provider /vendor arranges for its own workers or computer systems to perform and focus on a particular task or services, it is able to do it better, faster and cheaper than the hiring company could, either on-site at the hiring company’s own facilities or at some external remote locations.
Outsourcing is a common practice in which a firm hires a third party to perform a given task, manage operation or render the company with services. The outside business, known as the service provider or third-party supplier, arranges activities or programs for its own staff or computer systems at the recruiting company’s own facilities or at external locations. Today businesses can outsource various tasks or services. They often outsource information technology services as well as technical support, including programming and application development. They often outsource the functions of customer service and call service. Many forms of jobs may also be outsourced, including production procedures, human resources activities, and financial functions such as bookkeeping and payroll processing. Companies may outsource whole departments, such as their entire IT department, or even parts of a specific department. Outsourcing corporate operations are also called outsourcing procurement or outsourcing of business processes. Outsourcing may involve using a large third-party provider, such as a company such as IBM to manage IT services or the third-party logistics services FedEx Supply Chain, but it may also involve hiring individual independent contractors, temporary office workers and freelancers.
For a company to successfully outsource obligations, it is necessary to concentrate as much on the logistics as the business relationship. Outsourcing is more about maintaining the relationship than Service Level Agreements (SLAs), and is a collaboration, not a purchase project. Maintaining and securing a trusted relationship is essential to outsourcing efforts and is more complex than setting levels and relationships in service. Some experts recommend that the exit clause of a service contract should be given extra emphasis. It is important for companies to know when the contractual agreement inevitably occurs and to ensure that the parties involved fulfill their obligations and remain in place until the contract is concluded.
Reasons for outsourcing
Companies outsource primarily not only to cut costs but also to improve efficiencies, gain speed required to succeed in business (a universal phenomenon embraced in the world of business) and for reaping the benefits of planned and calculated outsourcing by accessing skilled expertise, reducing overhead, flexible staffing and increasing efficiency, reducing turnaround time, streamline processes and ultimately generate more profit. By outsourcing to a third party, the business can focus on the best core activities and gain a competitive edge in the marketplace. Outsourcing is always seen from a business perspective.
One of the main reasons for outsourcing may be expanding the business for a temporary period which demands more staff or resources. So, if a company does not wish to recruit more staff as it may not be required in future once that particular job is done, then the decision would very obviously be to arrange for outsourcing the activity to third-party services.
It is utilising in-house employees for meaningful errands. When a company’s time-consuming business process is delegated to a third party, you are giving more quality time to your internal resources to make the most of the time available at their disposal enabling them to deliver effectively.
Further, the skills required for that particular job may not be available locally. The resources with the specialized skills and experience needed to perform certain jobs may be available in plenty elsewhere and can be easily reached by outsourcing such labour. The demand for outsourcing continues to grow, as new and innovative services are introduced and businesses seek advantages to get ahead of the competition. It is a good alternative to labour migration, allowing the labour force to remain in their home country while contributing their skills elsewhere.
Outsourcing can involve using a large third-party provider, such as a company like TCS to manage IT services or FedEx Supply Chain for third-party logistics services, but it can also involve hiring individual independent contractors and temporary office workers.
It is also a way to shift meeting regulatory requirements or obligations to the third-party provider. For e.g., Outsourcing housekeeping activities of a company will help the company to breathe at ease, temporarily. However, under The Contract Labour (Regulation and Abolition) Act, 1970 does not absolve the principal employer from evading the statutory compliances to be made under the Act if, the contractor fails to comply and abide by it.
There may be legal or regulatory or statutory requirements for certain types of outsourcing transactions such as:
- Public sector transactions
- Business process transactions
- Financial Services transactions
- IT transactions including programming and application development as well as technical support.
- Telecommunications transactions
- Administration related functions such as Housekeeping, technical support
- Manufacturing processes
- Human resources tasks such as attendance
- Accounting resources tasks and financial functions such as bookkeeping and payroll
- Customer service and call service functions.
Business process outsourcing (BPO) a practice of contracting a specific work process or processes to an external service provider. The services can include payroll, accounting, telemarketing, data recording, social media marketing, customer support, and more. BPO usually fills supplementary — as opposed to the core — business functions, with services that could be either technical or nontechnical. BPO is divided into two main types of services: back office and front office. Back-office services include internal business processes, such as billing or purchasing. Front-office services pertain to the contracting company’s customers, such as marketing and tech support. BPOs can combine these services so that they work together, not independently.
Types of Outsourcing
There are several ways to outsource a business process and one may be preferable over another, depending on the process. Broadly, there are a few different forms of relationship depending on the distance between the two partners. Such types are:
- Onshore: When a company outsources its work to another company in the same country it appears to use an onshore outsourcing service. Since the language and culture are identical, this form avoids communication difficulty and distance in culture. On the contrary, onshore outsourcing might place a heavy burden on the budgets of companies in developed nations.
- Offshore: Offshore tech providers need to be based in remote areas. Companies in countries with high labour costs prefer this method to minimize costs while maintaining the same or even higher performance. Offshore outsourcing projects, similar to near-shore outsourcing, suffer communication difficulties due to differences in time zone, cultures, and languages.
- Near-shore: Companies, who want to outsource near-shore applications, employ providers in certain neighbouring countries, mostly located in the same time zone. Near-shore outsourcing could suffer internal language and culture difference difficulties with potentially lower collaborative costs.
- Multi-shore: This form is a mix of 4 models outsourced above. A Multi-source outsourcing project involves several producers working together in different countries.
Scope of Outsourcing
The scope of the outsourcing agreements may also vary widely. For certain processes, such as programming or creating content, it might be appropriate to hire freelancers on a job-to-job basis. A business that outsources the entire IT department would need a long term relationship with clearly defined criteria.
One trend is the increasing use of virtual assistants, where outsourcing will play a significant role. Undertakings are increasingly using virtual assistants at the business level to automate certain processes. This means that professional voice assistant apps are needed more. For cost and skill reasons, many companies may opt to outsource that development project.
If the company is American, and chooses to “offshore” that work, they may, for example, hire a development company in India or England. If they have chosen to “near-shore” the job, they can establish a partnership with a third party in Canada or Mexico. If they “onshore” the venture, they would likely connect or employ independent contractors with a business close by.
The closest the third party is to the client business, the less time and the variations in culture can make a difference. Since application development is often an unpredictable operation, it is not the top priority to be tightly scheduled and customers looking for the work may prefer offshoring to onshoring.
What is an Outsourcing Agreement?
“Outsourcing agreement is an agreement between a business and a service provider in which the service provider promises to provide necessary services. Such services include data processing and information management, using its own staff and equipment, and usually at its own facilities.”
A good outsourcing agreement is one which provides a comprehensive road map of the duties and obligations of both the parties – outsourcer and service provider. It thus minimizes complications in case a dispute arises. But the irony is many times people neglect to pay attention while drafting an outsourcing agreement.
Before finalizing an outsourcing agreement, the terms should be thoroughly discussed and negotiated to avoid any misunderstanding at a later stage. Every outsourcing agreement should be modified as applicable under different circumstances. “One brush should not paint all the painting.” A properly drafted Outsourcing Agreement saves a lot of problems later on.
Preferably, lawyers from all applicable jurisdictions must be consulted before finalizing any outsourcing agreement.
The most important areas to protect through an outsourcing agreement are security and confidentiality, legal compliance, fees and payment terms, proprietary rights, auditing rights and dispute resolution process.
For doing the job get the proposal, either from outsourcing websites or known sources or by advertising, evaluate the proposals and choose the right service provider/ vendor. Start analyzing the change that will result from contracting with a third-party service provider /vendor. What are the risks and benefits determined from the shortlist of potential service provider’s / vendor’s? The service provider’s / vendor’s ability to meet performance requirements in both quantitative and qualitative terms should be assessable in advance, including compliance with these Guidelines.
To start with, the Outsourcing Agreement should include basic identifying information like the agreement and effective dates as well as the names of contract parties and their addresses. There are a variety of other key ingredients or sections, a good outsourcing agreement should adorn :
A detailed description of services
The outsourcer is required to clearly distinguish the operational activity needed to be outsourced. A particular requirement pertaining to the said performance of the service provided should be specified, taking into account the objective of the outsourcing solution. Hence, a full review of your company processes, and also those which may be initially considered for outsourcing.
Duties and obligations of Outsourcer and the Service provider / Vendor
The respective rights and obligations of the outsourcing institution and the outsourcing service provider should be precisely defined and clearly specified. Make sure that the company’s business has open communication internally and with the service provider/vendor.
Security and confidentiality
The agreement should cover the protection of confidential information, banking secrecy and any other specific provisions relating to handling confidential proprietary information or data whose disclosure to or use by third parties would be damaging and cause irreparable loss to the outsourcer. Whenever information is subject to confidentiality rules at the level of the outsourcing institution at least the same level of confidentiality should be ensured by the service provider /vendor. What is not to be disclosed to third parties, would be :-
- Designs, drawings, models
- Research and development
- Marketing plans
- Pricing lists, policies, and other financial information
Fees and payment terms
The agreement should clearly mention the total amount payable to the service provider/vendor as decided mutually depending on the number of personnel /staff engaged for the job. All such payments would be subject to deduction of tax at source and other taxes as applicable to such services from time to time. The service provider/vendor to take the responsibility of making payments to its staff periodically and regularly.
No employer-employee relation
There shall be only one relationship and that would be of outsourcer and service provider / Vendor. The employees of the service provider/vendor shall always remain and the employees of the outsourcer. The outsourcer should be able to distinguish the employees of the service provider/vendor.
Details of staff appointed by a service provider/vendor
The service provider/vendor should regularly provide the details of its employees to the outsourcer for the company’s records.
Inspection and acceptance
The establishment should bear in mind that the level of monitoring, assessment, inspection and auditing required by the contract should be proportionate to the risks involved and the size and complexity of the activity outsourced. Ensure that the performance of the service provider/vendor is continuously monitored and assessed so that necessary and prompt corrective measures like can be taken.
If the performance of any obligations by any party is prevented, restricted, delayed or interfered by reason of force majeure i.e. Acts of God or requirement of any Government or statutory authority which are not instigated for the purpose of avoiding obligations or any other circumstances beyond the control of either of the party affected, such party shall be excused from its performance, provided the party so affected uses its best efforts to remove such cause of non-performance and when removed the party shall continue performance with utmost urgency.
Governing law and Legal compliance
The outsourcing in India is governed by the following laws:
- Indian Contract Act, 1872;
- Specific Relief Act, 1963;
- Foreign Exchange Regulations;
- Foreign Trade (Development Regulation) Act, 1992;
- Department of Telecommunications (DoT) policies and guidelines;
- Information Technology Act, 2000;
- Companies Act, 2013;
- Intellectual Property Laws;
- Labour laws;
- Transfer of Property Act, 1882;
- Competition Act, 2000;
- Income Tax Act, 1961;
- Indian Evidence Act, 1872;
- The Code of Civil Procedure 1908.
The judicial system in India has always supported the choice of proper law which is always backed by the courts in India if mentioned in the outsourcing agreement. You have the freedom to choose which law will regulate the contract when any work is outsourced to India. It is also granted the right to select which court should have jurisdiction over the case. Sections 13, 15 and 44 A of the Indian Code of Civil Procedure and Section 41 of the Indian Evidence Act regulate the authority and enforcement in India of foreign judgments.
Advantages: The advantages of outsourcing the work are:
- Access to competent people and quick completion of work.
- Outsourcing the company’s other tasks allows the company more time to concentrate on its key areas of operation.
- It helps to reduce the risks involved with any business decision.
- It helps to minimize the costs involved with setting up the company and the required facilities for it, the costs associated with maintaining the organization and the costs associated with recruiting outsourced staff.
Disadvantages: Outsourcing the work has the disadvantages of:
- There is always a risk that your confidential data and automation will be exchanged and used by all, due to which the replication of your goods on the market may increase.
- There is also a chance of late delivery of results, poor quality of services and inaccurate allocation of duties by the service provider which can be minimized if the outsourced company does so itself.
- There are many costs that remain undermined while outsourcing your work on international frontiers that can be very dangerous.
- The service provider cannot concentrate on the primary tasks which lead to low productivity.
This should also serve to ensure compliance with laws and supervisory regulations and guidelines for the duration of the outsourcing arrangement.
Termination and exit management clause
In order to underpin an effective policy for managing and monitoring the outsourced activities, the contract should include a termination and exit management clause, where proportionate and if deemed necessary, which allows the activities being provided by the outsourcing service provider/vendor to be transferred to another outsourcing service provider/vendor or to be reincorporated into the outsourcing institution.
The agreement shall contain provisions allowing the outsourcing institution to cancel the contract by notice of dismissal or notice of cancellation if so required by the supervisory authority because even the best plans don’t always work out like expected when started. The section should include the terms that allow for the agreement’s termination:
- Is there liability for cancelling?
- If notice in writing is needed, then how many days’ notice is required?
- What are the penalties for non-performance
- The number of days as a service provider has to correct its wrongdoing for breach or failure of performance?
- How will information and documentation be handled upon termination?
The agreement may be reviewed by the parties during the term of the agreement, and the parties may mutually agree to amend the scope of the agreement more particularly described therein.
The agreement may be renewed at the end of its term for such periods as may be mutually agreed upon by the parties. Such renewal shall be made through a written instrument signed by both the parties and shall be subject to the same or modified terms and conditions as may be decided and provided therein.
Amendment to the agreement
The rights and obligations of the parties would be governed by the agreement during its period, however, it may be amended, altered, modified, varied or added from time to time only by a written instrument and signed by the parties, provided such an amendment, alteration, modification, variance or addition is subject to the terms and conditions of the agreement. All the previous communications oral or written between the parties and related to the agreement would be declared null and void.
The service provider/vendor will refrain itself from advertising or publishing about its the services rendered to the outsourcer without the prior written consent of the outsourcer.
Jurisdiction and Arbitration
In case of any dispute or difference between the parties arising out or in relation to this agreement including dispute or difference as to the validity of the agreement or interpretation of any of the provisions of the agreement shall be resolved by mutual discussion. If parties fail to settle the dispute, then the same shall be resolved in accordance with and subject to the provisions of Arbitration and Conciliation Act or through the Courts having exclusive jurisdiction in all such matters.
The service provider/vendor should not wear the shoes of the outsourcer and outsource his job activity or part of it to any other person or entity for the performance of any part of the agreement it has entered with the outsourcer.
If Any clause of the agreement is held unenforceable under any enactment or rule of law, such clause shall to the extent be deemed severable and not form part of the Agreement. However, all other provisions shall nevertheless continue to be effective.
An indemnification clause is an important provision in which the service provider/vendor agrees to indemnify the outsourcer company for any breaches of its warranties. Indemnification means that the service provider/vendor will have to pay the outsourcer company for any third-party litigation costs resulting from its breach of the warranties. Although at times the service provider/vendor may want to further negotiation of this point.
What are the challenges of outsourcing?
Outsourcing is hard to implement and outsourcing relationships failure rate remains high. It can be from 40 to 70 per cent everywhere, depending on who you ask. The inherent conflict of interest at any outsourcing arrangement is at the heart of the problem. The customer seeks better service, often at lower costs, than they would get to do the work themselves. Yet the vendor wants to make a profit. That tension has to be closely managed to ensure a successful outcome for both customer and vendor.
Another cause of failure in outsourcing is the rush to outsource in the absence of a successful business case. Outsourcing undertaken as a “quick fix” cost-cutting strategy rather than an investment aimed at improving efficiency, spreading internationally, through productivity and competitiveness or boosting competitive advantage is more likely to disappoint.
In general, risks increase as the distinctions between the roles of client and vendor blur, and the scope of roles grows. Whatever form of outsourcing, the partnership can only work if both the provider and the customer obtain the benefits anticipated.
It is neither a problem nor a solution, but something where both the parties are comfortable and decide to work in sync with each other, preferably with a long-term future in mind.
Before outsourcing any task, one has to think carefully for choosing the right outsourcing company or individual who could help reap rewards for the business. However, like any recruitment process, it’s decision may have a lasting impact on the company’s brand and should be approached with the same due care and attention. It can bring fresh expertise to the business and free up time for innovation and other vital tasks. But there are risks, too. You could lose control of proprietary information or end up with products or services that don’t meet the company’s quality standards. Of course, every risk level can be mitigated by a good plan that addresses the issue, offers a trustworthy action plan and convinces the company, as well as investors and customers.
The key to a successful Outsourcing Agreement is to do your research beforehand, have clear expectations and deliverables with your selected service provider/vendor, and stick to what both parties agreed upon. The relationship should be defined formally, and managed and considered regularly. Trust cannot be bought, it has to be built and should be strong, which is essential to successful outsourcing.
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