Offshore Risks Are Numerous, Say Those Who Craft Contracts

Due-diligence process needed to ensure security measures, backup plan in place

NEW YORK -- IT managers who cut corners in their offshore outsourcing contracts may jeopardize their companies' security and intellectual property and could well undermine expected cost savings, attorneys who negotiate these deals warned last week.

The potential pitfalls are numerous, and companies can't take anything for granted. If an offshore provider says it has a backup plan, for instance, don't assume that it will work, said Marina Gracias, deputy general counsel at Providian Bancorp Services in San Francisco.

"If all these backup plans are there, that's great," Gracias told an American Conference Institute forum here last week. "But have somebody test it."

Carefully outline the process for ordering changes to the work being performed, and stick to it, said Mark Grossman, a Miami-based attorney at Becker & Poliakoff PA. It's easy for companies to lose track of change orders in multiple e-mail exchanges with a vendor and end up with unexpected bills.

Find out how stable an outsourcer's workforce is, advised Dennis Sholl, CEO of Global Vantedge Inc., a Larkspur, Calif., provider of credit services. Managers at offshore service providers can quickly find work with another provider if they aren't happy, said Sholl. So make sure your provider has a career advancement path in place for them, he said. "Don't just ask what their attrition rate is," he said. "Find out how they measure it."

A lot of the advice offered at the forum would apply to any outsourcing contract. But differing legal standards and cultural norms can create uncertainties in offshore deals. The concept of time, for instance, doesn't mean the same thing in all cultures. "When somebody says, 'It will get done shortly,' ... it could mean one day or a couple of years," said Bijesh Thakker, an attorney at Thakker & Thakker in Bangalore, India.

To protect themselves, companies need to go through an exhaustive due-diligence process and examine every possible contingency, outsourcing experts and users advised.

Companies moving work to an offshore provider can significantly increase costs if transition details aren't spelled out, said Cliff Justice, managing director at NeoIT Inc., a San Ramon, Calif.-based offshore consulting firm. U.S. companies may run parallel IT processes before they're comfortable enough to hand off the work. Get that transition wrong and "it will duplicate costs and create a situation where ROI is extended out years," Justice said.

Security is a major issue. Orrie Dinstein, senior counsel at a financial services firm that he requested not be identified, said users need to consider how data is classified and what level of security and encryption is applied to it. Periodic security checks, including penetration testing, are good practice, he said.

It's also important that user companies get consensus internally and set clear objectives before signing an outsourcing agreement.

"You've got to be able to demonstrate your savings, and they have to be unambiguous," said Akiba Stern, an attorney at Shaw Pittman LLP in New York. Offshore agreements are "going to be sold to your management on the basis of costs," Stern said.

And companies have to consider all of the expenses: travel, management and telecommunications costs, as well as the risk of additional future costs. "What happens if the privacy laws change again? Is that something that is priced into the deal?" asked Stern.

Companies have to be certain that they have nailed down all the terms before an outsourcing contract is signed.

"Your greatest leverage is before you sign a deal," said Mark Feingold, corporate counsel at Aventis Pharmaceuticals Inc. in Bridgewater, N.J.


Offshore Checklist

Detail service-level agreements and delivery requirements.
Arrange performance measurements, ongoing monitoring and provisions for audits.
Assess the vendor's workforce stability.
Ascertain what customers your vendor has lost
Determine how your data is protected if your vendor is working with your competitors.
Stipulate security and background-check policies.
Ensure compliance with all laws.
Get everything in writing.

Copyright © 2003 IDG Communications, Inc.

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