This article is written by Aarti Gosavi, pursuing a Diploma in Intellectual Property, Media and Entertainment Laws from Lawsikho.com. Here she discusses “Outsourcing Contracts: all you need to know about”.
What is outsourcing?
Outsourcing means hiring someone else to do the work which was done by or your employees before. Outsourcing takes place across many industries e.g. Information technology, BPO, KPO, etc. Offshore outsourcing is the one which is most beneficial as well as popular. Companies manufacture many products for which they do not have time and the required competency. Companies outsource their work to reduce operating costs and also to use the company’s internal resources for different reasons. Another reason is to reduce the amount of work and the mental strain of the main company and obtain quality results by the specialists. The two main types of outsourcing structures that normally exist are:
1) Onshore outsourcing
2) Offshore outsourcing
Onshore outsourcing is the type of outsourcing where the work is outsourced to an outsourcing service provider which is usually located in the same country of the company’s registered office. It is also known as domestic outsourcing.
Offshore outsourcing is the type of outsourcing where the work is outsourced to an outsourcing service provider that is located outside the country of the company’s registered office.
Why India is ranked as the most favoured destination for offshore outsourcing?
The need to outsource the work arises when the company wants to concentrate on its main business. Highly skilled foreign employees can benefit the economy of any country in the long run. Organisations also outsource their work to mitigate their labour costs. Many multinational companies outsource their work to India because of many reasons like
1) Excellent quality of products
2) Competent staff
3) Excellent expertise
4) Optimization of costs
5) Quick response to queries
6) Highly secured data
7) Access to best standard of services at relatively lesser cost
8) Rise in employment and subsequently good jobs with better salaries.
Statistics of Outsourcing
According to the Deloitte 2016 Global Outsourcing Survey, 78% of business owners across the globe are satisfied with their outsourcing partner. North & South America constitutes 42% of the outsourcing buyer region. Europe, Middle East, and Africa constitute 35%. The remaining 23% comes from Oceania & Asia
According to NASSCOM:
“The IT-BPO industry in India has managed to aggregate the revenue of $154 billion in the year 2017. Over the upcoming five years, 40% of India’s workforce is expected to amplify their skills to meet the advanced requirements. “This is the statistics provided by the website yourteamindia.com. In 2017 and 2018 India is considered the best country for offshore development because of its cost-effectiveness and talented professional availability. In fact, India holds 65% of the outsourced IT jobs. Furthermore, a prediction by Forrester Research moves to global business for IT outsourcing and hardware maintenance at approximately $503 billion in 2017.
What are Outsourcing Contracts?
An outsourcing agreement is a contract made between the company and service provider where the provider has vowed to provide definite services. E.g. sorting the data by the outsourcing service provider by employing its own manpower and resources by working from their very own venue. The different sectors that use outsourcing are:-
1) Call Center Outsourcing
2) Knowledge Process Outsourcing
3) Data Entry Outsourcing
4) IT service Outsourcing
5) Healthcare BPO Services Outsourcing
6) Financial Services Outsourcing
7) Engineering Services Outsourcing
What are the different laws that govern outsourcing in India
The different laws that govern outsourcing in India are
1) Indian Contract Act, 1872
2) Specific Relief Act, 1963
3) Foreign Exchange Regulations
4) Foreign Trade (Development Regulation) Act, 1992
5) Department of Telecommunications (DoT) policies and guidelines.
6) Information Technology Act, 2000
7) Companies Act, 2013
8) Intellectual Property Laws
9) Labour laws
10) Transfer of Property Act, 1882
11) Competition Act, 2000
12) Income Tax Act, 1961
13) Indian Evidence Act, 1872
14) The Code of Civil Procedure 1908
The judicial system in India has always supported choice of proper law which if mentioned in the outsourcing agreement then the courts in India will always support it. When any work is outsourced to India you have the freedom to choose which law will regulate the contract. The freedom to choose to which court will have jurisdiction over the case is also given. Sections 13, 15 and 44 A of the Indian Civil Procedure Code and Section 41 of the Indian Evidence Act regulate the authority and implementation of foreign judgments in India.
What are the advantages and disadvantages of outsourcing your work?
The advantages of outsourcing the work are:-
1) Access to competent people and quick completion of work
2) Outsourcing other projects of the company gives the company quality time to focus on main business areas.
3) It helps to reduce the risks involved when taking any business decisions.
4) It helps to reduce the costs involved in setting up the business and the necessary infrastructure for it, the costs involved in retaining the organization and the costs involved in hiring the staff for the outsourced work.
The disadvantages of outsourcing the work are:-
1) There is always a fear of your confidential data and automation being shared and used by everyone due to which there can be increased duplication of your products in the market.
2) There is always a risk of late delivery of result, low quality of services and incorrect delegation of responsibilities by the service provider which can be reduced if it is done by the outsourced organization itself.
3) There are many costs which remain suppressed while outsourcing your work in international boundaries which can be very dangerous.
4) The service provider cannot focus on the primary tasks which results in low productivity.
Cases on outsourcing of contracts
Nabha Power Limited v/s Punjab State Power Corporation Limited talks about the terms which are not clear in outsourcing contracts should not be assumed. In another case Sh. Sunderarajan, Bangalore vs. United India Insurance Co. it was held that if the public authority has outsourced its work to another private company then it should take care that to fulfil its main responsibilities of providing the answer scripts even if the work has been outsourced to another private company.
What and which jobs are outsourced?
The jobs that are normally outsourced are
2) Administrative tasks
3) Web design and development
4) Customer service
5) Customer billing
6) Business processes
7) Information Technology
8) Knowledge processes
Types of business models in outsourcing agreements
A business model which will be used for outsourcing of contracts depends on the ultimate aim of what the business wants to achieve from its target customers. They are as follows
1) Services agreement – This agreement is based on the basic model where the third party will perform a particular task for the customer. The company may dispatch its resources e.g. I.T. resources and its workers to another location where the outsourcing service provider is based by entering into a contract for the same. The workers will be working from that location till the agreement is in force but this usually happens in a joint venture or captive outsourcing model.
2) Joint venture– In this type of business model the outsourced company and the outsourcing service provider form a separate legal institution for performing the necessary functions. It could be of several types where in one instance the outsourcing company can form a joint venture with many dealers. This usually happens when one service provider does not have the resources to perform the various tasks of the customer. In such a case the outsourcing company may form many legal institutions where these institutions will then complete the necessary tasks in a well synchronized manner.
3) Captive outsourcing entity – In this type of business model the outsourcing company completely controls all the assets of the outsourcing service provider. The outsourcing service provider then performs functions of the customer itself and not of any other customer. In this type of model some workers may be employed but the outsourced company is in complete charge of the outsourcing service provider.
What are the precautions to be taken while outsourcing?
The company that is outsourcing its work must scrutinize the current third party contracts of the service provider to understand its efficiency. It is a common practice that the outsourcing company goes through the whole lifecycle of contract management. The usual terms that come up in third party contracts are
1) Term of the Contract
2) Third party usage and its limitations
3) Existence of any assignment clause in the contract
4) Costs to be paid before or on yearly basis
5) The right to cancel the contract
6) Fees if any to be paid
The company that is outsourcing its work to another company whether completely or partly must also always keep in mind as to how to optimize the company’s profits and economic cost by making best use of the laws and regulations to protect intellectual property rights of the parent company i.e. outsourced company. The parent company must do a thorough background investigation of the company’s past records as to whether the company to whom it is going to outsource the work is able to protect the trade secrets of the parent company. Other precautions that need to be taken while outsourcing are data protection, rules and regulations on the level of operations and quality of standards, the process of solving disputes between the parties and exit formalities.
Here is the link to statistics provided by website yourteamindia.com
Sample Outsourcing agreement
Here is one sample outsourcing agreement which has been included for the readers’ reference.