Foreign deals can be dangerous in shrinking outsourcing market

Out-Law News | 29 Jun 2006 | 4:26 pm | 1 min. read

Offshore outsourcing is a legal minefield and many companies are not aware of the problems it causes, according to a report from Gartner. Of the 18 areas in a standard contract 15 need to be changed if the outsourcing provider is abroad, it said.

Separate research from market analysis firm IDC has found that the outsourcing market in western Europe is shrinking, with just $40.5 billion spent last year as opposed to $42.1bn in 2004.

Any deals abroad need to be carefully monitored, said Gartner. "Many organisations that are looking to establish global outsourcing contracts with foreign providers mistakenly believe that the terms and conditions are about the same as onshore contracts with in-country service providers," wrote Gartner analyst Helen Huntley in the report. "Outsourcing contracts structured with in-country providers will not work as templates for global outsourcing without significant modification."

The easiest places in which to structure a water tight contract are those countries with major experience in outsourcing, such as India. "The greatest risks for global outsourcing come from emerging  countries that are early entrants into outsourcing, or those that have limited governmental support, ineffective legal enforcement, immature infrastructure, limited or nonexistent intellectual property protection or lack an understanding of foreign laws," wrote Huntley.

The most important areas to protect through a contract are security and confidentiality, legal compliance, fees and payment terms, proprietary rights and auditing rights, said the report. It warned that the legal systems in other countries might claim jurisdiction over any agreement regardless of which system the contract specifies, and that other legal systems might have little respect for intellectual property rights.

There are significant sums at stake, and according to IDC, the market for outsourcing is significant. That firm has found that the 100 biggest outsourcing deals in western Europe were worth $40.5bn last year. Over three quarters of that sum was accounted for by deals in information systems, network and desktop outsourcing.

The total sum is down on the 2004 figure, though IDC said that the value of the biggest deals is rising. Nine megadeals represented half of the total spending, said an IDC statement, and five of those deals were awarded by just two government agencies.

IBM won more contracts than anyone else, but BT and EDS each out-earned IBM in outsourcing, said the IDC statement.