Category Archives: Outsourcing

When (Out)Sourcing Goes Wrong

Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement.

Three hundred Pakistani garment workers die in a factory fire. (Source: New York Times) Doors were locked, windows were barred. And the factory had just been inspected by a subcontractor to a certification agency. Lesson here: If you can’t afford to visit the factory you are sourcing from, then no cost savings is sufficient. Do not let other companies do the research for you.


Thanks, Dick, for the valuable lesson here. (Global Supply Training)

All Roads Lead to Poland … Starting with Technology.

Recently, I pointed out how All Roads Lead to … Poland. As I was writing it, Venture Beat published a piece on why Poland is ready to hit the tech big time. According to the article, Poland has plenty of innovative companies with global potential, such as Appcod.es (which proclaims to be the Swiss Army Knife for App Store Optimization), Mobeelizer (cloud sync for your mobile apps), or Positionly (to track and improve your website’s position). Plus, with over 55% of the population online due to its solid level of technical education, it’s no surprise that Poland ranks second in the world in the Top Coder ranking, with only Russia scoring higher.

And when you consider the English competency, and the relatively low wages, it makes it a very attractive destination for companies looking for an alternative to India, with companies such as 10 Clouds and Applicake looking to help you with your business. And now there is Angel and VC support in the region, including Hard Gamma Ventures, Innovation Nest and Point Nine Capital.

And blogging has hit the big time in Poland. Poland leads European markets in blog engagement, with only Japanese and South Korean visitors spending more time visiting blogs worldwide. The tech blogsphere is ablaze, with the most influential polish bloggers reaching an average of 11% of the technical blog audience.

And the fact that it still hasn’t adopted the Euro gives it an advantage in the financial crisis. Its weaker currency, the zloty, supports exports and foreign investment. Plus, as per the I Love Poland website, eating out in Poland is superb value for the money, making it very attractive to valley-types who like to travel, and dine well.

And it’s gearing up for technology. Over one quarter of its 66 industrial and technology parks, indexed on the Invest in Poland site, are dedicated to science and technology. And if you need help breaking into Poland on this side of the Atlantic, the USPTC (US-Polish Trade Council), the Canadian Trade Commissioner Service (Poland), and the Poland Trade & Information Office of North America are there to help.

Some Legal Considerations When Outsourcing to India

A recent article over on Outsource Magazine had a good article on “legal considerations when outsourcing to India” that addressed core legal issues that should form the basis of your Master Services Agreement when outsourcing to India. The four issues addressed could be very problematic if not covered by your agreement.

Lex Contractus
This refers to the governing law, or proper law, of the contract. While the parties of a contract can choose the governing law, as the author notes, due to the fact that a major proportion of the services are to be rendered in India, consideration for services will be received in India and the Indian party may sign the contract in India, the applicability of Indian laws cannot be excluded by contract. So, even if the Indian party agrees to the governing law being a foreign law, it is possible that in case of any dispute, the Indian party could approach a court in India to seek appropriate relief and the court could also entertain the dispute on the basis of factors set out above. Keep this in mind when considering outsourcing to India. In addition, should you choose arbitration, Indian law mandates that for a foreign arbitral award to be directly enforceable in India, the award must meet the following conditions: the award must have attained finality in the country it has been passed; it must conform to and must not conflict with Indian law or public policy; both the parties and the arbitration venue should belong to a New York or Geneva Convention signatory country.

Data Protection and Privacy Laws
While India has been slow on the uptake with respect to data protection and privacy laws, compared to the US which has a number of industry specific federal laws and state laws (that also restrict cross-border transfer of personal and sensitive information) and the EU which has the European Data Protection Directive, it has moved quickly to catch up in an effort to insure it keeps the outsourced work that it has acquired. Since the Information Technology Act of 2000 didn’t have enough enforcement teeth in the eyes of the US or EU, the biggest outsourcers to India, it quickly passed the Information Technology Rules in 2011 that defined what would constitute “Sensitive Personal Data or Information”, laid down obligations for the data collector and data processor, and defined reasonable security practice and procedures. This may not be strong enough for extremely sensitive data, but is a great start. Just make sure you also insist on adherence to the IS/ISOIEC2700 as well.

Employment Issues
It’s important to explicitly state that the service provider complies with all the necessary laws and that the overseas outsourcing company may not be threatened by any kind of claim by employees of the Indian company.

Licensing, Copyright in Database and Infringement Issues
Remembering that the outsourcing company is creating, developing, and processing data for you, the client, it is essential that you state that all data, product, programme, software, designs, and compilations constitute IP and that all IP rights are protected and assigned back to you, the client. Note that, in Indian law, the supplier will hold the copyright interest in the software developed by it but Indian law also provides for the assignment of the copyright interest by the service provider in favour of the client, by entering into an separate assignment agreement.

If not properly handled in the agreement, each of these could come back to bite your organization in its organizational behind if something goes wrong. Think it through, and get some expert legal help.

All Roads Lead to … Poland?

In the last three days I’ve seen articles about three different international logistics companies expanding operations (with new routes and delivery centers) in Poland as well as two articles about global supply chain cooperation, one on logistics cooperation between Poland and China, which was discussed at a recent seminar following an MOU with SAIETC, and another on technical / mining cooperation between Poland and India.

While it never made SI’s series on Cultural Differences or Cultural Intelligence, edited by SI’s resident global trade expert Dick Locke, the doctor, a technologist by training (and an enterprise software architect), has been keeping tabs on Poland as he believed it was not only a rising destination for IT offshoring, but one which could soon provide advantages over India. But he never expected Poland, with an outsourcing index of 5.6 and a rank of 16 over on Sourcingline (which tracks 38 global outsourcing destinations), to all of a sudden become so prominent.

After all, it was only in 2010 that Ernst & Young, in their European Attractiveness Survey, identified Poland as the top potential investment destination for their FDI (Foreign Direct Investment) projects. Typically it takes years for recommendations to become reality. However, and this is one thing Poland does have going for it, Poland is pushing for FDI very aggressively. The English translation of the Inwestycje w Polsce site, Invest in Poland, site is quite informative, the GDP growth is stable, the high unemployment rate (given the average education level) suggests lots of room for additional growth, and the fact that FDI has been stable around the 10 B Euro range for the past 4 years leaves room for growth. And when you consider that half of the 2.1 Million Polish students speak fluent English, that’s a globally-prepared well-educated work-force being churned out every year. When Horses for Sources said Poland was more than “just another” BPO location, they were definitely ahead of the curve. And where Poland is concerned, at least with respect to North American and Western Europe, they have a very good chance of competing with the Sourcing Raj.

Poland is definitely Open for Business.

 

The Common Gotchas in Outsourcing are Well-Known, But Do You Know How to Handle Future Pricing?

The Outsourcing Center recently ran an article on the ‘5 “gotchas” when negotiating an outsourcing agreement’ that pretty much covered the same-old, same-old, when it noted that, if not carefully structured, the following five areas of an outsourcing agreement can not only drain value from your business case but decrease the probability of having a successful outcome. Specifically, without a good focus on the

  • Statement of Work (SoW),
  • Service Levels,
  • Delivery Locations,
  • Termination Language, and
  • Future Pricing

if things go bad, your agreement, and any value you expected to derive from it, can go to hell in a handbasket very, very fast. Why?

  • A poorly defined SOW can allow the service provider to take shortcuts and avoid doing intended responsibilities.
  • A poorly defined Service Levels agreement can result in worse, instead of better, customer service.
  • A poorly defined delivery locations clause can allow the provider to deliver from anywhere, and all of a sudden instead of being serviced from Poland, on CET, you’re being serviced from Nepal on NPT and you’ve just gone from UTC + 1:00 to UTC + 5:45 and forget about reaching anyone during a standard North American working day.
  • A poorly defined termination section can result in your inability to pull the plug if service gets bad.
  • And a poorly defined future pricing section that allows for year-over-year increases based on “labour rate increases” could have you taken to the cleaners if “labour rate increases” are not appropriately defined.

But in the future pricing discussion, the article did a great job of pointing out three specific areas you should look out for (and what you should do about them).

  • Year-over-Year Pricing
    In general, unless the service being provided is very labour intensive and requires highly skilled labour, prices should decrease. In a call center, average cost per resolution should decrease year-over-year. In a back-office processing outsourcing arrangement, the cost of processing an invoice should go down year-over-year. Etc. The provider should get more efficient over time and pass on some of those savings to you.
  • Cost of Living Allowance (COLA)
    If the agreement is long-term, it’s ridiculous to think that any provider will totally lock in pricing for services when labour rates are often unpredictable. You have to include a cost of living allowance. But you don’t have to make it almost discretionary. The COLA should be tied to a well-known and accepted government or public index (such as one provided by a major organization like the ISM), the specific services to which the COLA is permitted should be defined, and the percentage of the unit cost that is subject to COLA must be defined as well. (Remember, if you’re paying by invoiced processed, part of the processing costs are technological, and they should decrease year-over-year.)
  • Variance Pricing
    As the article notes, many outsourcing contracts contain variance pricing based on resource usage. An assumed number of resources are built into the annual price, and then adjustments are made up or down based on actual monthly usage. You need to watch how that will work for your organization. Some providers will start off with a lower base price to meet an initial price point or undercut the competition, but then have a relatively high additional resource charge (ARC rate) for more volume. The cost of additional resources should be flat in the worst case, and decrease if requirements increase considerably (as the profit margins the outsourcing provider should need to make should decrease with volume utilization).

So pay close attention to your future pricing unless you want your projected savings to turn into actual losses.