February 2, 2009

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Article

Offshore Outsourcing

Making the Transfer of Business Abroad a Smooth Passage

Gretta Spendlove

February 2, 2009

In its Offshore Success study, A.T. Kearney studied 35 major companies that transferred business functions to China, India and elsewhere. Third parties performed company functions (outsourcing) or were performed by the company’s own overseas operations. The companies collectively saved 49 percent of their baseline costs and improved across all six of the study’s performance categories, such as service and revenue. However, there was enormous variation among the companies, with 60 percent failing to meet operations targets, and 34 percent failing to meet savings targets. Offshore success, A.T. Kearney concluded, lay in the “execution” of the offshore plan—in such factors as adequate investment in managing the offshore operations, cultural sensitivity and concentrating on supplier capability and not merely price. More Utah companies are outsourcing data processing, call center operations and even product development overseas. There can be huge cost savings, but also huge legal headaches. Here are tips for maximizing the benefits of offshore outsourcing, while minimizing the complications: Recognize the Risks Legal systems vary greatly from country to country, as do tax laws and local regulations. Many countries do not have efficient court systems or stringent intellectual property (IP) laws. In India, for instance, it can take 10 years for a case to come to trial. Although India recently enacted more sophisticated IP laws, it is tough to enforce them. In 2002, Shekhar Verma, an out-of-work programmer, attempted to sell the source code for SolidWorks’ computer-aided design package. He obtained the source code, valued as high as $300 million, while working at a Mumbai contractor hired by SolidWorks to debug its software. Verma thought he was selling the source code to SolidWorks’ competitor, but the buyer was actually an FBI undercover agent working with the Indian police. At the time, India had no criminal laws prohibiting trade secret theft. Four years after his arrest, Verma was still out on bail. Nenette Day, the undercover FBI agent who busted Verma, told news source NetworkWorld that the nondisclosure agreements used with Verma weren’t worth the paper they were written on because they didn’t comply with Indian law. Before outsourcing abroad, U.S. companies should do a risk analysis, Day says, posing such questions as: Can my company risk loss of this data? What are my liabilities if I do lose it? Will the company I am outsourcing go the distance if I need its help to chase down a criminal? Understand U.S. Restrictions One rapidly growing offshore industry is legal process outsourcing. For instance, some foreign lawyers draft U.S. patent applications for 60 to 70 percent less than U.S. patent lawyers charge. Last summer, however, the U.S. Patent and Trademark Office cautioned against outsourcing practices. It reminded inventors that shipping data about an invention to another country for the purpose of preparing a U.S. patent application may be illegal, unless clearances are obtained from the U.S. Department of Commerce. U.S. Export Administration Regulations also restrict transfer of technical information abroad for other purposes. Still Interested? Deal only with experienced, reputable offshore companies. The goal of sending work offshore is to save money, but the cheapest alternative may not be safe. The contractor’s methods of choosing and monitoring employees, and maintaining security, can drastically affect the safety of the outsourcer’s assets. In the event of major liability, the contractor’s financial strength is critical. Hire Capable U.S. and Local Attorneys A Chinese or Indian attorney familiar with local laws and enforcement practices can tell how the legal system really works, and the best way to work through and around it. An experienced U.S. attorney can make sure all the pieces of the offshore deal are in place—providing the right form of business entity for the outsourcer, making sure the contract provides all the provisions U.S. companies need. Negotiate a Comprehensive Contract The contract should specify who owns the assets created or managed by the contractor, since copyrights and patents typically follow the inventor. It should also impose milestones or standards for performance, with default provisions, so the outsourcer can get out of the contract, if necessary. Outsourcers should agree with their contractors on a dispute resolution system, whether that involves courts, arbitration or mediation. The outsourcer and its contractor might, for instance, agree to use an international dispute settlement group located in London, Brussels or Geneva. Tax liabilities can often be allocated by contract. Vision of the Future oDesk, an online marketplace for out-sourcing, offers 150,000 freelance technology developers and programmers located in 100 countries. Although oDesk reports that the level of outsourcing to India remains the highest in the industry, the level of outsourcing to the Philippines is growing faster than in any other country. In an increasingly globalized economy, offshore outsourcing will continue to grow. Utah businesses which participate in the trend must manage the experience so that it remains a dream and not a nightmare. Gretta Spendlove is a shareholder with the law firm Durham Jones & Pinegar. She can be reached at gspendlove@djplaw.com.
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