The decision to outsource a service to an offshore location involves not only an analysis from the business and cost perspective, but also requires an understanding of legal, risk, and cultural aspects of the undertaking. A complete and thorough due diligence process tailored to the outsourced operation is a necessary step for success.
From a legal perspective, it is of utmost importance to be aware of impact of local laws, including the enforce ability of U.S. contracts abroad, among other topics. Thorough due diligence should be conducted in each jurisdiction involved and should be coordinated by effective counsel.
Below is a brief summary of additional steps in the due diligence process:
Company Due Diligence: This step involves internal due diligence of the company seeking to outsource operations (“Company”). The Company should confirm the “business case” to outsource the operations and should confirm that the Company is ready and able to engage in this type of transaction. Due diligence also reviews the legal systems of the target jurisdictions, the cultural affinity, and socioeconomic factors.
Requests for Proposal (“RFPs”): RFPs should be effectively drafted and should be comprehensive enough to weed out suppliers that do not qualify. At the very least, an RFP should request information regarding the following:
Risk Assessment: The Company should be fully aware of the risks involved in a complex outsourcing transaction and should take the necessary steps to mitigate and monitor the risks. In a large organization this is likely to be a coordinated effort between departments, but in a smaller organization it may be the responsibility of one or two members of management. The key, however, is to be aware of the risks and to manage them properly. Common risks include:
Information Exchange: In large outsourcing transactions the Company may have to share internal information for the supplier’s review. This ensures that the potential supplier fully understands the nature of the operation and the needs of the Company. The information exchange must be monitored closely to ensure accuracy and protection of confidential information.
Supplier Due Diligence: During the process, the supplier in complex outsourcing transactions should conduct an internal study of its ability fulfill its duties as offshore supplier. This involves studying the following areas:
The Outsourcing Agreement: The outsourcing agreement is a result of the process described above and should be tailored to the reality of both parties and the operations. The agreement should detail:
The due diligence piece of outsourcing process can be simple or complex, depending on the nature and size of operations being outsourced. The thoroughness of the parties in the due diligence process will help identify red flags, risks, and potential pitfalls, and often times sets both parties in the road for success.
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