“ObamaCare”: Promotion of Automation, Offshore Outsourcing and Job Losses; Penalizing Foreign Companies Based in Tax Havens (and Other Non-Treaty Countries)
November 16, 2009 by Bierce & Kenerson, P.C.
If enacted, President Obama’s healthcare reform would probably hurt domestic employment and accelerate automation, outsourcing and offshoring. It would change the economic incentives for keeping service industries in America. And it would hurt foreign-owned businesses whose ultimate parent company is based in a tax haven or other country that has no U.S. income tax treaty.
On November 6, 2009, by a paper-thin margin of 220 votes to 215, the U.S. House of Representatives passed the “Affordable Health Care for America Act,” H.R. 3962, the 1,990-page health care reform law that has been frequently called “ObamaCare.” If substantially adopted by the Senate and passed into law, the bill would impose significant new burdens on employers and self-employed persons.
Automate, Outsource, Offshore. As a result of the new mandatory taxes and/or health costs, American employers would be encouraged to automate processes, outsource many business functions to external service providers for more automation, and offshore many business functions. At a time when the U.S. unemployment rate is over 10%, this health care bill could permanently kill re-hiring in many service jobs that have been lost. It would encourage further globalization of American enterprises to establish foreign shared-service captives.
Taxing American Employers Encourages Export of U.S. Jobs. This version of ObamaCare would require every American citizen and lawful permanent resident (but not illegal immigrants) to enroll in a “qualified plan.” §§ 202 and 224. Every plan must be identical in coverages, except only for differences in co-payments and deductibles. § 303. If your employer fails to pay 72.5% of the cost of the “qualified plan” for individual plans (or a 65% share for your family coverage), your employer must pay an 8% payroll tax. § 412(b)(1). If you are the employer, your cost of hiring a U.S. employee would increase by at least 8% of the employee compensation. This would not affect independent contractors and consultants.
Part-time employees would be affected too. For part-time employees, the employer contributions are required in proportion of the average weekly hours of employment to the minimum weekly hours specified by the health insurance Commissioner for an employee to be a full-time employee. § 412(b)(3).
Small Business. Small businesses (with payrolls from $500,000 to $750,000 including owner salaries) would pay a lower tax in 2% increments for payrolls of $585,000 or more. § 413. If the small business has affiliates doing different businesses, they are aggregated for determining whether they get “small business” treatment. While small business might not consider offshore outsourcing, the House ObamaCare bill would encourage small business to automate and use independent contractors, staffing companies and outsourcing service providers domestically.
Taxation of High-Income Americans. The House ObamaCare bill would impose an additional 5.4% personal income tax on citizens and resident aliens earning $1.0 million per year (for married persons filing jointly), or $500,000 for individuals filing singly. This could be enough to encourage some high-earners to re-consider their personal tax planning and expatriation or non-residency for high-income years.
Hardships to Be Studied. The ObamaCare bill acknowledges that employer responsibility requirements may pose significant hardships. Yet it failed to take into consideration any special provisions for any employers by industry, profit margin, length of time in business, size or economic conditions (such as the rate of increase in business costs, the availability of short-term credit lines, and ability to restructure debt). Instead, the bill contemplates a future study of such hardships. § 416. The “hardships” listed do not include the impact of the ObamaCare system on the use of automation, outsourcing or offshoring.
Classification of Workers as Employees or Independent Contractors. The ObamaCare bill contemplates new regulations (in addition to existing tax and labor regulations) for “recordkeeping requirements for employers to account for both employees of the employer and individuals whom the employer has not treated as employees of the employer but with whom the employer, in the course of its trade or business, has engaged for the performance of labor or services” to “ensure that employees who are not properly treated as such may be identified and properly treated.” § 423(a). Existing regulations of the Department of Labor, the Internal Revenue Service and other agencies already address this issue. It will become a pivotal issue and encourage unemployed persons to set up new personal service companies or to work through staffing companies in lieu of permanent employment.
Individuals Taxed if Not Adequately Insured. For individuals who fail to purchase (or be covered by their employer’s purchase of) “acceptable” health insurance, the House bill would impose a federal income tax equal to 2.5 percent of a slice of income as especially defined in section 6012(a)(1)). § 501. Exemptions would apply to non-resident aliens, non-resident U.S. citizens, residents of U.S. possessions and religious conscientious objectors.
Collateral Targets: Foreign Business with U.S. Subsidiaries. Foreigner-controlled businesses would help pay for ObamaCare unless the controlling parent is in a treaty with a U.S. income tax treaty. The ObamaCare health “reform” would thus significantly increase the cost of doing business for foreign businesses that are not based in a country that has an income tax treaty with the United States. Amending U.S. federal income tax law (and bundling a tax provision unrelated to healthcare), the ObamaCare bill would require the U.S. subsidiaries of foreign-controlled companies to apply the normal 30% withholding tax on all deductible income paid unless an income tax treaty applies to the foreign-controlled parent company. “In the case of any deductible related-party payment, any withholding tax … with respect to such payment may not be reduced under any treaty of the United States if such payment were made directly to the foreign parent corporation.” Payments subject to withholding consist of passive income such as dividends, interest, rents and royalties. § 561, adding a new §894(d) to the Internal Revenue Code of 1986. The bill would apply to U.S. subsidiaries that are part of a “foreign controlled group of entities” that have a common parent that is a foreign corporation.
The U.S. currently has income tax treaties with 67 countries, including Russia, India, China and the Philippines. For the entire list, see http://www.irs.gov/businesses/international/article/0,,id=96739,00.html.
Foreign-controlled companies established in low-tax jurisdictions are targeted, including Aruba, Barbados, Bermuda, the British Virgin Islands, the Channel Islands (Jersey and Guernsey), Hong Kong and Panama. Formerly U.S.-based companies that moved their situs of incorporation from the United States to tax havens, such as Accenture did, will be directly affected.
However, the draft healthcare legislation would also have an impact on foreign businesses established in other industrial and commercial countries that provide significant levels of business process and IT services to U.S. enterprise customers. These countries include Brazil, Columbia, Costa Rico, Malaysia, Mauritius, South Korea and Taiwan. Companies in such countries that provide call center services, customer care and other remote offshore services would find that the cost of doing business in the United States is increased.
Conclusions. ObamaCare will cost American employers and American taxpayers. These costs will give a new comparative cost advantage to foreign service providers, assuming their ultimate parent company is based in a country with a U.S. income tax treaty.
Limits on Exclusive Use of “Trade Secrets” in Deal Structuring: Investment Banker Cannot Claim Misappropriation of Trade Secret for Bowie Bonds
October 9, 2009 by Bierce & Kenerson, P.C.
What right does an external advisor have to own the exclusive right to structure a business transaction? This question may become more interesting to consultants and outsourcing service providers who might wish to rely upon trade secrecy to develop a “new market” in a “new type of service” or “best practices.”
The bottom line appears to be that outsourcing consultants and outsourcing service providers must show a very high standard of secrecy in order to be allowed to exclude others from using an unpatented business process. The business process cannot merely be the simple application of business expertise to analysis of numbers by previously known techniques.
Music Royalty Securitization as Deal Structure.
David Pullman, an employee of an investment bank Gruntal & Co., introduced a concept for securitization of intellectual property royalties. He developed a plan to securitize the projected royalty stream from the music of an internationally renowned musical performer, David Bowie. Gruntal & Co. entered into a written engagement letter with Prudential Securities Corp. and affiliates in which Prudential agreed not to disclose Gruntal’s confidential information about the structure of the deal. (Mr. Pullman moved to Fahnestock & Co., another investment bank, which purchased Gruntal’s rights.) Prudential purchased $55 million allotment of bonds issued in a private placement in which David Bowie was paid a lump sum in cash for the right to receive royalty income from his music catalog for a 15-year period. The bonds were self-liquidating, meaning that the royalty stream was applied directly and paid to the bond holders to reduce principal and interest. Mr. Pullman claimed that he and his team “created formulae that were used in the financial analysis methodology model for the Bowie Transaction, and that using the formulae and applying it to a model, the user could predict cash flow, volatility, timing, currency risks and other factors required to analyze a proposed bond transaction.”
The Failed Joint Venture.
In June 1997, Mr. Pullman proposed that Prudential enter into a joint venture with his employer, Fahnestock, to form “Royalty Finance Co. of America.” Prudential would be the exclusive revolving warehouse lender and provider of subordinated debt on future bond issues secured by intellectual property royalties. Fahnestock was to act as exclusive agent for the placement of the loans and securitizations completed through the joint venture. Instead of completing this joint venture, Prudential allegedly used confidential information on the deal structure from Fahnestock and formed a joint venture with RZO, an entity that had had a joint venture with Fahnestock on music royalty securitization. The prestigious law firm of Willkie Farr & Gallagher represented both Fahnestock in the Bowie Bond transaction and later represented RZO in a transaction with Prudential that excluded Fahnestock and Mr. Pullman, and the absence to trade secret protection apparently justified the law firm’s representation of RZO in the Prudential relationship.
The Law firm’s Right to Represent Others.
The prestigious law firm of Willkie Farr & Gallagher represented both Fahnestock in the Bowie Bond transaction and later represented RZO in a transaction with Prudential that excluded Fahnestock and Mr. Pullman (and the absence to trade secret protection apparently justified the law firm’s representation of RZO in the Prudential relationship). The court noted: “The legal document prepared by WFG does not appear to differ materially from those of any other band transaction.” The court did not find any fault with the law firm’s actions.
Trade Secrets in Deal Structures.
The proponent of a trade secret must identify in detail the trade secrets and confidential information allegedly misappropriated by the defendant. Xerox Corp. v. Int’l Bus. Machines Corp. 64 F.R.D. 367 (S.D.N.Y. 1974). “If [the party claiming ownership of the trade secret] intends to rely upon a unique combination of previously known elements as the basis for its trade secret production [that discloses this to the court], it must specify what particular combination of components it has in mind and how these components operate in a unique combination.” Pullman Group LLC v. Prudential Ins. Co. of America, ___ NYS2d __, NYLJ (July 3, 2003), p. 24, cols. 1-6, p. 25, col. 1 (Supreme Ct. N.Y. Co. 2003), Judge Gammerman, at p. 24, col. 5. “The secret must be one which can be described with sufficient particularity to separate it from matters of general knowledge in the trade or the special knowledge of those persons skilled in the trade.” Imax Corp. v. Cinema Technologies, Inc., 152 F.3d 1161 (9th Cir. 1998).
Lessons for Outsourcing Customers.
Outsourcing contracts frequently contain provisions that allow the parties to continue to use information that is not trade secret. The wording of such provisions needs to be carefully reviewed. In the Pullman decision, the court identified several circumstances to support its conclusion that there is no claim against a service provider (or by a consultant against a customer) where the “trade secret” was “created” solely by applying “business expertise to the analysis of numbers by means of previously known techniques.” Pullman, supra, at p. 24, col. 6.
- The disclosure of the “trade secret” to others as part of a marketing concept or new product idea, which makes the concept inherently incapable of trade secret protection, Boyle v. Stephens, 1997 WL 529006 (S.D.N.Y. 1997).
- The fact that the concept was a “mere distillation of general knowledge which is common to a particular trade,” Laff v. John O. Butler Co., 64 Ill.
- Once a trade secret has been made public, it loses its status as a protected trade secret.
- The plaintiff failed to reveal the alleged formula.
As a result, a customer wishing to preserve its rights in trade secrets disclosed to its outsourcing service provider must treat those trade secrets with all the usual protections that are necessary to protect them from any other third party. In the context of joint development of business processes with an outsourcing service provider, the customer must carefully delineate the nature and scope of intellectual property protections.
Lessons for Outsourcing Vendors.
The mere claim that a customer’s operations are “trade secrets” might not mean that they are protected as such by applicable law. However, as a matter of marketing and credibility, the outsourcing service provider must show as much confidentiality concerning the processes as practicable. Maintaining confidentiality preserves both the customer’s goodwill, the service provider’s potential right to own internally developed ancillary or corollary processes, and avoids the unfavorable publicity of a dissatisfied customer’s claims of misappropriation.
Lessons for Outsourcing Consultants.
This decision raises a number of questions about an outsourcing consultant’s right of ownership of “trade secrets” that it uses in its consulting business. If the consultant did nothing but apply “business expertise” to the analysis of a business problem by the use of “previously known techniques,” the consultant might not have any ownership in the alleged trade secrets. If a consultant has been using essentially the same methodology for over a year then patent protection may be unavailing. Outsourcing customers selecting outsourcing consultants therefore may ask about the consultant’s claims to intellectual property as part of the process of selecting a consultant.
Document Retention, Document Management and Data Warehousing in Outsourcing
October 9, 2009 by Bierce & Kenerson, P.C.
Business enterprises must comply with a multitude of laws and rules governing the retention of business records. Destruction or loss of business records could cause serious loss to the enterprise and its trading partners. Fines might be levied under regulatory audits. Documents supporting novelty, originality or date of reduction to practice might result in a loss of a business process patent. In litigation, the enterprise might be unable to present evidence or rebut contradictory evidence. Recognizing the need for electronic storage, legislatures and courts worldwide have adopted various “electronic signature” and “electronic documentation” statutes and rules allowing, as probative evidence, documents stored solely in electronic form, provided that certain notarial protections such as immutability (non-changeability), provenance and other customary factors for attesting to the origin and custody of the record are satisfied. Records may also incriminate, so routine destruction of old records is advisable where no law or rule requires continued retention.
In response to such needs, service providers in logistics, storage, warehousing and data warehousing have developed an industry for the “life cycle management” of documents. The life cycle includes document creation, gathering of related records, organization of directories and data bases under organizing principles, record storage, distribution, document retention, retrieval, accessibility, destruction and reporting and record keeping of the life cycle itself. Such services involve different methods, cost structures and risks to the customer.
Recent jurisprudence establishes new rules governing “electronic discovery” under the Federal Rules of Civil Procedure. The impact of such rules on document retention, document management and data warehousing in outsourcing should be clearly understood by both outsourcing customers and services providers. Prudence dictates a number of “best practices” in records management in outsourcing.
Records Retention Policies and Procedures.
This article does not intend to list all laws that might require temporary or permanent document retention. Rather, it is critical that each enterprise adopt policies and implement procedures for compliance with record keeping and record destruction requirements of law.
Right of Access to Records in Criminal Proceedings.
This article does not intend to discuss the right of the criminal defendant to obtain information, or the right of the prosecutor to obtain evidence through police investigations. However, criminal negligence for corporate misdeeds is punishable under certain public statutes. Accordingly, maintenance of “best practices” in records management could make a difference in outcomes for both the enterprise and its managers.
Right of Access to Records in Civil Dispute Resolution.
Right of Access to Records in Mediation.
Most business managers might agree to mediation if it is not onerous and does involve detailed is closures of business records.
Right of Access to Records in Arbitration.
In general, arbitrators have no mandate to compel adverse parties to engage in any disclosure or discovery phase for the identification of records that might have a relevance or probative value in dispute resolution. The rules of arbitration of most common arbitral administration organizations generally do not require any such compulsory disclosure.
Right of Access to Records in Litigation.
Mandatory Discovery.
The U.S. Federal Rules of Civil Procedure 26 through 37 govern discovery in civil actions of any nature that may be adjudicated by U.S. federal courts. These rules permit the giving of notice, formulation of legal and factual issues and revelation of facts through pre-trial procedures including depositions and discovery. Rule 26(b)(1) defines very broadly the scope of mandatory disclosures by an adverse party in response to a request for discovery:
Parties may obtain discovery regarding any matter, not privileged, that is relevant to the claim or defense of any party, including the existence, description, nature, custody, condition, and location of any books, documents, or other tangible things and the identity and location of persons having knowledge of any discoverable matter. For good cause, the court may order discovery of any matter relevant to the subject matter, involved in the action. Relevant information need not be admissible at trial if the discovery appears reasonably calculated to lead to the discovery of admissible evidence.
In general, confidential business information may be discoverable and subject to a protective order so that the requesting party does not publicize it.
Scope of Discovery Must be Proportional to the Benefit.
Rule 26(b)(2) imposes general limits on discovery under a “proportionality” test. A federal court may limit the frequency or extent of use of “discovery” methods if the court determines:
- the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenience, less burdensome or less expensive;
- the party seeking discovery has had ample opportunity by discovery in the action to obtain the information sought; or
- the burden or expense of the proposed discovery outweighs the likely benefit, taking into account the needs of the case, the amount in controversy, the parties’ resources, the importance of the issues at stake in the litigation, and the importance of the proposed discovery in resolving the issues.
Payment for Cost of Disclosing Records and Information.
Normally, the courts presume that the cost of researching and producing the requested records and information in the discovery process must be paid by the responding party. However, under Rule 26(c), the court may shift the cost to the requesting party to avoid “undue burden or expense.” Oppenheimer Funds, Inc. v. Sanders, 437 U.S. 340, 358 (1978).
Common Law Approach to Equitable Determination of Cost Allocation and Cost-Shifting for Discovery of Records, including Electronic Records.
Different courts have adopted different standards and tests for balancing the costs and likely benefits. The most influential response to the problem of cost-shifting in the discovery of electronic records was the eight-factor list adopted by U.S. Magistrate Judge James C. Francis IV in Rowe Entertainment, Inc. v. William Morris Agency, Inc., 205 F.R.D. 421, 429 (S.D.N.Y. 2002). More recently, District Judge Shira Scheindlin of the same district court adopted a different rule to tailor the Rowe Entertainment principles to add one new factor and omit two unnecessary factors. Zubulake v. UBS Warburg LLC, __ F.3d __, NYLJ May 19, 2003, p. 37, cols. 1-6, p. 28, cols. 1-5 (S.D.N.Y. March 2003) (claim for alleged wrongful discharge due to claimed sex discrimination in employment). The Zubulake court reasoned that the factors should be weighted and that they should be not be predisposed, or “slanted,” as the Rowe Entertainment rules might do, in favor of shifting the costs of production from the responding party to the party requesting the electronic records.
The following table compares the two decisions:
| Rowe Entertainment Factors (without any order of importance or priority) |
Zubulake Factors (in numbered order of importance and priority) |
| 1.The extent to which the request is specifically tailored to discover relevant information. | |
| 1. The specificity of the discovery requests. | |
| 2. The likelihood of discovering critical information. | |
| 3. The availability of such information from other sources. | 2. The availability of such information from other sources. |
| 4. The purposes for which the responding party maintains the requested data. | |
| 5. The relative benefits to the parties of obtaining the information. | 7. The relative benefits to the parties of obtaining the information. |
| 6. The total cost associated with production (a test of absolute cost without reference to the amount in dispute). | 3. The total cost of producing the requested information as compared to the amount in controversy (a test of proportionality of cost to the amount in dispute). |
| 4. The total cost of producing the requested information as compared to the resources available to each party (a test of proportionality of financial resources). | |
| 7. The relative ability of each party to control costs and its incentive to do so. | 5. The relative ability of each party to control costs and its incentive to do so. |
| 8. The resources available to each party. | [See factor #4 above.] |
| 6. The importance of the issues at stake in the litigation. |
Types of Storage of Electronic Records.
Retention of documents in electronic form allows cheaper and faster access, with easier determination whether a document is protected from the discovery process by some form of evidentiary privilege (e.g., attorney-client communication, attorney work product, husband-wife spousal privilege, etc.). Judge Scheindlin’s opinion in Zubulake toured the types of methods for record keeping, with reference to accessibility and ease of production.
Whether electronic data is accessible or inaccessible turns largely on the media in which it is stored. Five categories of data, listed in order from most accessible to least accessible, are described in the literature on electronic data storage:
1. Active, online data:
“Online storage is generally provided by magnetic disk. It is used in the very active stages of an electronic records [sic] life – when it is being created or received and processed, as well as when the access frequency is high and the required speed of access is very fast, i.e., milliseconds.” Examples of online data include hard drives.
2. Near-line data:
“This typically consists of a robotic storage device (robotic library) that houses removable media, uses robotic arms to access the media, and uses multiple read/write devices to store and retrieve records. Access speeds can range from as low as milliseconds if the media is already in a read device, up to 10-30 seconds for optical disk technology, and between 20-120 seconds for sequentially searched media, such as magnetic tape.” Examples include optical disks.
3. Offline storage/archives:
“This is removable optical disk or magnetic tape media, which can be labeled and stored in a shelf or rack. Off-line storage of electronic records is traditionally used for making disaster copies of records and also for records considered ‘archival’ in that their likelihood of retrieval is minimal. Accessibility to off-line media involves manual intervention and is much slower than on-line or near-line storage. Access speed may be minutes, hours, or even days, depending on the access-effectiveness of the storage facility.” The principled difference between nearline data and offline data is that offline data lacks “the coordinated control of an intelligent disk subsystem,” and is, in the lingo, JBOD (“Just a bunch of disks”).
4. Backup tapes:
“A device, like a tape recorder, that reads data from and writes it onto a tape. Tape drives have data capacities of anywhere from a few hundred kilobytes to several gigabytes. Their transfer speeds also vary considerably.The disadvantage of tape drives is that they are sequential-access devices, which means that to read any particular block of data, you need to read all the preceding blocks.” As a result, “[t]he data on a backup tape are not organized for retrieval of individual documents or files [because] .the organization of the data mirrors the computer’s structure, not the human records management structure.” Backup tapes also typically employ some sort of data compression, permitting more data to be stored on each tape, but also making restoration more time-consuming and expensive, especially given the lack of uniform standard governing data compression.
5. Erased, fragmented or damaged data:
“When a file is first created and saved, it is laid down on the [storage media] in contiguous clusters. As files are erased, their clusters are made available again as free space. Eventually, some newly created files become larger than the remaining contiguous free space. These files are then broken up and randomly placed throughout the disk.” Such broken-up files are said to be “fragmented,” and along with damaged and erased data can only be accessed after significant processing.
Of these, the first three categories are typically identified as accessible, and the latter two as inaccessible. The difference between the two classes is easy to appreciate. Information deemed “accessible” is stored in a readily usable format. Although the time it takes to actually access the data ranges from milliseconds to days, the data does not need to be restored or otherwise manipulated to be usable. “Inaccessible” data, on the other hand, is not readily usable. Backup tapes must be restored using a process similar to that previously described, fragmented data must be de-fragmented, and erased data must be reconstructed, all before the data is usable. That makes such data inaccessible. Zubulake v. UBS Warburg LLC, __ F.3d __, NYLJ May 19, 2003, at cols. 5-6 (S.D.N.Y. March 2003).
The Bottom Line: Who Should Pay for Producing Copies of “Accessible” Records and for “Inaccessible” Records.
In Zubulake, the court ordered the defendant, employer UBS Warburg LLC, to pay the cost of producing e-mails stored in active use or on archived optical disks. The court remanded to a magistrate judge the allocation, in accordance with the Zubulake court’s seven-factor test, the costs of producing e-mails stored on backup tapes. Production of records from the backup tapes and from archived optical disks was estimated to cost were estimated at $300,000. In this case, the terminated employee had been earning $500,000 a year in compensation, and the employer was a major international investment bank.
In the final analysis, this raises issues for enterprises (and their records management service providers) in connection with litigation strategy.
Best Practices in Records Management in Outsourcing.
In the era of electronic signatures, electronic litigation discovery and mandatory reporting procedures for publicly traded companies, certain “best practices” are emerging.
Service Level Agreements and Standards of Care.
Records management services agreements have generally defined the service provider’s standard of care both in legal terms (degree of negligence) and in technological and business terms (specified business procedures whose inputs and outputs are objectively measurable as service level agreements).
Business Purposes and Risks in Rapid Accessibility to Business Records.
Enterprises might wish to think twice before storing all e-mails on easily accessible storage means, such as Storage Area Networks, network attached storage and other “online” or “near-online” technologies. If the enterprise is defending against a claim of unfair employment termination, it might be advantageous not to spend the additional cost for the more rapid method of access. However, if the enterprise is considering use of historical e-mails for development of a knowledge basis using semiotic, robotic knowledge generation tools, the shareholders will probably reap great economic benefit from the “online” and “near-online” technologies.
Service Level Agreements.
All documents are not created equal. The customer’s records retention policy must be clear. The customer may need the right to change the SLA’s in response to newly mandated record keeping requirements, ranging from a longer statute of limitations to more detailed accounting reports under the Sarbanes-Oxley Act of 2002 (more related links at end of article).
International Records Management.
Records management generally should be maintained in the country where the records originate. As enterprises globalize, internationalization of records management follows. As a result, the peculiar legal issues relating to international business transactions should be identified and resolved as part of any international records management service contract.
Data Warehousing.
This phrase “data warehousing” describes the consolidation of disparate forms and types of data under “one roof,” that is, in a manner accessible from one program. As digital information becomes more easily accessible to the data masters, so it may be more easily accessible to those, acting in litigation, seeking to obtain copies of that information.
Limitation on Liability.
An enterprise customer’s loss due to “poor” records management can come from any one of several sources, including:
- loss of business records required to comply with contractual, statutory, regulatory or judicial obligations.
- loss of goodwill.
- fines and penalties from failure to maintain records, or to file official declarations and “returns” that are based on such records.
- adverse evidentiary presumption in case of proven spoliation of evidence.
- loss of rights in a trade secret.
- loss of rights in a patent or patent application.
- compulsory disclosure of business records that constitute an admission against interest in litigation.
Before agreeing to limitations on liability, the enterprise customer should consider each of these business risks and evaluate the likely impact on the enterprise. Alternatively, the solution might lie in an enhanced SLA or more detailed statement of work.
Insurance and Other Risk Mitigation.
The enterprise and its corporate officers, directors and even shareholders may become directly or vicariously liable for the negligence or willful misconduct of its external service providers that provide records management services. The corporate risk manager should review the company’s and the service providers’ insurance policies for errors and omissions, directors’ and officers’ liability insurance and coverages for valuable papers and business continuity.
Securities Law Compliance.
Record keeping is now a strict obligation under the U.S. federal and state securities laws. The Sarbanes-Oxley Act of 2002 amended the federal securities laws to require that the CEO and the CFO certify that the financial reporting systems are adequate. Service providers in the field of records management and document management should determine how much risk they are willing to assume in relation to liability arising out of:
Insurance and Other Risk Mitigation.
- erroneous document retention policies of the enterprise customer;
- negligence or gross negligence by the records manager; and
- faulty procedures in any transfer or storage of data, including commitments of complete redundancy, data mirroring and disaster recovery.
Periodic Inspections and Verifications.
Trust depends on continued reliability. Audit and inspection are a normal part of the outsourcing processes. In the field of records management, the preparations for the date change in the year 2000 launched a global business process of disaster recovery testing. Normal records management should have periodic inspections and verifications to ensure the processes continue as promised and, more important, as may be required to comply with emerging applicable law.
Outsourcing Tools for Insourcing
October 9, 2009 by Bierce & Kenerson, P.C.
Outsourcing Tools for Insourcing.
The typical outsourcer also provides a spectrum of support and consulting services compatible with a totally insourced environment. Thus, outsourcing is only one of the core service offerings. Enterprise customers now ask the question: why outsource when I can insource using the right tools? While there may be many reasons to outsource, there are equally many reasons not to outsource. The reasons relate to ERP, SCM, CRM and DRM solutions that can be used to keep customers loyal and flexibly prepared for a future outsourcing. Emerging BPM / business process management tools and software as a “service,” can likewise create opportunities for retention of functions in house.
Does your “outsourcer” also sell tools that facilitate insourcing? In this article, we take a quick look at one particular tool offered by the king of outsourcers for its enterprise customers’ data centers.
Panoply of Insourcing Tools.
Insourcing tools help a customer manage its technology and service delivery to its internal customers without dependence on a third party for design, maintenance and support. Let’s consider a few:
- Web-Enabled Self Service and the ASP Model.
Under the “Applications Service Provider” model, the external services provider hosts its own proprietary software solution. The customer enters data into the provider’s software by remote control, either using web-enabled services or high-speed link. - Web-Enablement of Customer’s Proprietary Software.
Companies such as Citrix have developed tools to allow a customer to place its own proprietary software on a secure Intranet, thereby reducing access costs, particularly for end-users who are traveling, home-based employees, or in a large complex organization with multiple offices worldwide. - Software Licensing Model.
Software that helps customers perform their own “managed services” has developed over time. In the “early days,” data base software such as Oracle and DB2 organized data. More recently, enterprise resource planning software (“ERP”), supply-chain management (“SCM”), customer relationship (“CRM”) and device-relationship management (“DRM”) software have enabled enterprise customers to harness a uniform set of business process tools across large organizations. Such more robust software serve as tools for reducing complexity, enforcing business process rules and showing transparency of data. Such software also can plan, identify and manage for business continuity in case of disasters. As an emerging insourcing or outsourcing tool, new software tools facilitate provisioning of resources. - External Benchmarking and Performance Metering Tools.
Service level agreements (“SLA’s”) define the various performance parameters that define the essential services under any outsourcing agreement. Enterprise customers have tools that measure the same operational data that the external service providers see at the service provider’s facilities. Customers now are demanding access to benchmarking and performance metering tools.
Why Outsourcers Might Offer Insourcing Tools.
There are many reasons why outsourcing might not be a proper solution for a client. Currently, IBM, Hewlett-Packard and Sun Microsystems all offer some form of tool to enable an enterprise customer to automatically provision server workloads based on supply and demand and network traffic. The same “silicon switch” that enables a customer to manage insourced IT resources could thus be used to transform to a hybrid insourced-outsourced combination or externalize the business process virtually.
Transitional Tools for Eventual Outsourcing of Process or Infrastructure, or for Provisioning of Services “On Demand.”
In such cases, the outsourcer should consider providing tools that retain customer loyalty and, like a Trojan horse, enable the customer to become an outsourcing customer “on demand.” The customer becomes trained in the service provider’s software, and such training might inspire confidence that, by using such tools, the customer can place more trust in an outsourced solution, either temporarily or on a continuous outsourced basis. These tools face the challenge of maintaining user control and limiting access to software applications while demand surges or subsides across a network of servers and data centers.
Infrastructure Support.
In fact, among others, IBM has adopted this strategy to service customers who might need hosted infrastructure and rapidly deployable additional server capacity. Its Tivoli “Intelligent Orchestrator” software will allow customers to convert a data center into an IT utility, where provisioning of network capacity (bandwidth), server processing capacity, storage and other computing resources are allocated dynamically in response to defined parameters of supply and demand. This resembles a “utility” because the “grid” operator may now anticipate demand and plan for allocation and reallocation of resources. In emergencies, the “grid” (data center with Intelligent Orchestrator (or competitive equivalent) could redistribute computing resources globally. But the challenge of dynamic global provisioning will remain daunting.
Pricing Challenges.
Tools for insourcing present challenges for the vendor. If the price of the tool is too attractive, the tool will sell and the services will not. If the tool is too expensive, outsourced services might be preferred, but only where the customer has no alternative. And by promoting tools, the vendor might cannibalize revenue from services, and vice versa. Pricing could be in the form of per-seat, per user, global site license, or site license by some other “line of business” demarcation.
Legal Issues in Dynamic Provisioning of Computing and Telecom Resources.
When we look at dynamic, rules-based provisioning of resources across international boundaries, we must remember that data transfers across borders remain subject to local legal controls. These include:
- data protection laws.
- privacy laws.
- export controls on military data or “dual use” civilian-military processes.
- license restrictions on authorized use.
- infringement indemnifications that may be territorially restricted.
- force majeure risks.
Transitioning from Software Licensing to Outsourcing.
Generally, a contract for a software license does not change when the parties enter into an outsourcing relationship. But customers should consider what changes should be made when this occurs, and what risks and assumptions have changed by virtue of the transition. By gaining the customer’s trust through a software tool, the vendor can thereby convert the customer to an outsourcing customer quickly, almost immediately. “Just sign here.”
We believe, in such cases, there could be significant business issues that need to be reflected in an appropriate contractual document. We recommend that an outsourcing lawyer be consulted in such circumstances.
More Information.
Bierce & Kenerson, P.C. does not provide any of the tools described above. However, we may be able to identify or comment on legal and practical issues of tools that may be of interest to the IT and technology-enabled services community. Please let us know if you have any questions about our experiences with particular vendors.