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Legal risks

168 Comments · Business outsourcing

Legal risks associated with offshore outsourcing are legion, and their threat is made worse by the relative lack of legal precedent.

For instance, there currently are no clear legal rules governing the extent to which remedies can be extracted from a business process outsourcing (BPO) vendor in the case of a security breach on other gross malfeasance. Countries differ in their laws for foreign firms seeking damages from private enterprises.

This governing document provides a framework for the buyer-vendor relationship. Today, many law firms and, consultancies specialize in assisting BPO buyers in developing contract terms that are favorable and enforceable.

Of course, each contract must foster and promote the BPO relationship. In an offshore BPO project, the BPO buyer may have to concede some governing jurisdiction to the vendor’s home country.

That is, it may not be possible to draft contracts with offshore vendors that demand all legal conflicts be decided in the buyer’s preferred jurisdiction.

Some give and take may be required on different contract elements, with some potential areas of conflict to be decided in a domestic forum, some in a forum preferred by the vendor, and others in an international forum such as the International Arbitration Association.

BPO buyers should mix and match forums to ensure that matters of potentially greatest impact to competitive ability are decided in their preferred forum.

This can be achieved if there is a willingness to concede matters of less importance to be decided elsewhere.

One technique that has been effective for avoiding legal disputes is to split outsourcing contracts depending on different deliverables and service level agreements (SLAs).

For instance, many firms outsource software development as well as IT management to third-party vendors.

A BPO buyer would be wise to split the software development contract from the IT services contract. IT management services are generally governed by SLAs that require regular fee payments.

Nevertheless, software development fees should be payable at development milestones-with a substantial portion of the fee withheld until final acceptance of the final code.

Splitting the contract so that standard service provisions are kept distinct from software development reduces the risk of financing development of code that does not perform as expected.

Firms should also be careful no separate continuous service on transaction-related terms from those that concern development of some type of output, such as software on knowledge that is the property of the BPO buyer.

The transaction-related services are usually covered in the SLAs and are paid on a regular basis.

Development contracts should be treated separately. It is reasonable for the BPO buyer to withhold a substantial portion of the development contract fees until the final product has been delivered and tested.


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