7 Ways to Avoid any Legal Issues in an Outsourcing Contract
- Kevin Oskow
- April 1, 2020
- 4 Minute Read
Outsourcing or offshoring serves as the base for many businesses in making their regular business operations plain sailing and meeting their expansion goals. Approximately 300,000 jobs are outsourced offshore out of the US every year, with this the size of the global outsourcing industry in 2018 was $85.6 billion. Therefore, businesses in the US keep track of provisions in the countries they outsource their work to, that helps avoid any legal issues in an outsourcing contract
Thoughts about offshoring and outsourcing may vary from extremely negative to exceptionally positive, but, one thing that is for sure is – no business can decline the benefits of outsourcing.
However, outsourcing or offshoring has a far side that businesses cannot ignore entirely.
A Relevant Story of IT Outsourcing Failure
Virgin Airlines outsourced its internet booking and boarding management system to Navitaire, an IT outsourcing service provider. It was the second time the Airlines’ internet booking and boarding system crashed within three months in 2010, together with some other data management systems.
Navitaire traced the reason behind this crash and the predictions subtracted down to a failed disk drive. Now the contract between the airlines and Navitaire compelled the IT service provider to resolve system-critical issues like this within a “short period of time”.
Navitaire took around 24 hours to resolve the issue, which made the FAA ground all Virgin flights, leaving 50,000 passengers stranded and angry.
Navitaire chose to repair the faulted unit instead of attaching backup hardware, which wasn’t a smart choice looking at the urgency of the situation, and this created the chaos. The displeasing situation was ultimately Navitaire’s fault.
Legal clauses are important! The anecdote displays the need for choosing a worthy outsourcing provider and keeping your written contracts handy.
Legal Contracts to put on Paper While Outsourcing to an Offshore Agency
Choice of Law Provision
When creating a contract with the offshore agency, you need to be sure that the country of the outsourcing service provider allows a choice of law provision. There are countries that do not accept the jurisdiction of the US or other countries on a confidentiality agreement. Therefore, the offshoring country should recognize the legal provisions of your country. At the same time, you should avoid any ambiguity by mentioning the provisions clearly in the contract.
Businesses also build a network with the local attorneys in the offshoring country to stay updated with the legal provisions.
An important contract that comes handy when it comes to the security of intellectual property and data is NDA (Non-disclosure agreement). There are countries where a confidentiality agreement isn’t considered authentic. Therefore, you need to consider the laws related to proprietary information in your offshoring country. Moreover, you need to consider the law of information recovery in other countries in case of termination of the contract.
The reputation and the trust gained by an outsourcing vendor over the years says much about the company and plays an important part in the decision-making. An outsourcing company and its team should follow strict NDA norms in accordance with the provisions mentioned in the NDA agreement. Consultation from a local council on the agreement can assist a business in case of legal-intricacies.
The Vendor Contract
Though every business wishes to maintain a healthy and prospering relation with its outsourcing partner, unwanted times may knock the door. There may be times when you need to terminate your outsourcing contract.
It is better to count all the legal issues in an outsourcing contract on your fingertips before you move forward with a vendor. Organizations should keep their provisions for performance clear and mention down the clear expectations they have with their outsourcing vendor. It is essential to notify the organization of deficiencies that would equate to a breach of these expectations, allowing it to terminate the contract.
On termination of the outsourcing contract, explicit mention of the rights related to ownership of data or materials should also be made.
When offshoring to a different country, an organization should consider the outsourcing law related to cultural differences. There can be an agreement addressing cultural considerations so that workers from offshore countries can offer specific services without obstructing their culture. Furthermore, the writing should mention the holidays or the days off based on the religious practices of the offshoring country.
Data Security Contract
One of the most crucial legal issues in an outsourcing contract is inadequate provisions on data security. A survey reports 31% of businesses experienced a security breach attempt while they were working with an outsourcing partner. The contract must have clearly mentioned provisions related to data security. Furthermore, certain organizations have provisions and outsourcing laws related to the access to their company-critical information.
There should be a mention of the data security standards and the deficiencies that would constitute a breach of data security in the contract. The legal consequences of the breach should be noted and signed by the local authorities from both sides.
Quality Control Agreement
When working with an offshore agency, an organization has a lower degree of control over the assigned resources as compared to its in-house team. This may result in deterioration of quality standards of the business offerings and quality-control issues. The written implications ensure that quality standards are met and identify what constitutes a breach.
Some organizations also have written contracts related to quality-control issues and the measures that an organization can enact to meet the quality standards. It may include onshore training as well as on-demand changes in the team structure.
This goes without saying, but an outsourcing contract should have an individual clause for the ownership of the services, data, and proprietary information. This clause should include all the important provisions in detail so as to avoid any legal issues in the outsourcing contract. Many organizations go one step ahead by consulting the ownership clause with local attorneys of the offshoring country as well.
This contract helps organizations claim complete ownership over any form of property they have shared with the outsourcing provider and makes them the legal owner in the case of contract termination.
Every organization wishes to nourish and establish a long-lasting healthy business relationship with its offshore outsourcing agency, but this is not always the case. Unwanted legal issues related to outsourcing contracts are likely to arrive in the long run. Therefore, it is better to do your due diligence and be prepared well in advance. What encourages success is to hire a well-established and trusted outsourcing agency that understands the ethics of outsourcing laws and offers true worth for your money.
Get Informative & Insightful Articles delivered to You Monthly
Thank you for submitting the details!
We will keep your information safe. Feel free to contact us with any questions at firstname.lastname@example.org
Please check your email for next steps shared by Robert.