Legal terms

Why Outsourcing Abroad Could be Your Biggest Mistake

One of the biggest drivers for most businesses is cost reduction. Increasingly, companies are outsourcing their support functions, call centres and back office functionalities to organisations abroad on the basis that it will drive considerable cost savings to their organisation.

This cost based approach could negatively impact your staff and customer relationships, your business operations and result in increased costs to your business. So why, then, do we think organisations who are adopting the “cheaper abroad” approach are at risk of making a big mistake?

1.      Wrongly focusing on price Instead of skills & efficiencies

We have said this before in some of our other articles on contract and supply management – you get what you pay for. Yes, labour may be more expensive locally. But while labour may be cheaper in a foreign country, what are the other costs that also need to be factored into this equation?

Language and cultural barriers can often create significant customer dissatisfaction issues with a flow-on impact on reputation.  Failure to perform the required tasks due to lack of skill or the creation of inadvertent inefficiencies (see below) may result in losses to your business.   

2.      Failing to see what’s under your nose

When companies outsource abroad, they often do so to reduce employment costs locally.  The initial costs of this decision could be significant if redundancy payments are required, if there are industrial relations disputes or any unfair dismissal claims. But what’s forgotten is the cost to the organisation that arises from a huge loss of corporate knowledge that goes with retrenchment of entire teams across a business.

Organisations and their people have a lot of knowledge and that knowledge often comes from years of experience and history. When entire teams are retrenched to achieve an operational costs objective, much of that organisational knowledge is lost at a great detriment to the organisation.

So while a company may save money on wage costs, they may have neglected to consider the impact a loss of operational knowledge will have on their business and how this will affect day-to-day or business as usual activities. It can take organisations years to recover from poor outsourcing decisions.

3.      Forgetting that the true measure is “Business Efficiency”

It’s important that organisations consider whether their outsourcing arrangements will impact on organisational efficiencies. If outsourcing creates multiple touchpoints across a business, then that adds to the inefficiency of the business and can create organisational complexity. These inefficiencies can damage an organisation’s brand and can create issues for an organisation’s core business.  

Frustrated internal staff and dissatisfied customers can be the cost of bad outsourcing decisions. So while the price of the services abroad may be significantly cheaper, the true cost must reflect the costs of any inefficiencies created by the outsourcing arrangement.

4.      Failing to comprehend the true impact of failed deliverables

No outsourcing model is ever fail safe. But often organisations neglect to consider how they will enforce contractual terms they’ve agreed on as part of the outsourcing arrangements.

How, for example, will service deliverables and key service levels really be managed if those deliverables and service levels are not met? What is the direct impact to an organisation’s business?

It’s quite often the case that the local business is left faltering while the issues with the external service provider are resolved.  This may directly impact the operation of the business and also lead to both staff and customer dissatisfaction. The result can be disengagement between the lines of business (departments) within an organisation.

It can also create a raft of legal issues relating to the enforcement of contracts in those jurisdictions, particularly in relation to conflict of laws.

Sometimes the hardest part for organisations is conceding that they’ve made a mistake with their outsourcing approach. But it’s never too late and services can always be transitioned back. The sooner an organisation concedes that the arrangement isn’t working, the easier it is for everyone to work together towards re-instating an internal structure.

© Copyright 2016, Elisian Pty Ltd.

 

Exclusivity Agreements - Issues to Consider

Exclusive contracts are used as a means of monopolising various commercial arrangements to the exclusion of other third parties.

But all too often, there’s a failure to comprehend the impact exclusive arrangements may have on the parties. This includes a failure by the parties to consider the legal and commercial ramifications of the arrangements. 

Best practice is to always obtain formal legal advice prior to entering into an exclusivity agreement (various issues can arise including in relation to competition laws). But here’s our list of things you should also consider before going exclusive.

1. Long Term Contracts

If your contract is more than a year long, you need to have a long think about whether exclusivity is appropriate. Short term exclusivity arrangements may be helpful to your business. But for lengthy contracts of 3-5 years plus, you need to think very carefully about whether exclusivity is an appropriate course of action for your business. Where will your business be in that time? While you may be convinced that exclusivity is the right thing to do now, make sure you consider the issues below before you make a final decision.

2. Complex Organisational Structure

The more sophisticated and complex the corporation, the more likely it is that exclusivity will prove to be an issue later down the track. Big corporations change, bend and flex with time and businesses often change direction as they go. A decision you make today may be considered a very bad strategic decision in 5 years’ time.

3. Change of Management

While proponents within your organisation may decide that exclusivity is absolutely essential at this time, think about whether there’s anything driving this particular arrangement that is unique to this particular transaction. Management and leadership teams change. Assume that somewhere down the track, management may decide to exit the exclusive arrangement. What then, would be the implications?

4. Relationships Driven

Many contracts function well because of a good relationship between the parties. If that relationship changes, you may not want to be in an exclusive arrangement. Take for example, where the key client lead changes and there’s no longer the spirit of cooperation between the parties.

5. Change Of Policies or Procedures

People and organisations change their minds/strategic direction all the time. Sometimes corporate policies and procedures change with the result that the exclusive arrangement is considered bad for business. Assume you’ll probably want to change tact sooner rather than later while considering whether exclusivity is right for you.

6. Significant Exit Costs

Have a think about what the contractual exit costs are if you do decide to terminate an exclusivity agreement before the expiry of the agreed contract term.

This article does not constitute legal advice and is provided for general information only. If you have any queries, please contact Nadia Mansour at Elisian.

© Copyright 2016, Elisian Pty Ltd.