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The following headline recently caught my attention:

“Bill would OK secret privatization, outsourcing of Florida agency functions”

What is not news is that State and Local Governments (SLGs) are struggling to maintain the services their electorates are accustomed to. Blame declining tax revenues caused by the housing market bust and the “Great Recession”. But unlike the Federal Government, SLGs do not have unlimited resources to deal with budget shortfalls. So officials find themselves playing with the unpopular options of cutting services and/or raising taxes. In the search for a silver bullet, the concept of Private-public partnerships (PPPs) is garnering increased interest.

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Unfortunately, the new year does not hold much hope for reversing the disturbing trend of increasing federal, state and local taxes and surcharges that are applied to telecommunications services. It’s not unusual for enterprise customers to pay an additional 25-30 percent on their bill, depending on the types and locations of services purchased. The worst of these offenders is the Federal Universal Service Fund (FUSF) charge, which is administered through the FCC and applied by telecom carriers to interstate and international service charges, and is now almost 18 percent. The FCC is expected to review the FUSF contribution requirements this year, but may try to expand FUSF contributions to include broadband connections (Internet access), which are currently not subject to the charge. These would lower the percentage rate, but will likely not decrease total payments.

Thousands of state, county and local governments are faced with tightening budgets and decreasing revenue sources. These taxing authorities set their sights on telecommunications transactions to help replenish their coffers. In many jurisdictions, the idea of “updating” telecom taxes generally means revising existing statutes to include new technologies and services, such as Voice over Internet Protocol (VOIP) or prepaid wireless. For years, carriers have tried to get a national, uniform tax policy for telecom, but to no avail.

These taxes may be referred to on your invoice as sales taxes, gross receipts taxes, 911 fees, or communications services taxes. There may also be line items for regulatory administrative fees or property tax fees, which are imposed by some carriers but not required to be collected by any government agency.

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Outsourcing attorneys spend many hours negotiating complex terms and conditions governing the delivery of IT outsourcing (ITO) and business process outsourcing (BPO) services. As good outsourcing counsel, we spend a lot of time imagining ugly scenarios and allocating the associated risks and liabilities. Often as not, the result is an outsourcing contract that looks more like a phone book than anything you would use to guide the development and management of an outsourcing relationship.

It’s no wonder business people want to lock these contracts in the bottom drawer.

Industry-standard contracts have ballooned to hundreds of pages and yet, despite over two decades of maturation, the outsourcing industry continues to produce more than its fair share of disappointments: failed implementations, misaligned service delivery models, spotty operational performance, billing disputes, cost blowouts.

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Background on Economic Pricing Adjustments

Outsourcing contracts often include mechanisms to adjust prices for inflation. Among the factors of production, the cost of labor is the most critical and is often subject to these adjustments.

To account for rising production costs in a particular market,** service providers will typically ask for an annual price increase that is pegged to a standard cost of living benchmark, such as a public consumer price index (CPI). Some onshoring and offshoring examples:

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News that Accenture Life Insurance Services has won an eight-year business process outsourcing (BPO) agreement with BNP Paribas Cardif may be a sign that the European life insurance and pensions market is set for increased outsourcing activity.

According to Accenture’s press release, “Accenture will manage an important portfolio of BNP Paribas Cardif’s group life insurance policies business in France, including the administrative management of the insurer’s call centres and ancillary accounting operations.”

“The life insurance industry is undergoing fundamental change, driven by increased regulation and risk management pressure and more volatile markets,” said Daniele Presutti, managing director of Accenture Life Insurance Services. “This provides an opportunity for some insurers to gain market share. Outsourcing can help them strengthen capabilities to reach their objectives.”

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In the waning days of 2011, a measure was introduced in Congress directed at U.S. companies utilizing overseas call centers that may not have attracted much attention. However, given the current economic environment, industry press and at least one foreign government have taken note of the bill.

On December 7, 2011, a bipartisan group of Representatives introduced the United States Call Center Worker and Consumer Protection Act (H.R. 3596) (the “Bill”). The Bill specifically targets U.S. companies relocating call center operations overseas by (1) requiring them to disclose such action to the Secretary of Labor nearly six months prior to the relocation, and (2) making such companies ineligible for Federal grants or loans for a period of five years. Additionally, the Bill mandates that overseas agents fielding customer inquiries for U.S. businesses (regardless of whether the call center arrangement is new or already in existence) to disclose their physical location at the beginning of a communication.

While the Bill appears to be aimed at large customer call centers that field consumer complaints or inquiries, the Bill’s language could apply to instances where internal service help desks (i.e., non-customer facing) are moved overseas. It is not clear from the Bill’s language if these operations are intended to fall within the scope of the Bill but the language as currently drafted does not entirely foreclose the possibility.

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Making the decision to terminate an outsourcing agreement is often very difficult and is usually only pursued if enforcing existing rights is not sufficient to address a customer’s major concerns or renegotiating the agreement can’t achieve the desired outcome.

If a customer begins to think about terminating an agreement, it is useful for customers at that juncture to undertake a complete review of the agreement in relation to termination options and consequences to help inform the decision. What should such a review entail?

Can you terminate? And what are you terminating?

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We have previously discussed on this blog the increasing difficulty that offshore service providers are facing in obtaining U.S. visas for its employees that are non-U.S. citizens (see “The Buzz about Visas for Offshore Service Provider Personnel and the Link to On-Shore Hiring“). The rejection rate for H-1B visa applications has skyrocketed over the past two years, which has added to the administrative headaches that offshore service providers face when trying to bring their top talent to their U.S. client sites.

In the midst of this, Infosys has been battling allegations from internal whistleblowers that it has been abusing the visa application process in order to circumvent the administrative hurdles. Whistleblowers claim that Infosys has been applying for B-1 visas for its employees, which contemplate very short term visits (e.g., a visit for a conference) as opposed to the more difficult to obtain H-1B visa, which are required for long term projects and are subject to an annual cap on the number that the U.S. issues. In addition, the B-1 visa doesn’t include the prevailing wage and federal tax requirements that an H-1B visa requires. Infosys has denied abusing the visa system for its own benefits. However, Infosys was dealt a judicial blow recently when one of its employees, who alleged in a lawsuit that Infosys wrongly obtained B-1 visas in its work, won a federal court decision that set aside an arbitration clause and will allow him to bring his case to a jury. The employee, Jack “Jay” Palmer alleges that he was pressured by Infosys to systematically apply for B-1 visas when H-1B visas were required. The federal court held that the arbitration clause Palmer signed as part of his employee agreement is not binding, and Palmer may bring the case in front of a jury.

In response to the decision, computerworld.com stated that Infosys released a statement, which said that while the decision “is not the one we had hoped for, it is one that we have planned for. We take very seriously our obligations under the law and specifically our responsibilities to comply with the immigration laws and visa requirements in all the jurisdictions where we have clients. The fact is that there is not, nor was there ever, a policy to use the B-1 visa program to circumvent the H-1B program.” In addition to the civil suit, Palmer’s allegations have ignited the interest of the U.S. Department of Justice, which has begun a grand jury investigation into Infosys’s tax and immigration practices.

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In the wake of some extreme weather during 2011 (earthquakes, tsunamis, tornadoes, hurricanes, and mudslides), what better time to review your disaster recovery and business continuity (DR/BC) solution and planning processes?

In some cases, DR/BC planning is a legal or regulatory requirement, but even where it is not, common sense argues for a sound DR/BC plan for any business. Why?

  • For most businesses, the dependency on computer systems, applications, databases, networks and electronic delivery systems increases daily – to the point where the efficiency and productivity of the business would drop precipitously if these tools are not available.
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Because evaluating a service provider’s security posture is more challenging in the cloud, in Part Three of this article we looked at ways to evaluate a cloud service provider’s security prior to signing the contract and some of the issues between customers and suppliers created by the SEC Guidance. In Part Four we’ll look at ways to monitor the provider’s security during the term of the agreement.

Auditing Security

For years customers of outsourced IT services have asked providers for a copy of their SAS 70 Type 2 audit report as a means of evaluating a supplier’s security. Since the SAS 70 wasn’t really designed to be a security audit, it isn’t really suited for this, but in the absence of a more security-specific standard, the SAS 70 was a suitable proxy.

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