International Outsourcing: Business Judgment Factors
Posted October 9, 2009 by Bierce & Kenerson, P.C. · 
Print This Post
Summary.
Why do you need an international outsourcing strategy? You might be negligent if you don’t have one.
Fiduciary Duty.
Directors are legally responsible for managing their companies. They have a duty to exercise their own business judgment for the best interests of the company and its shareholders. Offshore outsourcing has matured in many industries to the point where it could arguably be a breach of that fiduciary duty not to send some work offshore.
The benefits to the company and shareholders of offshore outsourcing could include cheaper supplies, more competitive services by service providers or suppliers, lower cost of capital, speedier entry into the market and other reasons.
Against such benefits the directors must consider the commercial, legal, reputational, foreign currency, security, intellectual property, human resources and other risks involved in any outsourcing, particularly an international outsourcing.
Negligence.
Any lawyer will tell you what negligence is: you owe a duty to follow a standard of care, and when you fail to follow that standard of care, your failure proximately (predictably) causes the damage that actually results.
Business Judgment Rule.
One of the first principles of corporate governance is that the board of directors has a duty to exercise its business judgment in managing the affairs of a company. This rule requires active decisions, not neglect. Given the globalization of economy and the potential significant benefits of offshore outsourcing, it could be argued that every board of directors must consider international outsourcing.
Sarbanes-Oxley Act of 2002: Is Insourcing a Material Risk?
SEC regulations under the Sarbanes-Oxley Act requires disclosure of material contingencies. See Sarbanes Oxley and Outsourcing. Is it material not to seize business opportunities that could cut costs materially?
Investor Interest.
If your company’s shares are publicly traded, you need to consider the effect of your outsourcing strategy upon investors, particularly mutual fund managers and hedge fund managers.
Fund Manager’s Perspective.
In an interview published in The Wall Street Journal on January 28, 2003, Richard Lane, co-manager of a $650 million FMI Focus Fund, concluded that he would not invest his fund’s money in shares of companies that lack a “good outsourcing strategy to China.” His rationale: “The companies that are faster at outsourcing either products or components … will get a leg up on the competition.”Investment Banker’s Perspective.
Investment bankers advise on capital structures of companies. A management tool that harnesses low-cost suppliers effectively frees capital for spending on core business opportunities.
“Join the Bandwagon” into Foreign Sourcing.
In February 2003, Foote Partners reported as many as 35 percent to 45 percent of U.S. and Canadian Information Technology workers will be outsourced – replaced by contractors, consultants, offshore technicians and part-time workers – by 2005. The survey, based on discussions with 1,880 private sector and government employers, found American companies “can’t afford to do application development in the U.S. anymore (because) the nature of the business has changed.” Similarly, Forrester Research estimated in 2003 that the $4 billion in U.S. wages that floated offshore in 2000 will become a tidal wave of $136 billion – and 3.3 million IT-related jobs – by 2015. One reason: It’s now easier to contract maintenance and support via Web-based collaborative tools, high-speed data networks, cost-effective bandwidth and standardized business applications. U.S. IT workers facing displacement are encouraged to retrain in project management or technologies, such as IT security and wireless networking.
Caveat.
Outsourcing can involve considerable risk. For example, the existence of foreign legislation for protection of intellectual property or data protection might be clear, but the local government’s enforcement policy and judicial experience might not be favorable. Certain countries have a reputation for disregard of misappropriation of intellectual property rights despite laws protecting such rights. Depending on the type of functions or operations that can be outsourced, such risks might be mitigated by special strategies. Bierce & Kenerson, P.C. has advised multinational clients on such strategies.