Do's and don'ts for offshore outsourcing to India

Offshore outsourcing is the performance of tasks or functions by an external party or service provider in a country other than the country where the outsourcing company is located. Main reasons for outsourcing are still related to cost cutting and achieving competitive advantages. Offshore outsourcing or offshoring to India plays a major role for cross border ICT outsourcing. Each offshore outsourcing project requires careful analysis and preparation; when the actual outsourcing arrangements have been negotiated, agreed and become operative monitoring remains necessary to ensure quality services be delivered.

In order to support offshoring to India various legal and contractual aspects require close attention:

1. Letter of intent
The objectives of the project and the main terms and conditions must be agreed in a non binding letter of intent or heads of agreement summarizing the anticipated transaction.

2. Allow ample time for analysis and preparation
Offshoring projects require detailed analysis and proper definition to structure the specific transaction and determine the relevant services. From the beginning a broad range of legal issues and risks involved must be addressed in order to prepare for clear and workable contractual arrangements together with various exhibits. Setting up a realistic time scheme shall be of assistance, as well as a good division of tasks in preparing the transaction documents and arranging for proper exchanges between various disciplines involved.

3. Contractual arrangements and targets
One should realize that offshoring to India is not a one time exercise, but should result into a lasting relationship for multiple years. Whilst the outsourcing party wishes to transfer some critical business processes one should ensure the competence and financial strength of the service provider and the continuity and quality of his services. Multiple issues need to be addressed, including scope of services, cost saving targets, pricing, transition, service level requirements, quality control, improvements, local representatives and escalations, privacy aspects, intellectual property rights, regulatory and tax aspects, termination rights etc.

4. Allow for flexibility, structural changes
Since offshoring services shall be closely related to the future growth and prosperity of the outsourcing company one should allow for flexibility. Contractual arrangements should allow for extension and reduction of capacity, scaling up or down of services when required, as well as corresponding savings and costs.
On the other hand structural changes like change of ownership of service provider and other material adverse changes to the contract performance must be addressed together with appropriate rights for outsourcing party.

5. Relationship management
In view of the long-term nature of offshoring projects good relationship management is key to achieving the objectives for both parties. This would require the appointment of relationship managers who can deal with day to day issues at the spot. There should also be a procedure for resolving issues when the relationship managers are unable to do so.

6. Performance control and audit
A detailed Service Level Agreement (SLA) should provide for performance requirements, periodic reviews and appropriate remedies when problems occur. One may need to introduce benchmarks and impose sanctions if the service level is not met. Regular auditing rights need to be obtained and access to reports and information be secured possibly by making escrow arrangements.

7. Back-up plan and exit route
The nature of the services creates a need for minimizing dependency and to set up an up to date back-up plan and exit route which can become operational without delay right from the transition of services to the new service provider. Such contingency plan shall also be of importance when (immediate) termination of offshoring arrangements be required and a smooth continuation of services is essential with minimal disruption.

8. Choice of law and arbitration
One should neither accept for making Indian law applicable to the contract, nor the choice for the jurisdiction of courts in India. Instead Dutch law or English law and international arbitration in Europe should be an acceptable choice for resolving any contractual issues when they arise.

The above legal and contractual aspects give a first summary of do's and don'ts when contracting an offshoring project to India and do not constitute advice for a specific project. Without doubt the offshoring project requires a multidisciplinary team composed of consultants and legal advisors which are skilled and experienced to structure the transaction in a sound way and negotiate the offshoring contracts successfully.

Mr Marcel Mock
Interim-manager / Interim-lawyer
Mock Interim Services
Amstelveen, August 2005
e-mail: mlm@mocklegal.eu