International outsourcing involves complexity and risks not found in typical domestic outsourcing. These risks are cultural, political, financial, technological, managerial and legal. Ultimately, these multiple international risks show up in the process of drafting, negotiating and enforcing the contract. Freedom of contract varies according to the governing laws and attacking the legal issues requires initiatives from the beginning.
For simplicity of discussion (as an American lawyer), the “home” country is the United States, and any other country is considered “offshore.”
Legal Risk Follows Business Operations
Legal risk management starts with identifying the business process. A company must first examine their internal processes such as enterprise resources planning. Then a business must consider their entire supply chain, ranging from the suppliers and the supplier’s suppliers to a company’s customers. And also the reporting functions necessary to deliver the company’s core goods and/or services to their customers.”
What is International Outsourcing?
“International outsourcing” can take many forms.
- Exportation, either directly or by subcontracting of particular tasks or functions to a foreign enterprise for performance offshore (the “out-tasking” model), for use in the customer’s home country after completion.
- Partial exportation of a task, such as the accelerated design through “7 X 24” design operations using two interdependent teams in different time zones (another “out-tasking” model).
- Reliance upon a foreign external enterprise to support a foreign subsidiary of the U.S. customer (the “foreign local subsidiary” model). This is typically a part of “global outsourcing” (across territorial boundaries). But could equally be done country-by-country and managed by the headquarters staff, in-house, in the home country or regional centers. (The global multilateral outsourcing model challenges the later model.)
- Establishment of a jointly owned subsidiary for the provision of shared services to affiliates (the “shared services” model).
- Reliance upon a multinational enterprise to support a multinational customer’s operations in multiple countries (the “global multilateral outsourcing” model). This model includes cases involving “private label” services by the outsourcer to create foreign business infrastructures rapidly. Private label outsourcing is expanding rapidly, particularly with regional telephone call centers for “customer care.”
- Without one of these other models, “international outsourcing” does not include a simple, one-time localization service to adapt a product or service to the local foreign market.
A company’s initial step should involve the selection and reliance upon local foreign lawyers familiar with the outsourcing process. Your domestic outsourcing lawyer should manage the process globally in coordination with your local foreign lawyer.
Hidden International Issues Revealed in Due Diligence
A customer considering outsourcing needs to listen carefully and inquire fully to the hidden international issues that should be revealed in the process of investigating the service provider and the proposed form of operations.
- Will the supplier be dependent upon a foreign enterprise for delivering any important level of services?
- How does the service provider intend to overcome political, legal and cultural limitations on the foreign subcontractor?
- How can you identify and manage the special legal risks arising from the application of U.S. laws?
- How can one identify and manage the special legal risks arising from the application of foreign laws?
- Are there any supra-national sources of laws, such as multilateral organizations, free-trade unions or bilateral treaties that might govern the deal? Examples include the European Union or Mercosur.
- Are there any hidden legal excuses for the supplier’s non-performance?
- How will pricing, international finance and other essential terms of the deal be affected by legal considerations?
What Typical Foreign Legal Issues Arise?
Foreign legal advice is needed to address a broad range of the legal issues involved in international outsourcing.
- How should the contract be structured to obtain applicable tax benefits and minimize regulatory, operational or other intervention by foreign government?
- As with the U.S. WARN Act (requiring a 60-day advance notice to workers whose jobs are being transitioned to the service provider), what notices must be provided, and to whom?
- What permits and licenses are required to conduct the proposed operations? Are there any conditions, such as local ownership and local control requirements, of such permits and licenses that would be excessively onerous?
- What restrictions might apply to transborder flows of data, personnel, goods and other products of the foreign services?
- Is the customer’s data entitled to legal privacy and intellectual property protection?
- Does foreign local law limit the enforceability of the customer’s rights under the outsourcing contract, particularly as to payment conditions, limitations of liability, covenants to perform services, the right of termination, post-termination covenants and contractually selected methods of dispute resolution?
- Does the operation result in submission of the U.S. customer to the jurisdiction of foreign courts? Under what conditions?
- Does foreign law restrict plans for mitigation of risk, including business continuity planning and disaster recovery procedures?
What Typical U.S. Legal Issues Arise?
The U.S. lawyer should understand the unique U.S. perspective on international business transactions.
- Will the transaction involve any attempted imposition by the U.S. government of extraterritorial jurisdiction? If so, will there likely be a conflict of laws, and what treaties or other legal mechanisms exist to overcome any such conflict?
- How can the operations be made most tax-efficient? For example, if there is a transfer abroad of U.S. intellectual property that will be used to capitalize an offshore company, special U.S. income tax rules apply.
- What will be the impact of U.S. rules on the export of any information technology, process technology or other trade secrets?
- If the foreign personnel need to be deployed rapidly in the United States, under what conditions will the Immigration and Naturalization Service cooperate in allowing them to visit for the necessary time period?
Examples of Issues That Can Arise
Hidden Political Risk
A recent 1998 outsourcing transaction highlights the need to ferret out potential political risk. In that case, a leading U.S. enterprise in mineral extraction wanted customized applications to be developed and maintained by the outsourcer. These applications were indispensable to the smooth operation of the customer’s human resources function. The outsourcer explained that its subcontractor in North Carolina had an offshore subsidiary in India that would perform the applications development and maintenance. Suddenly, Pakistan exploded a nuclear device; India and Pakistan exchanged provocative messages; and the United States considered imposing political sanctions on Pakistan and India to quell the unrest and to restrict nuclear proliferation.
To overcome the risk that the U.S. government might prohibit the importation into the United States of the Indian-developed software, the North Carolina subcontractor offered to bring the Indian personnel to the United States to perform the development work. While this solution would have avoided such a prohibition, it would have introduced additional uncertainty as to pricing contingencies and potential delays in obtaining work permits (visas) for Indian programmers. Such risks and uncertainties are inherent in international outsourcing.
Data Privacy RegulationsIn designing workable international outsourcing, the customer must understand the foreign legal risks that its data might not be transferable freely among the foreign outsourcer and the U.S. customer and the customer’s foreign facilities. The European Union’s Data Privacy Directive limits the export of European data to countries that do not offer equivalent privacy protections. While the United States does not meet these standards currently, as of this writing (April 5, 1999) the European Commission is presently forbearing from enforcement pending progress on legislation and regulation in the United States
Acquired Rights of Workers The European Union Acquired Rights Directive protects employees from the loss of “acquired rights” to pensions, seniority and similar privileges when their unit is transferred to another employer. In other countries (especially in Latin America) workers are entitled to substantial compensation upon their severance from employment, even if they are hired immediately by an outsourcer. In each case, the calculation of projected costs and benefits, as well as the structuring of the transaction, may depend on the applicable labor laws as well as the decisions of individual employees. In the United States and Canada, corporate customers adopt a number of human resources strategies for ensuring the continuation of employment for key employees in any outsourcing or shared sourcing process. In Europe and Latin America, statutory and judicial protections ensure the continuation of employment by virtually all employees, or the inclusion of termination costs in pricing. As a result, in Europe and Latin America, outsourcing may be focused more on strategic benefits than on cost savings. Also, in such countries, facilities management may be more popular than pure outsourcing.
The Right Lawyers
In conclusion, the management of legal risks in international outsourcing requires skills in “comparative jurisprudence.” A company’s outsourcing lawyer should not know just the basic process for domestic outsourcing. Even if you rely on a foreign lawyer, your domestic outsourcing lawyer should also have training and skills in foreign law, and in interacting with foreign lawyers, in order to anticipate legal complications and facilitate effective cross-border planning.
Bill Bierce is a business, “infrastructure services” and technology attorney with Bierce & Kenerson, P.C. in New York. He earned law diplomas from both U.S. and French law schools, practiced law in Paris, has taught legal and tax aspects of international business for MBA students and has published over 50 legal articles, in six languages.