An outsourcing relationship requires give and take. Even the best contracts include gray areas that can be interpreted in various ways. The deal must work for both companies, so mutual benefit is the goal. For example, look for ways to increase the outsourcer’s revenue within its core competencies. Everyone knows of a horror story related to outsourcing. As a result, many IT people seem to think of outsourcers as an axis of evil that should be eliminated or at least squeezed for every penny. However, outsourcing, like any business relationship, is more nuanced than that.

“Don’t do outsourcing as a knee-jerk undertaking. Do your homework. Do it in steps. Really understand the motivations for outsourcing.”

A common pitfall encountered in both captive and outsourced operations originates from unrealistic ramp-up expectations, whereby project planners try to start up too many new offshore seats too quickly. Quality is sacrificed for quantity. The most important offshore lesson that new project managers have to learn is that quality has be achieved before ramping up large numbers of seats -- or quality will never be achieved.

Entering into an offshore outsourcing agreement can be very confusing and challenging considering the fact that the offshore vendor operates from different geographies governed by different laws, regulations and compliances. These agreements are integral to any business and they need to be created and/or reviewed carefully. A well drafted agreement is vital to the organization’s business interests. Many contracts fail to secure the interests of the organization or create confusion simply because they are incomplete. Omission of important terms can lead parties to misinterpret the expectations. Use of any ambiguous language in a contract can lead to misunderstandings, delays, frustration — even litigation.

Here are some essential aspects to consider while drafting an offshore outsourcing agreement:

Scope of Agreement
The purpose and the scope of the agreement should be clearly specified. It should preferably incorporate parameters such as change over scenarios, implementation plans, performance tracking and transition of the services and time frames. The specifics can be covered in a detailed statement of work (SOW). The definition of all terms used in the agreement should be covered upfront. Most of these terms are customary and may have culture-specific interpretation, so defining them upfront helps avoid any false expectations or misinterpretations by the parties involved. Clauses governed by the master agreement can be separated from the clauses governed by the detailed statement of work. The effective date of contract can be kept different from the date of entering into the contract if that is the actual case.

Parties to the Contracts
It is important to understand the legal entity of the offshore vendor. The contracting ‘group’ as a whole may consist of holding companies, subsidiaries, affiliates, branches, subcontractors, agents, etc. This helps the organization (organization can be defined as the company intending to outsource) ascertain the risks, and specify who would be eligible to perform the services, particularly, when the vendor has offices across various geographies.

Compliance with Laws
The agreement should ensure that the offshore vendor is a legal entity with a valid existence and is in good standing under the laws of the jurisdiction of its incorporation. It should have the corporate power and authority to execute and deliver the agreement and to perform its obligations under the agreement. The offshore vendor should comply with all the federal, state and local laws, rules and regulations that are applicable to its service operations. The offshore vendor should be made responsible to identify, obtain and maintain all government licenses necessary to perform the services. This reduces the threat of business disruption, in case the vendor is operating without adhering to legal and statutory compliances.

Audited Financial Statements
The agreement should preferably insist on the annual submission of the audited financial statements of the offshore vendor. This helps in understanding their financial standing and accuracy in representations related to business and operations. This will help the organization identify any adverse changes and risks affecting the vendor’s business.

Representation and Warranties
The agreement should also ensure that the vendor is authorized by all necessary corporate action, and the agreement is duly executed. The agreement should be made binding and enforceable, except as may be limited by bankruptcy, insolvency, force majeure and similar laws. Warranty terms should be stated as precisely as possible, so it is clear what constitutes failure of performance or breach of contract.

Confidential and Proprietary Information
During the performance of the services, the organization will be disclosing a lot of confidential and/or proprietary information to the vendor. An organization's intellectual or intangible property is among its most valuable assets. Such confidential and proprietary information should be defined to include user data, trade secrets, product knowledge, customer information, business and marketing strategies, software programs, technical information, flowcharts, diagrams, quality procedures, internal policies, methods, inventions, processes and techniques. The terms of ownership for each one of them should be identified and defined. The organization should not in any way, under any circumstances, unless stipulated otherwise, transfer, assign or convey title of user data to the vendor. Separate clauses on what should form to be a part of the permitted disclosures, prohibited disclosures, excluded information, exclusions and injunctive relief incase of a breach, should be clearly defined. A clause for return of confidential and proprietary information should specify how the information has to be delivered back or destroyed.

For intellectual property of the vendor, the organization can seek a limited license for its internal use. The license should outline the scope and terms of use.

Technological and Security Services
Ideally, the agreement should specify in detail the technology and security services that are to be provided by the vendor. The agreement can also specify the technological standards that are to be maintained by the vendor while providing the services. All IT (hardware, software, network connections, connectivity, and security assessment) requirements should be in place by the vendor, to be able to meet the SLA as defined in the scope of work. Further, the vendor should preferably have a tested business continuity and disaster recovery plan in place. This will ensure safe transition and minimal disruption of services in case of any adverse eventuality.

Invoicing
Contract payment terms are crucial and should state a definite payment schedule. The agreement can also provide for, if mutually agreed upon, reserving a portion of a payment that becomes payable after specified performance milestones are achieved. The fees payable can be inclusive (or non-inclusive) of taxes imposed by any domestic or foreign taxing authority including sales tax, excise, value-added tax, withholding tax or any other tax in respect of the provision of the services. The contract can also specify a clause for revision in the pricing by making adjustments related to change in inflation or fluctuation in foreign exchange.

Audit Rights
The agreement should ensure that the vendor maintains accurate and complete records in accordance with consistently applied and generally accepted accounting policies detailing all fees for its services rendered. The agreement can also specify a period for which the vendor would have to maintain such records after the termination or the expiry of the agreement. The right to inspect and audit such records to verify the accuracy of the information contained in any invoice or the fees paid for services rendered, can be provided for.

Indemnification
The indemnification provision should adequately protect the organization and its affiliates, officers, directors, volunteers, employees, subcontractors and agents. Any negligence on the part of the vendor might cause loss or damage to the organization and therefore the agreement can specify to what extent the vendor has to indemnify and pay for those losses or damages on behalf of the organization. Mutual or reciprocal indemnification provisions are common and appropriate. With certain types of contracts, specific liquidated damages provisions can also be included, such as attrition clauses.

Handling of Tangible Property
The agreement can cover interest of parties on retaining/returning any tangible property of the organization or the vendor after completion of the term of the agreement. Such tangible properties may include promotional literature, samples, products, promotional items, computer disks, tapes, tangible files and other relevant documentation.

No Agency
Ideally, the agreement should clearly specify that the relationship with the organization is that of an independent contractor and nothing in the agreement should be construed to create a partnership, agency, joint venture, or employer-employee relationship between the organization and the vendor, unless clearly stipulated. In special cases, the agreement can specify whether the vendor can be the agent and also to what extent the vendor would be authorized to make any representation, contract, or commitment on behalf of the organization. This clause would offer protection to the organization against any potential international tax issues.

Non-solicitation
The agreement can have a non-solicitation clause whereby both parties cannot solicit, hire or retain, or cause any third party to solicit, hire or retain, any employee of the parties as an employee, consultant or in any other capacity for any purpose, without the other parties written consent.

Sub-contracting
In certain instances, if the organization allows the vendor to subcontract its obligations, it should subject it to obtaining undertakings from the subcontractors in favor of the organization providing the same rights and remedies as are set out in the agreement.

Insurance
The vendor may maintain, during the term of the contract, professional indemnity insurance with a reputable insurer that covers potential liability of the vendor that may arise during rendering of the services up to a certain mutually agreed upon limit. Such clause would ensure that in case of any eventuality of occurrence of any errors, omissions, fraud etc., the vendor would be sufficiently covered and can make good the losses due to disruption of the services to the organization.

Transitional Services
Upon termination of the services by the organization, the vendor should, on request, provide such transitional services as are reasonably necessary to permit the organization to transfer the performance of the services to organization’s own personnel and/or to another provider or providers. The nature and scope of all transitional services should be defined along with sharing of transition costs thereof.

Term and Termination
The term of the agreement should be clearly defined as also the eventualities for terminating it earlier. The contract can be automatically renegotiated or renewed. It can be terminated with a cause in case of a breach.

Publicity
The agreement can have a publicity clause that regulates the use of organization’s logo, press announcements or publicizing the agreement by the vendor with prior written consent from the organization.

Governing Law
The agreement should preferably be governed by the respective laws of the state or country where the organization has its registered or legal office.

Assignment
The agreement can inure the benefit of and be binding to both parties and their respective successors or affiliates. This clause helps to cover a situation where any party goes through a consolidation, sale, merger or corporate restructuring.

Severability
If any provision or restriction contained in the agreement is held invalid or unenforceable by a court of competent jurisdiction and is not reformed by such court, the remaining provisions and restrictions contained in the agreement can nevertheless continue to be valid and enforceable.

Arbitration
Any disputes or controversy under the agreement can be settled by arbitration in accordance with the rules of a specified Court of International Arbitration. The Arbitration Panel arbitrates the controversy by majority decision. An arbitrator appointed should be sufficiently knowledgeable in the areas of law necessary to arbitrate the controversy. The agreement can specify the terms for sharing the costs of the arbitration including the compensation and expenses of the Arbitration Panel. Arbitration does not necessarily constitute a waiver of any right of termination under this agreement.

Conclusion
The above standard language might seem a little overwhelming but can end up being immensely important in the event of a dispute or when the relationship is experiencing certain difficulties (examples include missing of service level by the vendor, IT lapses, change management, breach of confidential information of the organization, termination for convenience etc.). Good contracts will have mechanisms to deal with these issues. However, these typically require a good relationship and mutual trust to work well. Ideally, the contract negotiation is the place where the parties build trust.

The agreement stands as a testament to a mutually beneficial relationship over a long period of time. The points covered above will provide the organization with a tremendous advantage in shaping the negotiations and structuring the deal suitably for the relationship to grow and ultimately be a win-win for both parties.

Sohil Parekh
The author is a certified CPA and leads the finance team at Motif. Motif, Inc. is a knowledge based services provider in the space of customer support services, back office transaction processing and research and analytics.
(www.motifinc.com)