In the last decade, the advent of cheap telecommunications fulfilled the promise of the WTO Uruguay Round of free trade agreements. Outsourcing (or “global sourcing”) is a business discipline based on principles of comparative advantage reflected in the “build-vs.-buy-vs.-ally” paradigm in this new global marketplace. By outsourcing, an enterprise hires the services of a specialized service provider, and the provider’s functions integrate into the enterprise’s operations. Like ganglia, this integration creates key
interdependencies.
Many myths give a misleading impression on the sustainability of global sourcing. While foreign wage levels might be much lower than domestic “onshore” wage levels, the actual cost savings from outsourcing or offshoring may be much less due to the costs of operating a “project management office” (“PMO”) to structure, negotiate and manage the operations. Attrition rates of key foreign employees need to be managed to avoid turnover that could impair business continuity and increase replacement costs.
Security, quality metrics, accounting management and audit controls need to be in place. The service provider needs to demonstrate an understanding of the globalizing enterprise’s regulatory environment and strategies for risk management.
Outsourcing is no panacea. It requires ongoing hard work and a willingness to take meaningful decisions on risk and to adapt to change.
Effective outsourcing requires careful project management. This includes planning and methodologies for management of risks to operations, security, customer relations, legal and regulatory compliance and ultimately brand value. In-house counsel skilled at the day-to-day oversight of ordinary day-to-day outsourcing transactions may need assistance from experienced outside counsel to accelerate enjoyment of intended benefits and, more importantly, to provide judgment, strategy and documentation developed through dozens of simlar transactions and a focus on this area of legal practice.
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