OUTSOURSING - Reducing Costs But Increasing Risks?

Have you ever been attracted by the idea of outsourcing part of your business or a specific function abroad? To somewhere labour costs are lower and the quality of staff very much higher? It’s public knowledge that many large financial institutions have seen these opportunities. Examples of banks outsourcing their call handling to India and insurance companies outsourcing data processing abroad are well documented.

As consumers we may not like it – but if the service levels can be maintained often this approach makes sound business sense. Even in smaller businesses an international labour market may be able to provide more cost effective ways of handling things like direct mail or data input.

But nothing is ever that simple is it? What about the legal implications of doing business in this way?

Outsourcing: Legal Compliance
There have long been concerns about the legal compliance aspects of outsourcing: Data Protection being a major one. Given that, to put it very briefly, sending customer data outside the EU is generally banned (without detailed contractual arrangements and due diligence) we can instantly see that places such as India may have a problem.

Recently the Financial Services Authority (FSA) finished a major report into outsourcing to India. Their conclusions are interesting for non-FSA regulated businesses.

The FSA found that outsourcing abroad was not more inherently risky than outsourcing within the UK. Given that most businesses outsource at least a little within the UK that seems to remove any argument (at least on compliance and legal grounds) against outsourcing abroad. Surely it then becomes just a cost and quality issue?

The Risks
But, and it’s a big but, they did find that outsourcing abroad brought a major risk of financial crime and problems of proper supervision unless the relevant government and also the outsourcer took full and proper steps to ensure these issues were dealt with. The big businesses they observed tended to have thorough risk management processes and management structures in place, but this might not be the case in a smaller concern.

Quality Service
The FSA found that in India the standard of work obtained was “extremely high”, the workforce was highly educated and often graduates worked in outsourcing companies. Interestingly they found evidence that security was higher than in the UK. A copy of their report is available to download here.

Legal Frameworks
It seems that outsourcing abroad, provided all risks are considered and carefully managed and the delivery of the outsourced service is closely supervised, can be a sensible option. But you do need to ensure you have the right legal framework in place. As a minimum we would recommend anyone outsourcing needs:

• A service level agreement (the FSA say this is essential)
• A general contract setting out what is provided, how to end the arrangement, and (crucially) how to get back all the data with some thought given as to how to re-start the operations in the UK (common sense would suggest that this is essential too!)
• A data processing contract (Data Protection legislation) and indemnities from the company abroad for any breach.

Finally, if things go wrong at any stage do make sure that UK law is used to resolve any dispute!
Woolley & Co provide all these agreements at a pre-agreed fixed fee. For more details contact Andrew.Woolley@business-lawfirm.co.uk or telephone on 01789 267377.