Worldwide, outsourcing is growing at double-digit rates.  While IT outsourcing has been the most predominant form to date, outsourcing of key business processes, such as human resources, logistics and shipping, and procurement is increasingly being considered.  Outsourcing is driven by a desire to reduce the cost of operations, the need for business flexibility to respond quickly to changing markets, and the need to mitigate business and technology risk or to obtain specialized knowledge or skills.

          Even though outsourcing continues to grow in importance within U.S. companies, more than 40 percent of those relationships will still fail to deliver the business value originally envisioned by the parties when the contract was signed.  Those outsourcing failures will cost U.S. companies between $30 and $40 billion a year in lost time and expenses.

Trends

          Outsourcing increasingly involves more than one country.  “Single-country” outsourcing is giving way to “multi-country” outsourcing as U.S. companies seek arrangements that cover their global operations.

          Outsourcing increasingly encompasses strategic activities and operational functions.  “Strategic sourcing” is steadily moving beyond manufacturing, assembly and development and into more customer-facing activities.

          Outsourcing partners increasingly endeavor to imbed procedures in their contractual arrangements to deal with both anticipated and unanticipated issues.  Codified service-level commitments are supplemented with various relationship-management processes.  Each of these trends raises a number of interesting challenges for business and legal teams that are asked to close the deal.

Negotiating the Agreement

          Negotiating a good single-country outsourcing relationship is not a trivial task.  The agreement obviously must address service level issues.  It must address how and when personnel, assets and intellectual property rights will be transitioned from the U.S. company to the foreign partner.  It also must address how the outsourced function may eventually be transmitted back to the U.S. company in the event that the parties terminate their relationship.  Outsourcing should be viewed as a marriage – do not underestimate the importance of negotiating a good prenuptial agreement.

          Negotiating a good multi-country outsourcing relationship multiplies the challenges as multi-country relationships introduce a new layer to the discussions.  If the relationship involves the transfer of employees, the parties will find that the foreign labor laws may give rise to various hurdles that do not exist here in the United States.  In Europe, for example, the “transition in “ and “transition out” may be tantamount to a transfer of a going concern, which raises a plethora of employment issues.

          When negotiating a multi-country outsourcing agreement, it is important that the legal structure provide a workable structure for negotiating, implementing and potentially unwinding a multi-country outsourcing arrangement.  In practice, this often results in two levels of agreements – a framework agreement between the top principals and local agreements between affiliates of each principal in the relevant countries.  To the extent possible, this structure should discourage needless renegotiation at the local level.  However, local applicable regulations or mandatory law may make certain country-by-country customization necessary or advisable.

Important Components of an Agreement

          There are several critical components to a good outsourcing agreement.  The emphasis from the outset should not be on who wins the best deal, but rather on negotiating a fair and reasonable contract for both parties.  Because each aspect of the outsourcing relationship is governed by the contract, both the U.S. company and the foreign party need to agree on everything.  This also means that managers must think of every possible contingency to cover in the contract.  The parties also need to agree on how to resolve disputes after the contract is signed.  Such an agreement should not merely function as an open-ended assurance of good will, but rather it should delineate the who, what, when and where of conflict situations.

          Remember, outsourcing relationships fail for many reasons.  Chief among them are unrealistic expectations – so-called rational contracts that assume the foreign party will act as a strategic partner but that fail to spell out the details – and failing to manage the relationship once the contract has been signed.

Conclusion

          The contracting process should be seen as a roadmap to a successful, ongoing relationship.  However, if the contract is to be a roadmap, be sure it describes the right highway.  There is no worse situation than when, three years into a deal, the parties are finally required to see what remedies they have to solve a particular dispute, and they discover that the contract bears no resemblance to the current view of the deal. 

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