Outsourcing is a key strategic decision for businesses, enabling more efficient operation through a focus on core areas, while leveraging the capabilities and scale of specialist service providers to effectively operate non-core areas. The economic downturn has increased the pressure on businesses, in Ireland and globally, large-scale corporations and SMEs, to maximise competitiveness while controlling the cost base. Outsourcing can be a valuable method of achieving this balance. As outsourcing transactions move further up the value chain, in-house counsel have a key role to play, both at the strategic decision stage in evaluating risks and identifying key issues, and then in implementing the decision to outsource by co-ordinating the procurement and contract negotiation process in conjunction with internal stakeholders and external advisors. This article offers an overviewof key trends and future developments in the Irish outsourcing market, together with some useful guidelines to assist in-house counsel and their organisations, both to effectively manage the outsourcing process and to achieve successful long-term outsourcing relationships.
Irish Outsourcing MarkeT: Weathering the Storm
The value of Ireland’s strategic outsourcing industry is expected to top €700m by the end of 2010, with over 80% of Irish businesses having at least one outsourced or managed service. The recent Mazars Annual Outsourcing Survey 2010 concluded that the Irish outsourcing market is weathering the economic storm and that:
- 90% of respondents believe that outsourcing adds value to their organisations;
- over 80% maintained or increased use of outsourcing services in the past 12 months;
- key reasons to outsource are improving process efficiency and quality, access to skills and knowledge not available internally, cost savings, and the ability to concentrate on core functions with cost savings increasingly an essential driver; and
- in the Irish market, outsourcing is most likely in the public sector and financial services sector.
This is consistent with global trends that show 62% of outsourced service providers planning to expand the scale of their service offerings, according to a recent PricewaterhouseCoopers/Duke University survey. In Ireland, this pattern is evident in the recent announcement by domestic life and pensions service provider Percana Group that it has doubled its workforce. Abtran, a Cork-based business process outsourcer, has created 300 new jobs. Recent headline activity includes O2’s recent outsourcing of its IT division to IBM and network management function to BT, Aer Lingus’s 2009 announcement of its outsourcing plans, and Bank of Ireland’s recent shortlisting of IBM and HCL Technologies Ltd as potential new IT infrastructure providers.
Key Challenges and Strengths
The greatest challenge faced by the Irish outsourcing industry in 2010 is cost-effectiveness in an economic climate where the country has lost significant ground in competitiveness (down from fourth in 2000 to 19th in 2010 in the IMD World Competitiveness Index), although there are signs that the economic downturn is slowing that slide due to lower rents and more competitive salary scales. On the other hand, Ireland continues to be an attractive location for inward investment (as well as for domestic outsourcing), with several acknowledged strengths, including high-quality IT, financial and customer service skills, a knowledgeable and innovative workforce, a low-risk environment, excellent infrastructure, and a favourable corporation tax rate. Increasingly, and in line with the Irish government’s smart economy strategy, the Irish outsourcing sector will need to play to its strengths by focusing on higher value services for which Ireland has a highly educated, motivated, service-centric workforce, capable of providing innovative solutions to complex business processes and to the development of smart technologies.
Recent Trends and Future Developments
The outsourcing industry continues to evolve, both globally and in Ireland, with continued growth in IT, financial services and business process outsourcing (BPO). There are increasing signs of growth in areas previously not commonly outsourced, such as research, product development, tax and knowledge management. Recent trends are set to drive increased market activity in Ireland and beyond, which in-house counsel advising businesses with a presence in Ireland need to be aware of. They include:
- Public sector outsourcing: predicted as a key growth area, with increasing pressure on government to control spiralling costs and inefficiencies. The July 2009 McCarthy Report on public sector expenditure recommended outsourcing as one method of achieving these objectives and its use was acknowledged in the Public Service Agreement 2010-2014. While the public sector unions remain a significant political hurdle, the die has been cast and increased public sector outsourcing is inevitable.
- Green outsourcing: as Irish businesses become increasingly aware of the high-energy cost of IT processes, green IT is likely to gain ground in Ireland, given the drive to develop green economy credentials. In 2009 Tesco and Barclays started green IT initiatives to cut carbon emissions, while IBM, Accenture and Microsoft are all engaged in green IT programmes to improve data-centre energy efficiency. In 2009 the UK Environmental Agency outsourced its IT function to a BT/Capgemini syndicate, following a procurement exercise in which sustainability accounted for 15% of the evaluation criteria, which is regarded as having set a new green standard in UK public procurement.
- Cloud computing: this, put simply, involves maintaining data and applications centrally on the internet and remote servers, allowing more efficient computing by centralising storage, memory, processing and bandwidth, and is another area in which there is likely to be increased activity over the next few years. Ireland is already at the forefront of the trend, due to IBM having located its cloud computing centre in Dublin in 2008 and Hewlett-Pakard having established its cloud computing competency centre in Galway in 2009.
- Offshoring and nearshoring: the trend for outsourcing to overseas service providers will continue, most commonly offshoring to locations such as India and China or nearshoring to central and eastern European locations to gain access to lower production and employment costs. However, while business will continue to avail of these options for low-value, commodity-type services, Ireland is likely to continue as a preferred location for higher-value services for several reasons.
- Financial services outsourcing: outsourcing activity in this area has always been high in Ireland and, given the current economic pressures on the financial services sector and potential cost-savings offered by outsourcing, it is set to continue. Market research indicates that many outsourcing decisions may have been put on hold in the more turbulent financial climate of 2008/09 and are likely to come on stream again.
- Multisourcing: as the outsourcing market increases in sophistication, it is becoming more common for Irish businesses to divide different aspects of a single process or activity between multiple providers to diversify risk, reduce costs and access best-of-breed suppliers.
Avoiding the pitfalls: ensuring a successful outsourcing relationship
Once the business has taken the strategic decision to outsource, it is crucial that the right supplier is chosen, the process is managed effectively, and an effective contract is negotiated that will facilitate a workable relationship between customer and service provider, all areas in which the role of in-house counsel is key. The following guidelines will assist in avoiding the most common pitfalls of outsourcing and in getting the most benefit from the relationship:
- Finding the right fit: focusing on cost alone can be counter-productive. The relationship between service provider and customer is key to the success of the arrangement. To keep expectations realistic, the customer needs to know that the service provider is a good cultural fit and brings the required levels of service, while the service provider needs sufficient knowledge of the organisation. For this reason, good due diligence is crucial.
- Managing the process: outsourcing is a complex and lengthy process involving strategic, structural, commercial and legal issues, and, if not well-managed, can result in costly delays, an inappropriate contract and irreparable damage to key working relationships. Success is most likely where objectives are clear and transparent from the outset, confrontational attitudes are avoided, and the right teams of internal management and external advisers are on board right through from strategic decision, procurement and supplier selection, and due diligence, to contract negotiation and employee transfers.
- Achieving a mutual win-win: to achieve the best outcome in the context of a long-term business relationship, the deal needs to be balanced. Customers should think twice before automatically trying to squeeze the best possible deal from the supplier in all circumstances. If, ultimately, the deal is not economically beneficial to the supplier, then it is likely to focus increasingly on cost-saving, potentially to the detriment of quality, and tensions are likely to arise. If benefit is mutual, everybody wins.
- Ensuring flexibility: the outsourcing contract must achieve the complex balance between being sufficiently detailed, both to successfully govern the relationship, and be flexible and practical enough to anticipate and facilitate change. The economic downturn has highlighted the need for flexibility, with problems commonly arising in meeting minimum commitments or fixed-price obligations. For this reason, the contract needs to be bespoke to the deal, be an effective operational tool, and must contain water-tight change control mechanisms for negotiating and implementing change.
- Effective protection and governance: as well as change control and termination, the outsourcing contract must govern the relationship effectively, while allowing it to evolve and measure performance effectively by including clear key performance indicators, service levels, charging mechanisms, cost controls and ability to benchmark costs standards against other service providers. It must also ensure regulatory compliance, impose technology update obligations and provide a customer right to audit. Intellectual property, data and confidential information must be protected. Risk management must be ensured through business continuity and disaster recovery, and liability limited through warranty and indemnity provisions, force majeure rights, and practical dispute resolution solutions, including escalation, service credits, step-in rights and expert/mediation referral provided.
- Providing for the future: while outsourcing relationships are long-term, they will inevitably end and, for this reason, it pays to ensure that the contract includes a range of (partial and complete) termination options, and also that it has an effective exit management strategy to ensure a controlled exit with minimum disruption, appropriate protections (including for employees) and transitional provisions.
Key Legal Issues and Role of External Advisers
Outsourcing is a lengthy, complex and labour-intensive process involving a myriad of strategic, commercial, structural and legal issues, with in-house counsel often expected to take a lead role in this process. Involving external counsel early on in the process, even prior to selection stage, can add value by freeing up in-house counsel to focus on core issues, while involvement in request for proposal (RFP) preparation, due diligence and provider review processes, increases knowledge-sharing between the technical, financial and legal teams. This ensures that key legal issues are addressed from RFP stage and ultimately lead to a smoother, more efficient transaction and more successful outsourcing relationship. At ByrneWallace, the dedicated and experienced cross-departmental outsourcing group works closely with clients’ in-house counsel to provide a cradle-to-grave service, from understanding the key business drivers behind the decision to outsource, to assisting in selection and procurement, and playing a pro-active role in driving the deal and project managing the process and key relationships, right through to advising on disputes, exit arrangements and contract re-negotiations.