Outsourcing and the Foreign Worker

By Renee Oricchio

For many enterprises, IT outsourcing is a great way to cut costs, streamline business processes, and free up time and capital for growth in other areas of the organization. But make no mistake, it's not a turnkey solution -- especially when the vendor is overseas. While direct management of an overseas workforce is the vendor's responsibility, the risks that come with inadequate performance remain with the company farming out the work.

U.S. spending on IT outsourcing overseas was a $68 billion dollar market in 2006. And, according to Forrester Research, it's expected to grow another 6% to more than $72 billion in 2007.

There are many reasons IT outsourcing overseas has become so popular, the most common of which is lowering IT costs. Other benefits come from often superior technology, infrastructure, and a well-educated workforce.

"Offshore delivery providers have as good or better process control than many U.S. firms, because they've built their delivery infrastructure more recently and from scratch," says Paul Roehrig, senior analyst from Forrester Research. In the case of many Indian vendors, in particular, their technology is typically as good as -- or better than -- that in the United States.

The vast majority of reputable vendors are just as strict, if not more so, than U.S. companies, when it comes to background checks, drug testing, and onsite security clearance checkpoints for employees. This is an important consideration for U.S. companies, given the advent of a variety of laws and regulations stipulating that organizations must secure much of the data they collect -- such as private health information about employees or customers, confidential financial information about clients or partners, and sensitive data about the company.

Roehrig says the biggest mistake CIOs make with outsourcing vendors is not being clear about what they need from the vendor.

"The painful secret about outsourcing is the customer usually does get exactly what they ask for, they just don't ask for the right things to begin with," he says.

The best way to avoid pitfalls is to research the vendor thoroughly, and make sure that every expectation, requirement, and risk is addressed in writing.

"For the (IT manager), it's largely a contractual issue," says Christine Adams, vice president of research at Gartner Group Inc. "It's like anything else. You have to do your due diligence with the provider."

Here are just a few risk areas to consider addressing when negotiating the contract:

• Legal risks Some companies have questions about foreign workers who may need to spend time on-site at company facilities on U.S. soil. This is an area where it always pays to consult an employment attorney. But, in general, since the worker in question is employed by the vendor, there should be no employer liabilities on behalf of the company itself.
• Financial risks What are the potential costs from lost productivity, damaged reputation with customers, budget overruns, or non-performance? How can these risks be covered in the contract? In most cases, it's easier to quantify losses than recapture them. This is where it pays to have a detailed plan laid out in the contract.
• Security risks How will sensitive company data be protected? Most companies opt to put strict limits on what information is actually allowed out of the country. Data storage typically lives on-site back home with limited access through a PC or laptop for the overseas worker.

The Art of the Deal
Ben Trowbridge, managing partner of Alsbridge, a global advisory firm that specializes in outsourcing, knows all too well where the biggest missteps usually happen. His firm is often called in to help untangle failed outsourcing agreements after the fact.

Trowbridge offers this list of some of the most common pitfalls he sees in outsourcing deals:

• Being a victim of aggressive sales "There's an incredibly entrepreneurial spirit among outsourcing vendors. The number of vendors has grown dramatically in recent years. It's very competitive and there's sometimes a tendency to oversell the abilities of what their employees can actually deliver," warns Trowbridge. He advises shopping around to make sure the price is right and, more importantly, that references are checked.
• Using the wrong kind of attorney This is not the time to use the corporate attorney, unless he or she happens to specialize in overseas outsourcing. One example of what a good attorney (with the right area of specialization) might do for you: construct the contract so that any conflicts would be settled by arbitration rather than a U.S. court. Keep in mind, 75% of IT outsourcing is performed by Indian vendors, and Indian courts will not enforce a ruling from a U.S. court. But it will enforce arbitration, because that's a commercial transaction which is recognized by Indian courts.
• Placing too much trust in the vendor Trowbridge advises that IT managers must have contractual rights to regular on-site inspections with minimum advance notice, access to the vendor's written work policies, as well as built in audit and verification rights. If any of those requirements are a problem, then keep looking.
• Not managing the contract "There's a tendency that somehow once the contract is signed, it's done. The work still needs to be managed like it's in your department," cautions Trowbridge. Forrester's Roehrig emphasizes it's a relationship that needs constant management, oversight, and clarity of expectations. Make sure key personnel from both organizations are identified from day one with a clear understanding of who is responsible for what during the life of the relationship.

Conclusion
Choosing an outsourcing vendor with overseas or foreign workers out of your direct control is a big commitment. Before inking a long-term deal, a "test drive" might be advisable. Trowbridge often encourages his clients to run a pilot project first, preferably something with limited risk but involved enough to give them a good idea of what it will be like to work with the vendor.

At the very least it will provide food for thought while crafting that final contract.

Renee Oricchio is a freelance writer in Norwalk, Conn. For the past 20 years, she has been writing and producing news segments about technology and business for CNN, MSNBC, Ziff-Davis, CNet and a variety of Silicon Valley-based local news outlets.