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2013 began with a flurry of articles about companies insourcing work or rethinking their sourcing strategies. The reasons for this vary by company, but often include a perception that outsourcing has not delivered the cost savings, innovation or other value the companies had hoped to realize, particularly in information technology outsourcing (ITO). In contrast, we continue to see high levels of satisfaction among companies that have outsourced facilities management and other real estate functions. This makes us think the ITO industry might benefit from some of the best practices used in FMO deals.

First, let’s define what we mean by FMO. FMO involves the outsourcing of functions necessary to keep a company’s leased and owned buildings operating. FMO deals typically include core functions like maintaining building systems, performing repairs, and handling custodial and landscaping work. They will often also include higher value services like energy demand management and procurement, space planning and support for critical facilities like data centers and lab space. They may also be part of larger outsourcing relationships in which a company outsources responsibility for managing construction projects, lease administration or brokerage transaction management. For companies with sizable real estate portfolios, the annual spend covered by an FMO deal can be in the tens of millions of dollars.

Now let’s outline some of the key reasons we think FMO deals seem to have a relatively high success as compared to other types of outsourcing.

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When customers decide to outsource part of their operations there are many factors to be considered and decisions to be made over the course of the initiative. Getting to the “right price” is obviously one of the key objectives in any outsourcing transaction. Nobody wants to pay too much for a particular service and, while it might seem nice at first blush, nobody really wants to pay substantially below market price for a service because of the problems that will ensue later in the relationship. However, once the right price has been determined, then a decision must be made as to how to structure the payment of this right price.

The Dead-Band Method: For some customers, especially those with little variance in their monthly usage, having a consistent invoice amount from month to month may be more important than perhaps squeezing that last dollar of cost savings out of the operations. For such customers, paying the same amount for volumes that are within some small percentage (up or down) of the original baseline volumes can be a preferred way to structure the payment.

With the Dead-Band Method, the amount the customer pays each month doesn’t change within a small percentage of volume changes (e.g., +/- 5%). In addition to the stability in amount paid, this method can also reduce the angst created by conflicts with the supplier over the accuracy of volume counts. Counting issues often arise in the early days of outsourcing relationships as volumes that have been loosely measured in the past suddenly take on far greater importance. If the invoice price doesn’t change until the dead-band is passed, then small changes in volumes can be validated and worked through without the pressure of an aging supplier invoice. Ideally, by the time the dead-band limit is reached, the counting issues have been worked out.

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A recent special report in the Economist focused on the general state of the offshore outsourcing industry, with a particular focus on the emerging trend of companies relocating the performance of IT services from offshore locations to locations closer to home in the United States (known as “re-sourcing”). The report cites a number of reasons for this trend, such as the increase in wages in offshore locations, performance issues by offshore service providers, and the inherent challenges posed by the distance between a U.S.-based customer and the offshore service provider. The Economist isn’t the only one to take notice, a recent article on CIO.com cited a number of similar factors contributing to the new attractions in keeping outsourced resources stateside.

The Economist notes that 67% of American and European outsourcing contracts have some element of offshore outsourcing, so most customers with any sort of outsourcing agreement are impacted by the changing landscape of the offshore outsourcing industry. However, deciding to move services back from an offshore location isn’t as simple as flipping a switch (or sending a notice of termination). There are major risks in terminating and transitioning IT services, and the service provider, having been notified that their services are no longer required, is hardly in a motivated position to help mitigate those risks.

Common risks associated with terminating an outsourcing contract include potential disruption to, or degradation of, service, loss of critical resources (e.g., people, equipment, software) and loss of historical knowledge relating to the impacted environment (i.e., scant or insufficient knowledge transfer by the service provider to the customer or the successor provider). Put another way, at the time when the customer is most vulnerable to service disruptions and unanticipated costs, the service provider has the least incentive to provide quality assistance and services. The question that follows is, what can a customer do to protect itself from the pitfalls of re-shoring services either by taking the services in-house or sourcing them to a successor provider?

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The UK government has issued a consultation on proposed changes to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (TUPE).

TUPE is the UK’s implementation of the Acquired Rights Directive (2001/23/EC) (ARD) and, broadly speaking, protects employees when the business or undertaking for which they work transfers to a new employer. Critics of TUPE (which revoked the 1981 TUPE regulations) have raised concerns that it ‘gold plates’ the ARD (i.e. it does more than is strictly required by the Directive) and is too bureaucratic. They also cite a number of practical difficulties. In November 2011, the UK government responded by publishing a Call for evidence on the effectiveness of TUPE, subsequently concluding that the gold plating aspects of TUPE should be removed and the operation of the regulation be made more practical.

What does this mean for outsourcing and other long-term service arrangements? The most significant change being proposed is the repeal of the regulations relating to “service provision changes.” The “service provision changes” provisions were introduced in 2006 in an attempt to avoid uncertainty as to when TUPE applied. The 2006 Regulation expressly states that TUPE applies at the end of a services relationship in the same way that it already applied under the earlier TUPE regulation to a “relevant transfer” at the outset. Thus, in certain circumstances (which have had to be clarified recently by a number of employment tribunal and decisions and appeals), an automatic transfer of the staff working on delivering outsourced services would take place under TUPE at the end of an outsourcing deal, regardless of whether the work is taken on by another third party as a successor to the original supplier or is brought back in-house by the customer.

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We have written before on this blog about the visa issues that offshore service providers face when bringing talented resourced to the U.S. from other countries. Since there are a finite number of H1-B visas that can be issued each year, some service providers have sidestepped the limit by obtaining B-1 visas, which contemplate a more short term engagement than most outsourcing contracts envision.

In response to a host of immigration issues, the Senate has recently introduced a bill that would not only increase the number of H1-B visas that can be issued each year, but would also include an automatic increase to a maximum of 300,000 visas annually if there is sufficient demand. Currently, the United States has an H-1B visa cap of 65,000, and the proposed legislation would increase the cap to 115,000, with the potential to rise to 300,000.

The proposed legislation would certainly ease the visa restrictions on offshore service providers that are seeking to bring top talent to the United States. A recent report in the Economist has noted that there is an increasing trend in customers bringing offshored services closer to home in the United States, and this proposed legislation would make it easier for offshore suppliers to staff in the U.S. using foreign workers. In particular, the Economist noted that Infosys has opened new offices in the U.S. in order to accommodate its customer’s requirements for on-shore offices. With the trend of customers moving IT services back closer to home, the relaxed visa restrictions will put offshore service providers in a better position to win business with their top talent located in the U.S.

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It pays to closely read the payment terms in your software license. Or rather, it costs if you don’t read them closely enough.

I was reviewing a software license for a client recently and came across this term:

“We may increase the license fee in a renewal term by giving you notice at least 60 days prior to the commencement of that term by an amount considered by us to be reasonable if we determine that the existing license fee does not give us an appropriate return when compared to returns from other of our customers, but in no event will any such increase be greater than 10% of the renewal License Fee.”

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As customers continue to embrace Software as a Service (SAAS) solutions that are hosted in the cloud, rather than traditional software solutions that are loaded onto and hosted on the customer’s own environment, they should closely review the contract that will govern their relationship with their SAAS provider. Frequently, we see SAAS contracts that are missing certain basic (and key) requirements that serve to protect SAAS customers.

In Part 2 of our two-part series, we continue our list from Part 1 of the critical contract protections that SAAS customers should keep in mind, before signing any SAAS agreement. Alternatively, if a customer already has a SAAS agreement that omits any of the following terms, the customer should explore amending its current agreement to include these protections, during its next contract renegotiation.

Who May Use the SAAS Solution? SAAS customers should think about who they need to access and/or use the SAAS solution. SAAS agreements frequently place limits on those who are allowed to access the solution. Make sure that the contract allows access and/or use by all of the necessary categories of users. Will the persons accessing the solution only be employees of the customer? What about employees of a customer’s affiliates? What about a customer’s customers – are there any VIP, downstream customers who need access rights? And what about agents, subcontractors and independent contractors, whether they work for the customer itself, an affiliate, or a customer’s customer? (More about the last category directly below).

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As customers continue to embrace Software as a Service (SAAS) solutions that are hosted in the cloud, rather than traditional software solutions that are loaded onto and hosted on the customer’s own environment, they should closely review the contract that will govern their relationship with their SAAS provider. Frequently, we see SAAS contracts that are missing certain basic (and key) requirements that serve to protect SAAS customers.

In the first of a two-part series, we offer the following critical contract protections that SAAS customers should keep in mind, before signing any SAAS agreement. Alternatively, if a customer already has a SAAS agreement that omits any of the following terms, the customer should explore amending its current agreement to include these protections, during its next contract renegotiation.

Implementation Schedule If a SAAS solution is being put into service for the first time for a customer, the customer should make sure that the contract lists the expected schedule for the implementation, including the milestones that must be met and hard dates (not wishy-washy “we hope to get it done” or “we will use reasonable efforts to try and get it done” by a certain date) by which the milestones must be met. If the milestones are not attached to hard dates, then arguably, an implementation that is over one year behind schedule may be “late” in terms of what everyone expected, but it may not be late in terms of the specific guarantees in the contract.

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On 1 January 2013, over 4 years after the idea was first discussed, new Binding Corporate Rules (BCRs) for data processors were launched following a meeting of European data protection authorities.

BCRs are internal codes of conduct which companies within a group can “sign up to” regarding data privacy and security to ensure that transfers of personal data outside of Europe will meet European rules on data protection. Whilst BCRs have been an option for data controllers to ensure compliant transfers from Europe for some time, the introduction of BCRs for processors have been welcomed with open arms by both data controllers and data processors alike.

As a result of this change, processors, such as IT outsourcing providers, cloud providers and data centre providers, who implement BCRs will be able to receive data in Europe from their controller clients and then transfer that data within their group, outside of Europe, whilst complying with European privacy rules. For processors who choose BCRs to ensure compliance, this development could significantly reduce managerial time (and paper) spent negotiating often complicated, data protection safeguards for each and every data processing activity they carry out, whilst also doing away with the supervision associated with such contracts once they are up and running. At the same time, this development offers controllers’ clients comfort in the sense that controllers will be able to more simply demonstrate that their processing activities comply with European laws by pointing to an approved set of BCRs.

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Tim Wright and Craig Wolff, partners in Pillsbury’s Global Sourcing practice and Jack Barufka, partner in the IP practice, explain Legal Process Outsourcing.

Whatever your viewpoint, there’s no denying that Legal Process Outsourcing (LPO) is undergoing a boom, with regular reports in the legal press of its use by law firms and corporate clients alike. Companies, as well as law firms themselves are now looking to outsource legal processes for many of the same reasons that saw them already outsource an increasingly wide array of other corporate functions previously performed in-house – to achieve compelling cost reductions and faster turnaround times, to free up scarce in-house resources to focus on more strategic and higher value activities, and to refocus the company’s energies on its core business activities.

As a result of this phenomenon, a rapidly growing cadre of LPO service providers has sprung up in countries that are able to offer the right mix of a suitably educated workforce with good English language skills, modern telecommunications capabilities, a substantially lower wage structure than Western industrialised countries, and a reasonably well developed legal system which is typically based on English law. Favoured LPO destinations currently include India, the Philippines, Sri Lanka, South Africa, Singapore and Canada.

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