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Tuesday, November 17, 2009 – Managing Knowledge, Compliance and Legal Risks in Sourcing of Global Talent

October 28, 2009 by Bierce & Kenerson, P.C.

Special Notice – Webinar on Sourcing of Global Talent

• William B. Bierce, Esq., Bierce & Kenerson, P.C. – outsourcing lawyer
• Larry Scinto, PA Consulting, Managing Consultant
• Neil McEwen, PA Consulting, Managing Consultant

• How do I put together an effective contingent workforce strategy to optimize my investment in contingent labor?
• How do I ensure that my business customers are engaged in the case for change and buy-in to common technology, process, policy and governance?
• How do I govern multiple providers and ensure effective performance and value for my investment?
• What technologies should I be using to track provider/contingent worker utilization and performance?
• How do I ensure that legal/regulatory/compliance risks are recognized and managed in all geographies where I operate?
• How do I ensure that there is effective governance across the entirety of my contingent workforce?
• How do I manage risk and compliance issues that arise through the implementation of a contingent workforce?

This webinar is by invitation only. To register, please click here.

“Offshoring” of BPO Services within the European Union: A Transatlantic View of the Proposed Services Directive

October 16, 2009 by Bierce & Kenerson, P.C.

The European Common Market (and its successor the European Union, “EU”) were founded on the principles of four freedoms of movement: capital, people, goods and information. According to the European Commission, the service sector accounts for more than 70% of economic activity in the EU, much of which involves Europe’s small and medium sized companies. A Services Directive, proposed in January 2004, would liberalize freedom of establishment of EU enterprises and trade in services among EU Member States. The ensuing political debate evokes classic issues in trade policy in international services. Will this Directive have any impact on how outsourcing is conducted in Europe? Will anything change? Who cares?

The proposal, entitled “Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on services in the internal market (presented by the Commission).” Its provisions would be phased in over several years, with full effectiveness due in 2010. As a framework for minimum standards applicable to general services without regard to individual industries, it would not mandate specific rules but rather provide for minimum principles to reduce the administrative and regulatory burdens of cross-border trade in services within the European Union.

According to the European Commission, the service sector accounts for more than 70% of economic activity in the EU, much of which involves Europe’s small and medium sized companies.

I. The Proposed Services Directive.

The proposed Services Directive would allow the free flow of IT-enabled business processes across national borders of members states. Many sensitive sectors, such as public utilities (e.g., postal services and electricity, gas and water distribution services), public service broadcasting, transport and general financial services, would not be affected. Non-economic services (e.g., charitable and governmental services) would not be affected.

• Freedom of Establishment.
  The proposal would eliminate certain obstacles to the freedom of establishment of enterprises in one EU country to set up operations in another EU country. This would involve several key mandates that would transform the processes of government regulation by enforcing simplification, ease of compliance and minimum standard principles for regulation across the entire EU.
• “Simplification” including Single Points of Contact in the Country of the Service Recipient.
  The basic principle of simplification would apply: “Member States shall simplify the procedures and formalities applicable to access to a service activity and to the exercise thereof.” Proposed Services Directive, Art. 5(1). Administrative (bureaucratic) measures would be simplified by requiring that Member States establish “single points of contact”, at which service providers could complete the administrative procedures relevant to their activities. Covered procedures would include “all procedures and formalities needed for access to his service activities, in particular, all necessary declarations, notifications or applications for authorization from the competent authorities, including applications for inclusion in a register, a roll or a database, or for registration with a professional body or association and any applications for authorization needed to exercise his service activities.” Proposed Services Directive, Art. 6.
• Electronic Government in the Country of the Service Recipient.
  To expedite and facilitate compliance with local administrative procedures within the context of this “single point of contact” mandate, Member States would be required to enable enterprises to complete these procedures by electronic means. The laws, forms, rights and administrative law remedies would have to be posted on the Internet. Proposed Services Directive, Art. 7. “Member States shall ensure that the [relevant] information and assistance … are provided in a clear and unambiguous manner, that they are easily accessible at a distance and by electronic means, and that they are kept up-to-date.” Art. 7(3). In effect, compliance with local regulations would need to be Internet-enabled. The Member States would have to operate as an “application services provider” to web-enable the compliance mechanisms.

  Governments could circumvent this principle by adopting rules requiring inspection of premises. The draft proposal does not apply the E-Government principle to “the inspection of premises on which the service is provided or of equipment used by the provider, or to physical examination of the capability of the provider.” Art. 8(2).

• Minimum Standards for Administrative Procedures on “Authorization Schemes.”
• By definition, an “authorization scheme” would mean “any procedure under which a provider or recipient is in effect required to take steps in order to obtain from a competent authority a formal decision, or an implied decision, concerning access to a service activity or to the exercise thereof.” Proposed Services Directive, Art. 4(6). Member States would be required to comply with uniform minimum standards of administrative procedures relating to establishment of foreign enterprises from other Member States. Such minimum standards would apply to”authorization schemes” applicable to service activities (in particular relating to the conditions and procedures for the granting of an authorization).Under Articles 9 and 10, authorization schemes would have to be based on criteria that hich preclude the competent authorities from exercising their power of assessment in an arbitrary or discretionary manner. Principles of such administrative procedure would thus require that the criteria for decisionmaking be non-discriminatory; objectively justified by an overriding reason relating to the public interest; proportionate to that public interest objective; precise and unambiguous; objective; and made public in advance. (These rules of administrative decisionmaking are common and would conform to the U.S. Administrative Procedures Act, 5 U.S.C. 551 et seq.) This principle would effectively change the way in which some EU governments conduct business by exposing all decisionmaking to a standard of reasonableness and transparency.Local governments could not discriminate against foreign EU service providers, even where the number of authorizations available for a given activity is limited because of the scarcity of available natural resources or technical capacity. The proposed Directive would mandate the use of a selection procedure to potential candidates that provides “full guarantees of impartiality and transparency, including, in particular, adequate publicity about the launch of the procedure.” Art. 12(1).In addition, Member States would be prohibited from imposing “certain particularly restrictive legal requirements” existing, or adopted in the future, in certain Member States. Under Article 14, Member States could not make access to or the exercise of a service activity in their territory subject to compliance with any of the following:(1) discriminatory requirements based directly or indirectly on nationality or, in the case of companies, the location of the registered office, including in particular:

  (a) nationality requirements for the provider, his staff, persons holding the share capital or members of the provider’s management or supervisory bodies;

  (b) a requirement that the provider, his staff, persons holding the share capital or members of the provider’s management or supervisory bodies be resident within the territory.

  (2) a prohibition on having an establishment in more than one Member State or on being entered in the registers or enrolled with professional bodies or associations of more than one Member State;

  (3) restrictions on the freedom of a provider to choose between a principal or a secondary establishment, in particular an obligation on the provider to have his principal establishment in their territory, or restrictions on the freedom to choose between establishment in the form of an agency, branch or subsidiary;

  (4) conditions of reciprocity with the Member State in which the provider already has an establishment, save in the case of conditions of reciprocity provided for in Community instruments concerning energy;

  (5) the case-by-case application of an economic test making the granting of authorization subject to proof of the existence of an economic need or market demand, or an assessment of the potential or current economic effects of the activity, or an assessment of the appropriateness of the activity in relation to the economic planning objectives set by the competent authority;

  (6) the direct or indirect involvement of competing operators, including within consultative bodies, in the granting of authorizations or in the adoption of other decisions of the competent authorities, with the exception of professional bodies and associations or other organizations acting as the competent authority;

  (7) an obligation to provide or participate in a financial guarantee or to take out insurance from a service-provider or body established in their territory;

  (8) an obligation to have been entered, for a given period, in the registers held in their territory or to have exercised the activity for a given period in their territory.”

Surprisingly, these prohibited administrative procedures suggest that, within the EU internal market, the EU has not been complying with the non-discrimination principles that the EU has agreed to under the General Agreement on Trade in Services.

Certain restrictions would be classified as subject to evaluation. In general, such restrictions, such as territorial limitations, compulsory provisioning of service and other terms traditionally found in franchise agreements, reflect considerations of competition policy (antitrust).

• Proportionality and Other EU Principles for Validity of Local Legislation within a Member State.
  Other legal requirements applicable to the right of establishment of foreign EU enterprises would be subject to the higher governing principle of “proportionality.” Under this principle, local legislation would be valid only if compatible with the conditions laid down in the Directive, particularly as to proportionality. The process of determining the validity of a national law would require an evaluation of “the justification and proportionality of a number of requirements listed in the Directive which, where they exist in their regulations, may significantly restrict the development of service activities (Articles 9, 15 and 30).” For example under Article 15(3)(c), “proportionality: requirements must be suitable for securing the attainment of the objective pursued; they must not go beyond what is necessary to attain that objective; and it must not be possible to replace those requirements with other, less restrictive measures which attain the same result.”

  National governments would therefore be required to eliminate unjustified requirements and would be the subject of mutual evaluation. Where appropriate, additional Community-level initiatives might be necessary to ensure the application of the principle of proportionality. Proposed Services Directive, Chapter 3(c).

• Freedom of Movement of Services.
  In order to eliminate the obstacles to the free movement of services, the proposal would mandate:
  • Regulation of Enterprises only by the Country of Origin. Under the principle of “country of origin” regulation, a service provider established within one EU Member State would be subject only to the law of the country in which it is established. Member States could not restrict services from a provider established in another Member State. Service providers could provide services in one or more other Member States without being subject to those Member States’ rules.

Member states would be able to apply “national” regulatory schemes. These include “national provisions relating to access to and the exercise of a service activity, in particular those requirements governing the behavior of the provider, the quality or content of the service, advertising, contracts and the provider’s liability.” Art. 16(1).

As a corollary, the Member State of origin would be responsible for the effective supervision of service providers established on its territory even if they provide services into other Member States.

Certain exceptions (“derogations”) would apply. The exceptions would either be general in nature, temporary in duration, or applicable on a case-by-case basis based on the facts and circumstances.

• Consumer Protections for Businesses and Individuals who are Service Recipients.
  Anyone seeking to receive services from a foreign service provider in another EU Member State would be entitled to certain minimum consumer protections. The proposal considers the possibility of a situation where the service provider would be lawfully entitled to provide a service but the service recipient might not be lawfully permitted to receive the services. To eliminate such procedural possibilities, the proposed Directive would define the right of recipients to use services from other Member States without being hindered by restrictive measures imposed by their country or by discriminatory behavior on the part of public authorities or private service providers. Transborder health care reimbursements would have a special rule.
  
  
• Customer Service.
  Each Member State would be required to offer a mechanism to provide assistance to recipients who use a service provided by an operator established in another Member State.
• Allocation of Work Assignments.
  The proposal would require Member States to allocate tasks between the Member State of origin and the Member State of destination and the supervision procedures applicable that relate to the posting of workers in the context of the provision of transborder services within the EU. This situation would be an exception to the general rule of “country of origin” regulation of business operations.
• International Cooperation between Member States.
  The proposal would seek to improve the quality of information available to service recipients so that the background, reputation, quality experience and other bases for service recipients to trust foreign service providers as well as local service providers. This cooperation would adopt minimum standards at the governmental level (national legislation and national cooperation between national authorities of other Member States) and at the level of compliance with quality certifications and codes of conduct.
  • Harmonization of Consumer Protections including Minimum Disclosures about the Foreign Services Providers.
    The proposal would require the harmonization of national legislation to guarantee “equivalent protection of the general interest on vital questions, such as consumer protection, particularly as regards the service provider’s obligations concerning information, professional insurance, multidisciplinary activities, settlement of disputes, and exchange of information on the quality of the service provider.” Proposed Services Directive, Section 5.
• Mutual Assistance.
  The concept of mutual assistance has been long established in the context of protection of citizens abroad and to avoid double income taxation under income tax treaties. The proposed Services Directive would require stronger mutual assistance between national authorities “with a view to effective supervision of service activities on the basis of a clear distribution of roles between the Member States and obligations to cooperate.” This would delineate what outsourcing parties understand as the “statement of work” or “statement of services.” In this case national governments would be required to act as a service provider to its counterparts in other national governments.
• Quality Control.
  The proposal would facilitate the establishment of brands of quality for foreign services providers. For example, current norms such as the International Standards Organization (“ISO”) 9000 series of standards cover the quality of services. The proposed Directive would require the governments of Members States to adopt “measures for promoting the quality of services, such as voluntary certification of activities, quality charters or cooperation between the chambers of commerce and of crafts.” Proposed Services Directive, Section 5.
  
  
• New Codes of Conduct.
  The proposal lays down a framework to encourage the adoption of codes of conduct to be drawn up by interested parties at the Community level on certain questions, including in particular commercial communications by the regulated professions.

II. Impact of the Proposed Services Does not Affect External Services Providers Outside EU.

Under the WTO’s General Agreement on Trade in Services, the proposal for a Directive is an “internal market instrument” and therefore concerns only service providers established in a Member State. This ncludes foreign-owned companies or firms formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Community. The proposal does not cover “external” trade in services such as

• Right of Establishment of Non-EU Service Providers: the case of service providers from third countries who wish to establish in a Member State (first establishment in the EU);
• Sale of Services from Non-EU Sources: the case of operators from third countries who wish to provide services in the EU; or
• Branches of Foreign Service Providers: the case of branches of companies from third countries in a Member State that are not companies formed in accordance with the legislation of a Member State and therefore are not eligible to not benefit from the proposed Directive.

A. Right of Establishment. Since the advent of the modern nation state, nations have entered into treaties of friendship, commerce and navigation (“FCN Treaties”). The principles of non-discrmination and national treatment, enshrined in the WTO trade agreements since World War II, owe their broad acceptance to FCN Treaties.

In general, FCN Treaties authorize the nationals of one nation state to establish a commercial business within the territory of the ohter nation state. The issue whether a foreign-owned enterprise is subject to the local labor laws was not really resolved in the United States until a sex discrimination claim was filed by a female employee against a U.S. subsidiary of a Japanese corporation. In Avagliano v. Sumitomo Shoji America Inc., __ U.S. __ (1979), the Court ruled that the protections of the U.S.-Japanese FCN Treaty did not exempt a U.S. subsidiary from U.S. labor laws. The ruling concluded that a U.S.-incporated subsidiary was not a “company of Japan” that would have been protected from such regulations under that FCN Treaty.

In the European context, local lawyers may inquire whether the adhesion of the new EU Member States to the EU would abrogate any protections for local business enterprises under historical FCN Treaties. If such protections (as in the U.S.-Japan FCN Treaty) cover branches, then, under the Avagliano principle (as interpreted by a U.S. court), branches from one country might have certain rights to be free of some of the governmnetal restraints on establishment that the proposed Services Directive would eliminate.

III. Legal Structuring of Offshore BPO within the EU – Before and After the Services Directive.

The Services Directive appears to only state the obvious in a direct fashion: trade in services will flow across borders according to economic forces.

Current Law – Consumer Protection.
The principles of national legislation for consumer protection would not be affected. Technically, a xenophobic Member State might adopt strict rules on quality of services, for example. Practically, such rules would likely not be too severe since they would have to apply uniformly and without discrimination against foreign service providers from other EU Member States.

Proposed Directive on Unfair Commercial Practices (Consumer Protection).
The proposed Services Directive is not intended to displace the proposed Directive on unfair business-to-consumer commercial practices, which would regulate those commercial practices that cause harm to consumers’ economic interests. See Proposal for a Directive of the European Parliament and of the Council concerning unfair business-to-consumer commercial practices in the Internal Market and amending directives 84/450/EEC, 97/7/EC and 98/27/EC (the “Unfair Commercial Practices Directive”), COM(2003) 356 final of 18.6.2003.

However, by adopting rights for service recipients, it would create a new layer of consumer protection applicable to both individuals and enterprises who, as service recipients, would become a specially protected class.

Current Law – Acquired Rights Directive.
Without the proposal, offshore BPO can occur by a local EU company hiring a foreign company to provide services from abroad. Under the Acquired Rights Directive and implementing legislation, it becomes a question of fact whether an offshore outsourcing contract between an EU enterprise and a non-EU services provider results in a transfer of a EU-based job. Under that directive, such covered transfers can occur in a merger or acquisition or an outsourcing. That directive targets any covered transfer of a job, without considering the ultimate destination.

The Acquired Rights Directive is not water-tight. By careful planning and structuring the transaction, the parties can satisfy the Acquired Rights Directive. Consultations with EU legal counsel can help avoid this trap for the unwary.

Communication on Business-Related Services.
The EU Commission had already issued a Communication on business-related services. The proposed Services Directive deals with the removal of legal and administrative barriers and does not specifically address the competitiveness of the services sector that might be improved by complementary economic measures set out in the Communication on business-related services.

Proposed Services Directive.
The Services Directive would not necessarily contradict the Acquired Rights Directive. The Commission did not even mention that the two might be related.

IV. Legal Value of EU “Directive.”

A “directive” is not a law that citizens and enterprises must comply with directly. Instead, a directive commands Member States to adopt implementing local legislation. Thus, a directive acquires its “force of law” by forcing member states to adopt enabling legislation that conforms to the minimum requirements of the directive. As a result, there can be multiple adaptations of a directive, but all must comply with the directive. Directives are drafted and adopted by the European Commission, an administrative body in Brussels.

V. “Social Dumping”: The Consequences of an Enlarged EU with Political Challenges to Centralized Legislative Authority.

This proposed Services Directive evokes fundamental issues of public policy involving the mobility of employment and services within the EU. By allowing free BPO across borders within Member States, the proposed directive would enable enterprises (called “undertakings” in the EU) to choose between local labor and foreign labor within the EU. The purposes of such freedom include increasing productivity of labor and reducing prices for consumers in all countries of the EU.

The debate resembles the political debate in the 2004 U.S. Presidential election. Freedom for businesses to hire labor in any location, without governmental rules limiting transfers of data or protecting classes of local workers, involves important economic policy decisions.

The Advantages of the Proposed Services Directive.
The advocates argue that such freedom promotes competition, reduces consumer prices, makes markets more efficient and creates new jobs involved in project management, new types of services and goods that rely upon lower cost services from the “offshore” labor market, and increases gross domestic product in all affected countries in the aggregate and even in individually. By allowing work, not just people or goods, to cross borders freely,

The Disadvantages of the Proposed Services Directive.
This freedom of choice is opposed by France and Germany. French Prime Minister Pierre Raffarin has stated that the draft proposal is “unacceptable” and that France would “take every measure to oppose this directive. German Chancellor Gerhard Schroeder also criticized the proposal.

• Social Dumping.
  Critics argue that this freedom will be a “race to the bottom” and result in “social dumping” of low-wage jobs to foreign service providers. In markets such as France and Germany, where labor markets are highly regulated and make hiring and firing both costly and difficult for employers, social dumping means that work protected by such regulations will be done in countries without such regulations. The lack of such regulations is seen as an incentive for exporting the work, and thereby reducing local market jobs.
• A “Social Protection Directive.”
  The debate over “social dumping” within the EU ignores the larger picture of whether employers within the EU should be freer to improve efficiency by moving certain job functions to locations globally. “Social dumping” connotes transfers of low-wage jobs to underdeveloped countries with no rights of unionization, no minimum wage, no rights against abusive termination of employment and other measures for job security. One solution to “social dumping” would be the adoption of a directive on uniform European “social [labor] protections.:” The proposal of a companion “Social Protections Directive” would highlight the tension between labor policy and innovation and global competitiveness.
• Legal Protections for Employees under National Law in the EU.
  Member States have adopted a variety of labor laws and regulations that hinder the mobility of labor and protect incumbent employees.
  • Workers councils are entitled to participate in decisions on work rules.
  • Employers satisfy statutory notification and consultation procedures before major changes including layoffs.
  • In Germany, workers in certain large enterprises are entitled to appoint a representative to the board of directors under the principle of “co-determination.”
  • In France, the government is a full legal party and signatory to “collective conventions” (“conventions collectives”) that embody the agreements between organized labor and the patronat (organized employers). Changes require governmental consent.
  • In France, the government has adopted a prohibition on an employee working more than 35 hours per week, with complex time management accounting rules for carryovers and lookbacks to provide limited flexiblity for a rigid rule.
• Legal Protections for Employees under Federal Law in the United States.
  Under the federal Fair Labor Standards Act (“FLSA”) and the federal minimum wage law, workers throughout the United States are entitled to certain rights. The FLSA requires payment of 150% of the normal hourly wage for work by non-exempt employees working more than 40 hours per week. Because of the federal system, there is no risk of “social dumping,” where employees in Mississippi could be entitled to only 100% instead of the 150% for work perofrmed in excess of 40 hours per week.
• Legal Structures Impeding the Proposed Services Directive.
  The proposed Services Directive proposes a legal framework for mutual recognition of internal labor laws, without forcing any specific minimum standard such as a principle of co-determination, a 35-hour week or a minimum overtime rate of 150% for time in excess of 40 hours per week. As a framework, the proposed Services Directive justifiably has been criticized for “social dumping” since it mandate mutual recognition without a floor on worker protections in the Member State where the services are performed.
• How the EU Promotes Importation of Services from Providers Outside the EU without Promoting Importation of Services from Providers within the EU.
  Enterprises with European operations understand that the it might be an easier solution to outsource to India or China than to outsource to Poland or Slovenia. The newly admitted Member States are subject to all the constraints of EU regulation including the Acquired Rights Directive.

VI. Projected Economic Impact of the Proposed Services Directive.

In defense of its position, the EU Commission hired a consultant to identify the impact of the proposal. The report, issued in February 2005, concluded that the Services Directive would have several benefits:

• Job Creation.
  The liberalization of the services industry would create up to 600,000 new jobs.
• Distribution of Job Creation.
  Every Member State would enjoy its share of the newly created jobs. This contradicts the notion that “social dumping” would result in a net loss of jobs in the Member States that have the tightest employment regulation.
• Lower Prices.
  Not surprisingly, the study showed that consumers would pay lower prices for services obtained from other Member States.
• Higher Productivity.
  The consultants’ report concluded that higher productivity would result from “offshore” BPO within the EU. Productivity improvements flow from streamlining the work that is required to complete a business process from start to finish. Such streamlining comes from elimination of processes that add little comparative value. And where low-value processes must be performed, they can be “offshored” within the EU to lower-wage countries without depriving the workers in higher-wage countries from exercising managerial roles in process design, evaluation, distribution and customer relations.

VII. Offshore BPO in Action: NAFTA and the World Trade Organization.

This European political debate can be contrasted with the liberalization of trade in services under the North American Free Trade Agreement and the World Trade Organization.

NAFTA.
Under the general principle of non-discrimination and most-favored-nation (“MFN”) treatment, NAFTA encourages trade in services across borders, allowing foreign firms to compete with local firms. Certain licensed professions are granted special TN-visa status for commuting to and from the United States.

WTO.
Under the general principle of non-discrimination and MFN, the WTO Agreement on Trade in Services adopts the general principle of freedom of competition between domestic and foreign service providers. It does protect certain regulated industries such as the licensed professions.

VIII. Internal Market: Analogy to U.S. Constitution.

The proposed Directive would adopt certain principles of free trade in an internal market that are part of the United States Constitution.

• Full Faith and Credit Clause.
  This clause requires one state to honor the administrative decisions and judicial decisions taken within another state. It corresponds to the “country of origin” concept in the proposed Services Directive.
• Interstate Commerce Clause.
  The Interstate Commerce Clause reserves to the federal Congress the right to regulate trade between the respective states. This provision creates a strong central government. The proposed Services Directive does not mandate any centrally determined rules, but rather sets up a framework for fairness, transparency, reasonableness (and thus proportionality).

IX. Long-Term Issues.

The EU Commission’s effort to liberalize labor laws challenges many fundamental premises of the labor movement in many key EU countries.

Euro-Sclerosis.
The book entitled “Euro-sclerosis” has highlighted the complex labor protections. According to some EU lawyers, labor laws that insulate existing jobs from outsourcing, and prevent “rationalization” (and layoffs) following mergers, only deprive the EU of the opportunity to add new work to existing jobs. Such lawyers advise us that European employers have no choice but to comply with the protections. As an ineluctable consequence, European employers remain free to establish foreign captive services companies and to outsource their “new” and “innovative” job tasks to such captives or outsourcers.

Export of Innovation.
A local company can still benefit from the “export” of “new and innovative” tasks by establishing a captive or controlling the intellectual property that is created or used when foreigners perform the new tasks. As a result, the company can retain control. But the home country for that company can lose its innovative engine unless economic strategies are in place for innovation at home.

Innovation at Home.
Understanding all this, the U.S. presidential nomination campaigns of Senator Joseph Lieberman and John Edwards, as well as President George W. Bush, called for greater support for local innovation. Such support includes improved quality of education, regulatory incentives and tax advantages for entrepreneurship and investment and the use of government contracting to finance risky new technologies.

X. The Proposed EU Services Directive – “Rest in Peace”?

The impending death of the Services Directive has already been pronounced by the French Prime Minister. But it remains alive to promote a public policy debate that will play out in European elections. For a large segment of an economy that is protected by “social legislation,” the Services Directive augurs risk of job loss. For their children, continuation of such protections may stifle the economy and hinder global competitiveness. Like Social Security reform, debate on the Services Directive underscores the choices between present benefits and future harms of continuing the status quo.

XI. Would the Proposed Services Directive Change Outsourcing in Europe?

In some quarters, any liberalization of trade in services, even within the context of the privileged and trusted long-term alliance of EU Member States, would lead ineluctably down the “slippery slope” towards unlimited outsourcing. The debate over the Services Directive is ironic.

• Intra-EU Trade.
  The proposal would promote intra-EU trade and could help limit the growth of offshore outsourcing, at least while the wage levels in newly admitted Member States remains significantly lower than in the founding Member States.
• External Trade in Services.
  Neither existing EU law nor the enactment of the Services Directive will prevent the growth of outsourcing to non-EU service providers in a broad spectrum of business processes. In protected sectors, the outsourcing will continue subject to special contractual risk allocations that reflect the ongoing protection of local labor in the EU. In non-protected sectors, compliance with existing laws does not require a ban on offshore outsourcing. In short, the proposed Services Directive is not needed to benefit non-EU service providers.

C&W US Clients Face Uncertain Future

October 9, 2009 by Bierce & Kenerson, P.C.

By Ed Agar, primesourcingadvisors.com

October 27, 2003 – The drama surrounding Cable and Wireless’ US hosting business remains an unresolved story for its approximately 1,500 clients. Since declaring its intention to exit the U.S. market in early summer, C&W has yet to deliver a clear update with regard to its business direction. C&W seems to be avoiding the inevitable.

Fundamentally, C&W was viewed to have two alternatives: sell the assets and existing contracts to an interested suitor, or declare bankruptcy. Andrew Schroepfer, founder and President of IT Infrastructure research firm Tier 1 Research (tier1research.com), says there may be a third hybrid option on the table. “We believe there is a buyer at the table for some of the marginally profitable data centers and the customer base where C&W would pay the costs to close down some of the other sites. Such an option would save C&W from the bankruptcy issues and save it several hundred millions of dollars from the option to pay to merely close the entire business.”

Most customers of the firm appear to have remained loyal thus far, which confuses Danny E. Stroud, former CEO of managed hosting firm AppliedTheory. “I don’t understand why CIOs, COOs and in-house counsel are not heads-down working on alternative service strategies – why executives are subjecting their valuable IT assets to significant risk exposure is irrational,” he says. “Since the financial shakedown of the last couple of years, there are now many quality providers. Further, with the availability of hosting vendor rankings like the PrimeSourcing Index there is a multitude of data to help buyers make informed decisions.”

The ‘wait and see’ attitude of C&W customers may be attributed to two factors: 1) customers have remained loyal due to renegotiated flexible terms and distressed pricing offers, and 2) transition efforts to a new provider are time consuming, costly, and rife with execution risks for resource-strapped IT departments.

Outsourcing lawyer Bill Bierce of Bierce&Kenerson PC and publisher of outsourcing-law.com (outsourcing-law.com), thinks current customer indifference is a highly risky approach. He recommends that CIOs review their agreements for termination and transition rights in case of bankruptcy. Should C&W opt for bankruptcy and the sheriff padlock the front doors, customers may be facing some nasty surprises:

• Assets could be locked down, forcing customers to petition the court to move their assets out. It would be expected that IT assets would be frozen a period from several days to several weeks, which is longer than the period of the typical disaster recovery service contingency plan.
• Bankruptcy could deprive C&W of the flexibility to service its customers in compliance with service level agreements. For managed services, the bankruptcy courts have the right to terminate executory contracts and not pay damages for wrongful termination.
• Customers may need to get a license to continue to use software licensed by C&W. The US Bankruptcy Code allows the bankrupt service provider to terminate a service but does not require it to allow the user to get access to any software that was used in providing the service.
• Where a bankrupt managed service provider abuses its credit lines with its own suppliers, paying customers have no assurances that funds will flow downstream to subcontracted suppliers or even if subcontractors will be retained by the bankruptcy courts. As the cash cycle stops, the services may stop, too.

How C&W will respond to its obligations will be played out in the coming months. The experience of Exdous, Intel Online Services, WiTel, MFN, PSInet, Genuity, Northpoint, Rhythms, Network Plus, Winstar and others exiting the data center market has been mixed. In some situations, there have been documented examples of looting, destruction of property, stranded customers, and total withdrawal of services accompanying a dark data center. “Some customers were forced to take extraordinary steps under duress to insure service continuity, while other customers sustained revenue loss and productivity hits,” Stroud says. “Further, costs and performance degradation during a hasty transition to a new provider are generally significant.”

Stan Lepeak, VP of Meta Group Inc. (metagroup.com), a research firm, says the best hope for customers “is a prepackaged bankruptcy that allows the customer relationship to be bought by a ‘white knight’ with the court’s blessing. This process allows the shedding of liabilities.” There must be reasons why suitors have not already grabbed C&W’s US assets for pennies on the dollar. In simple terms, this would seem to indicate the business does not appear to be salvageable and that a clean buyout seems unlikely.

Given the above scenarios, it is recommended that prudent executives start to invoke contingency plans. According to Schroepfer, “aside from acknowledging that avoiding a migration is a good thing, we would move our own operations out of C&W if we were there.”

It is recommended that exit strategies be planned with the assistance of independent hosting consultants and specialized attorneys. Such trusted advisors are needed to understand the ramifications of outsourcing contracts. A critical element that hosting advisors are now assessing in selecting new providers is the vendors’ implementation of quality initiatives like ISO 9001, IT Service Management or Carnegie Mellon’s e-Sourcing Capability Model.

As a next step, Global 2000 firms should identify their degree of risk exposure to their internal audit committees in order to determine applicability for disclosure in SEC filing as part of Management’s Discussion and Analysis forms in compliance with the Sarbanes Oxley Act.

C&W is due to report its mid-year financial results in November, and it is also expected that they will communicate their future direction and intentions at that time. One can anticipate that the competition will feature attractive incentives and deeper price discounting in order to woo prospective C&W clients.

As an observer, it will be interesting to see if C&W clients will be enticed by price incentives or if there will be a ‘flight to quality’. Time alone will tell.

About the author

Ed Agar is co-founder and Principal of PrimeSourcing Advisors, an IT advisory firm. For more information, visit primesourcingadvisors.com.

Privacy in Outsourcing of Health Information

October 9, 2009 by Bierce & Kenerson, P.C.

The general Privacy Rule under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) requires anyone to obtain a patient’s prior consent in order to use “individually identifiable health information” for non-medical purposes, such as employer evaluations.   For medical treatment and payment purposes, however, using or sharing medical information “for incidental use or disclosure” is permitted.   For marketing purposes, a pharmacist may use a patient’s medical information to make recommendations to the patient to switch medications.

The final Privacy Rule, published August 14, 2002, preserves the role of outsourcers of medical information.  Certain prior draft provisions were softened.

Prior Draft Regulations.

Prior draft regulations, issued by the administration of former President Bill Clinton, would have prevented hospitals and clinics from  scheduling medical tests or surgery until the patient had read and signed a long, legalistic “privacy notice.”

Impact of Regulations on Outsourcing of Medical Information Processing Services.

The prior draft HIPAA Privacy Rule raised several concerns for those involved in outsourcing of medical information processing services.

Continuation of Outsourcing of Records Management and Photocopying.
The prior draft would have had a negative impact on outsourcing of records management and photocopying activities.   It could have effectively eliminated any economic benefits to outsourcing services providers of the cost-based copying fees allowed to be charged to individuals who request a copy of their medical record under the right of access provided by the Privacy Rule. See 45 CFR Section 164.524.  There was a risk of driving the outsourcers out of business.

In acknowledging this, the Department of Health and Human Services made a special clarification to accommodate outsourcing.  Many hospitals and other covered entities currently outsource their records reproduction function for fees that often include administrative costs over and above the costs of copying. In some cases, the fees may be set in accordance with State law. The Privacy Rule, at Sec. 164.524(c)(4), however, permits only reasonable, cost-based copying fees to be charged to individuals seeking to obtain a copy of their medical record under their right of access.   In response to comments that persons seeking copies of all or part of the medical record, such as payers, attorneys, or entities that have the individual’s authorization, would try to claim the limited copying fees provided in Sec. 164.524(c)(4), the final Privacy Rule makes clear that the fee structure in Sec. 164.524(c)(4) applies only to individuals exercising their right of access.

However, the Department of Health and Human Services acknowledged that even this accommodation could put a strain on covered medical-related entities, and that the regulation forced subsidized access to medical records by the individual patients.   HHS argued:

While perhaps onerous on covered entities, the rule does allow outsourcers and their customers to recover more than their costs on non-patients in order to subsidize patients’ access to medical records.

Outsourcing Continues to Require Contracts.
The Department of Health and Human Services final Privacy Rule requires that any relationship between a “covered entity” and a “business associate” (also known as an outsourcer or services provider) must be established and managed by contract.  Some service providers tried, unsuccessfully, to be authorized to “self-certify” their compliance, or have a neutral certification authority.  “With respect to certification by a third party, it is unclear whether such a process would allow for any meaningful enforcement (such as termination of a contract) for the actions of a business associate,” the HHS concluded.

Minimum Standards, not Exclusive Standards.

The final Privacy Rule does not supersede any more stringent privacy protections of any state laws.   The “best practices” approach, therefore, may be to obtain the patient’s consent for certain uses of the medical information, particularly for patients who are likely to change residences from one state to another and the new state of residence has stricter provisions.

Outsourcing Contract Terms.

The final Privacy Rule adopted in August 2002 sets forth specific requirements for contracts between “covered entities” and “business associates” (outsourcers).   For the minimum terms of such a contract, our subscribers can view the terms at hipaa privacy data use contract terms

Definitions.
Key definitions under the final Privacy Rule can be reviewed at hipaa_privacy_definitions

Human Resources Outsourcing: Employment Manuals as Basis for Exceptions to the Employer’s Liability for Wrongful Termination of Employment and Defamation

October 9, 2009 by Bierce & Kenerson, P.C.

Summary.

Human resources outsourcing involves facilitation of the employer/customer and management of its human resources. This includes assistance by the HR service provider in avoiding or limiting the risks of litigation by employees who are terminated for matters arising out of breach of contract and other policy issues that could embroil the employer in statutory liability. This article addresses issues relating to wrongful termination of employment under New York law and defamation.

Wrongful termination.

Prerequisites for a Breach of Implied Covenant of Good Faith and Fair Dealing. It is well settled (under New York law) that absence of an agreement establishing employment of a fixed duration, an in the employment relationship is presumed to be a hiring at will, terminable at any time by other party.” Gill v. Pathmark Stores, Inc., 655 N.Y.S.2d 623, 624 (2d. Dept 1997). Furthermore, New York law does not impose a duty of good faith and fair dealing with respect to the termination of an at-will employment agreement. See Nunez VA-T Financial Info, Inc., 957 F.Supp. 438, 443 (S.D.N.Y. 1997).

Obligation to Pay Commissions.

However, in certain circumstances an employment at will contract will result in liability for the employer when the employer has failed to pay the agreed commission, provided that the commission is calculable and not merely discretionary. Wakefield v. Northern Telecom, Inc., 769 F.2d 109 (2d Cir. 1985).

Advice for Employers.

Upon hiring, the employer and/or its HR service provider should ensure that the agreements of employment or terms of employment for a breach employee of an employer governed by New York law will specify conditions under which any bonus or commission has been earned.

Breach of contract.

Most employers that are well advised have adopted a series of policies and procedures applicable to their employees operations. These may include:

• a compliance program, which may require employees to be responsible for reporting violations of a code of ethics;
• a code of ethics, which sets forth the culture and specific rules governing conflicts of interest and other issues of potential impropriety;
• an open door policy, in which issues of concern to employees should be available for discussion with their supervisors, and
• a discipline and discharge policy, which permits certain discussions and opportunities for improvement in performance prior to termination, following a series of verbal and written warnings.

General Rule:  Manuals Set the Rules.

The use of such written employee manuals and codes of conduct do not create a basis for an employee to file a claim for breach of contract, where the employee manual expressly preserves the right of the employer to terminate the employment at will.

An Employer’s Policy Manual

Whether a policy manual successfully sets the rules depends on what it says about the “at will” nature of employment.  In one case, the policy manual stated:

The policies and rules stated in this manual are intended as guidelines for company employees and managers, and do not create a contractual obligation. The company is an “at will” employer and can terminate an employee’s employment at any time without notice, for any reason, with or without cause, unless an employee has a written employee agreement or is covered by a collective bargaining agreement which expressly limits the company’s right to terminate the employee’s employment at will.  Mirabella, v. Turner Broadcasting Systems, Inc. (___F.2^nd ___, Judge Jones, NYLJ May 28, 2003, p.24, cols. 2-5,

Location of the General Policy.

It is important to note that such limitation applied under the table of contents and was therefore deemed to apply to all provisions contained in the manual, barring a claim for breach of contract based upon the terms of the manual.

Discipline and Discharge Termination by Employer.

In addition, with respect to the discipline and discharge provision of the manual, a reservation was significantly important, to support the reserved right to terminate, when the employer’s manual set forth a bold warning at the top of the page calling attention to the “at-will” nature of employment:

This policy is not intended to restrict or interfere with the company’s right to terminate or suspend employment in accordance with the terms of written employment contracts, or on an “at will” basis, without cause and without notice.

Employee’s Disclaimer of Reliance.

In addition, each new employee was required to expressly disclaim any reliance upon any kind of employment contract that was not expressly signed as an employment agreement. In that case, upon hiring, each employee signed a separate Employee Acknowledgement Statement approximately at the time of hiring, which stated:

I am aware that the policies and procedures contained in the Policy Manual do not constitute a contract of employment. The Company does not guarantee anyone employment for any specific duration or for any specific hours per week. I understand that employment with this company is on an at-will basis for an indefinite period unless terminated at any time by myself or by the company, or unless altered by a written employment agreement between myself and the Company which is signed by the President of the Company or an authorized officer of the Company. I understand that employees hired by this company may voluntarily leave employment and may be terminated by the employer, at any time and for any reason.

HR Outsourcing: Impact of Employee Manuals.

Generally, employment manuals are critical documents for the protection of the employer from claims of abuse by the employee. As seen in this case, a well drafted series of policy manual and Employee Acknowledgement Statement at the time of employment was sufficient to defend against a claim of wrongful termination by an employee who was terminated at will.

Thus, under the New York Court of Appeals rules, an express disclaimer of contractual rights in an employee manual bars an action by the employee for breach of contract based upon the terms of the manual. Barthelps Lobosco v. New York Tel. Co. / NYNEX, 96 N.Y.2d 312, 317 (N.Y. 2001). However, if a personnel manual states that employees may only be terminated for cause, such a provision is support of breach of contract claim if the employee detrimentally relied upon that limitation when accepting employment.

Slander.

Slander and libel are forms of common law defamation.

Definition of Slander.

To establish a claim for slander under New York law, a plaintiff must allege four conditions:

(1) A false and defamatory statement of fact;

(2) of or concerning the claimant;

(3) the publication of such statement to a third party; and

(4) injury to the claimant as a result. Scholastic, Inc. v. Stouffer, 124 F.Supp 2^nd 2d 836, 849 (S.D.N.Y. 2000).

The injury element is presumed when “the defamatory statement takes the form of slander per se,” which may include statements that tend to injure the plaintiff in his or her trade, business or profession being slanderous per se. Albert v. Loksen, 239 F.3^rd 256, 271 (2d Cir).

In disclosing the termination of an employee, New York law provides a qualified privilege to be available to a defendant when “a communication is made by a person with an interest or duty to make the communication and sent to a person with a corresponding interest or duty. Weldy v. Piedmont Airlines, Inc. 985.F.2d 57, 62-63, as 62, 61 (2d Cir. 1993). Further, a claimant (such as an employee) may rebut the defendant’s assertion of a qualified privilege by proving that a defendant (such as an employer) made the statement knowing that it was false or with reckless disregard as to its truth. Weldy, 985 F.2d at 62 (stating that

“[a] plaintiff may demonstrate abuse of the privilege by proving that the defendant acted (1) with common law malice.or (2) outside the scope of the privilege.or (3) with that the statement was false or with a reckless disregard as to its truth.”

Impact of Slander Principles on HR Outsourcing.

The significance of such employment law requirements for HR outsourcing is clear.

Employers and HR outsourcing service companies that engage in actions that, if they had been done by the employer would give rise to the liability of the employer, can be protected by compliance procedures. The HR service provider therefore should be fully familiar with the legal requirements for accordance of liability in connection with the employment transactions that it manages or administers.

At the same time, the employer is liable directly for such errors, the employer should maintain, as part of its retained team, compliance process managers familiar with applicable conditions.

The HR Outsourcing Contract.

The employer and HR outsourcing services provider must come to prior agreement that anticipates such litigation situations. The HRO agreement should alleviate risks relating to the liability of the parties arising out of the different threads of the employment relationship.

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:

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.

Legal Compliance in Outsourcing

October 9, 2009 by Bierce & Kenerson, P.C.

When is the Service Provider Liable for its Customer’s Compliance with Laws, including Payment of Fines and Penalties for Non-Compliance?

When is the service provider liable for its customer’s compliance with laws, including payment of fines and penalties for non-compliance?   Most outsourcing agreements require each party to comply with applicable laws.  However, as business process outsourcing (“BPO”) services move up the value chain, legal compliance obligations can get somewhat tricky.  Consider the scenario where the service provider’s services substitute for the enterprise customer’s normal compliance with laws governing the enterprise customer’s operations.   If you are a candidate for public office, your consultant might just be liable for your compliance, fines and penalties.  If you stay out of politics, you can still learn about a critical BPO contracting issue that played out in a New York City election campaign.

Context: Compliance with Election Laws.

If you are a candidate for public office, your consultant might just be liable for your compliance, fines and penalties.  While laws vary, it is instructive to consider the liability of a political consultant.  The consultant’s client, a New York City political candidate, failed to timely respond to the Campaign Finance Board’s draft audit report and filed late four disclosure statements.  The consultant acknowledged its office failures.  It offered two excuses.  First, its failures were due to its own disorganization (and not its client’s).   Second, the candidate’s records were on a computer affected by a computer virus.  This is hardly a case involving the usual due diligence, site visits and other critical infrastructure offered by the usual “big ticket” outsourcing.  But the case illustrates what happens in case of “worst practices.”

Statutory Liability.

The particular statute imposes liability on “agents” as well as the political candidates.   Under the New York City Administrative Code, §3-711(1), an “agent” includes individuals and entities  who have undertaken the responsibility for campaign law compliance.

The Service Agreement.

The political consultant claimed that it had developed computerized systems designed to keep its clients’ political campaigns  in compliance with the campaign finance regulations.   The agreement provided that the service provider would complete all filings with the regulatory agency and explain to the candidate and monitor all rules and regulations applicable to the political campaign.

The Course of Dealing.

The political consultant actually performed as promised, at least to the degree sufficient to be designated as an “agent” liable under the regulations for compliance.   The candidate’s Candidate Certification listed the service provider as the mailing address for notices from the regulatory agency.   The service provider’s employee represented to the regulatory agency that she represented the committee for the candidate’s election with respect to compliance.  The candidate’s disclosure statements were generally delivered by hand by the service provider’s messenger.   The service provider’s contacts with the regulators outnumbered those of other representatives of the candidate’s election committee.

Implications for Enforcement of Other Types of Regulatory Legislation.
This decision represents an enforcement action by the governmental agency responsible for administering a regulatory law.  The regulators targeted enforcement action directly against the “BPO service provider” by reason of its contractual undertakings, its actions for compliance and its direct communications with the agency.  The same analysis might not apply to non-delegable compliance duties, such as these of the CEO and the CFO under the Sarbanes-Oxley Act of 2002.

Equitable Estoppel.

In this case, the court, without setting forth a theory of law, concluded that it would be inappropriate to allow a service provider to act as agent and not have the liability of an agent.

To allow any entity, that has agreed to fulfill the compliance requirements of behalf of a candidate to shoulder the blame for a candidate’s non-compliance, and then to allow that same entity to escape liability because it claims it is not an “agent” of the candidate, would not serve the purpose of the Campaign Finance Act.   To accept [the service provider’s] argument would defeat the policy behind the Campaign Finance Act.

As a result, the court found that it was not “arbitrary and capricious” to impose the candidate’s penalty on the consultant, and that such an imposition did not lack a rational basis.

Lessons Learned.

By assuring compliance with laws, the service provider agrees to guarantee the result.  Unlike a commitment to use “best efforts” or some other type of “efforts,” a BPO service provider’s guarantee of results implies an agreement to shoulder the fines and penalties imposed on the service provider’s customer by reason of any failure to comply.

Matter of The Advance Group v. New York City Campaign Finance Board, __ N.Y.S.__, NYLJ (Feb. 3, 2004), p. 18, cols. 3-4 (N.Y. Co. Sup. Ct. 2004), per Justice Shafer.

Finance & Accounting Outsourcing: Does Outsourcing Reduce Risk?

October 9, 2009 by Bierce & Kenerson, P.C.

When enterprises look to outsource in-house responsibilities, finance and accounting functions are usually not the first ones farmed out. Executives might expect to read headlines like, “Aon Negotiating to Outsource Most of its U.S. IT Infrastructure to Computer Sciences Corporation,” a development Aon and CSC touted in a 2004 press release. Sophisticated business process outsourcing (“BPO”) such as finance and accounting is not as widespread as IT outsourcing.

As enterprise firms seek to enhance their competitive advantage and minimize risks in the Sarbanes-Oxley environment, more and more businesses are looking to outsource parts of their finance and accounting functions. Determination of the right fit with a service provider and the right mix of services is essential.

This article addresses some key business and legal issues in whether F&A outsourcing reduces risks.

What F&A functions are candidates to be outsourced?

Not all F&A functions are created equal. Each F&A function has its own risk profile and potential suitability for outsourcing. Risk profiles reflect the nature of the business functions, size and character of the enterprise, since publicly trade companies must deal with the vagaries and criminalization of accounting practices under Sarbanes-Oxley, and other considerations.

Transactional vs. Judgmental Operations.
Transactional functions, especially payroll and accounts payable and receivable, are the most commonly outsourced functions. Financial reporting and more advanced functions can also be outsourced, though the more interaction required for a function—say, for instance, budgeting—the less likely it is to be outsourced. But today, F&A outsourcers are taking on responsibilities once executed by entire in-house F&A departments.

Enterprise Maturity.
F&A outsourcing depends on enterprise maturity.

Public Companies and “Wannabe’s.”
Mature enterprises — public companies and those considering going public — must, or will have to, establish and certify, on a quarterly basis, the adequacy of their accounting reporting and control systems. Compliance with the Sarbanes-Oxley Act has generated new software and service offerings by information technology service providers and consultants. Such technology might be maintained in-house, a hosting service provider or by a managing service provider.

For public companies, the challenge is to identify those F&A functions that can be “safely” outsourced with minimal risk that a failure will result in civil or criminal liability for the CEO and the CFO. Once such “safe” functions have been identified, the lawyers can deal with “reasonable” allocations of risk between the service provider and the enterprise.

Startups and Emerging Companies.
Startups may outsource more of a function. Outsourcing helps startups avoid misestimating their own needs. Two scenarios are common among startups: they underestimate their F&A needs, or they overestimate them.

Startups will often hire a bookkeeper, for instance, and may get the basic transactional aspects of the business right. But without an accountant, they can’t optimize their F&A strategy. This mistake can often require a startup to sink far more capital in F&A and litigation down the road than they would have had to invest up front.

Alternatively, some firms will bring on a CFO or Comptroller when their F&A needs do not demand that those positions be filled by a full-time employee.

Governance Considerations.
Entire F&A departments can be outsourced, all the way up to the CFO level. We interviewed two F&A outsourcing firms on the desirability of outsourcing CFO and Comptroller functions. Ephinay will take over all F&A responsibilities from a customer except CFO and Comptroller, which Ephinay believes must be retained by the customer for governance purposes. Other outsourcers, like Geller & Co., are more willing to absorb even the responsibilities of CFO and Comptroller, eliminating the need for any F&A functions to be retained by the customer. In contrast, Ephinay believes that is rarely optimal except when the customer’s business is highly specialized. Perhaps the distinction is not so important for small business, but for larger and growing businesses, retention of key internal executives helps ensure controls are retained as well.

When is F&A outsourcing a better solution than in-sourcing?

Business Process Analysis.
As in all other types of outsourcing, F&A outsourcing starts with an analysis of the business processes of an enterprise. This analysis must cover virtually all essential elements of the business processes under consideration. Thus, an “end-to-end” approach will identify functionality, interaction with third parties (such as suppliers, customers and regulators), the degree of human expertise required for each process and the degree to which human expertise can be captured in a scalable information technology solution that includes hardware, software, telecommunications and technology managers.

Business Processes Considered for F&A Outsourcing.
Having dissected the business processes from end-to-end, the enterprise then considers how the classic types of rationales for outsourcing might fit into each F&A process. Many firms find outsourcing F&A business process functions preferable to retaining them. Here are some common reasons why.

Shifting functions plays to core competencies.
F&A outsourcers exist for one reason and one reason alone: to take over the F&A functions of other businesses. If F&A outsourcers fail to do a good job of F&A in a competitive marketplace, they will fail entirely. F&A is an F&A outsourcing firm’s core competency, by definition. Of course, this is an agreement to “trust me.”)

In-house functions are always secondary to the fundamental premise of the company.
In a semiconductor business, for example, making and selling semiconductors is the lifeblood of the business; F&A functions are necessarily secondary because they do not create business. This is no less true of large corporations than it is of startups or enterprise businesses. Top talent is routed to revenue-generating departments; being an accounting whiz, for example, is unlikely to take you to the top of GM. F&A outsourcers, unlike their customers and prospective customers, are structured to reward those who perform F&A functions well.

F&A outsourcing optimizes functions of non-F&A businesses.
F&A outsourcers allow businesses to focus on revenue generation instead of worrying about F&A matters, which are integral to their operations but do not actually create revenue for their business.

Outsourcing optimizes the function of the CFO and other senior-level employees.
When transactional functions are outsourced, the CFO can focus on F&A strategy rather than minutiae. The CFO can be a CFO, the Comptroller can be a Comptroller.

Cost Substitution.
Outsourcing enables businesses to implement more advanced technology solutions more cheaply. Take, for example, a firm with an antiquated IT system that costs them $10 million dollars a year to run. They want to upgrade, but the upgrade will require a capital investment of $15 million; the outsourcer, on the other hand, can provide the service for $8 million. The customer may prefer to go with the outsourcer, who can provide the improved technology for less than the cost of the customer’s obsolete technology and for substantially less than the cost of an in-house upgrade.

Economies of scale.
F&A service providers such as Ephinay and Geller claim they can give the customer “more F&A bang for the buck.” An outsourcing provider (or a CPA firm) could enable a company outsource its needs to F&A experts who work part-time for the company. When ’re hiring a part-time F&A provider, the enterprise can afford to tap a deeper bench for the same money. For the same costs as for a CFO, the enterprise might get a CFO, a Comptroller, and a bookkeeper. The customer can take advantage of the fact that the outsourcer likely has a much larger and more specialized staff than the customer’s in-house F&A department. A customer could afford to have a small army of outsourced accountants, for example, working on its projects at crucial times, which it could never do in-house.

Peaks and Valleys.
Outsourcing may also help smooth peaks and valleys in the monthly, quarterly and annual financial and accounting cycles. Variability in service volumes enables companies to budget for their in-house baselines and manage the pricing and costs — on a variable pricing method — of outsourced staffing for peak loads. In contrast to staff augmentation as a business model, though, outsourcing involves minimum purchase commitments by the enterprise customer, thereby allowing an efficient outsourcer to engage in resource management planning and delivery of lower per-unit resource costs.

Process Complexity.
Certain F&A processes are so inherently complex, or judgmental, that the entire process is outsourced before the enterprise even considers hiring and supporting its own staff. Such areas include employee retirement planning, ERISA fund investment and pension administration. (These processes overlap with HR functions, making them even more complex.)

Why F&A outsourcing minimizes risk

Outsourcing in F&A is often a way to increase competitiveness and minimize a firm’s risk. Outsourcing can improve competitiveness by cutting costs, but it can also improve the capabilities of the customer’s firm beyond freeing up intellectual and financial capital. Here’s what the sales pitch sounds like:

• Shifting functions is shifting risks.
  Shifting functions to an outsourcer can be a way of shifting risk to that provider. When a customer contracts with an outsourcer to execute a function, the customer then looks to the outsourcer for results; it becomes the responsibility of the outsourcer rather than the customer to deliver. This improves efficiency for the customer; if an employee calls in sick and can’t deliver before an important deadline, for instance, that now becomes the outsourcer’s problem rather than the customer’s.
• F&A outsourcers are better structured to catch many kinds of errors.
  Many outsourcers have multiple levels of review built into the F&A process and are therefore more likely to catch errors before they become catastrophes. These errors could range from the occasional arithmetic mistake to faulty accounting and the attendant potential for civil liability. Many customers cannot afford to hire in-house the quantity or quality of people required to match an F&A outsourcer’s product. F&A outsourcers also often have more detailed or more up-to-date knowledge of arcane tax regulations that can be leveraged to the customer’s advantage. This is, of course, more important in the Sarbanes-Oxley world, where accounting errors can embroil firms in heftier fines and more serious litigation than before. In addition, unauthorized expenditures by outsourcers are impossible—whether the result of a mistake by the outsourcer or criminal embezzlement—when the contract between the customer and the outsourcer spells out precisely what expenditures are authorized and what responsibilities will be retained by the customer.
• F&A outsourcers are less likely to make mistakes because it undermines their entire business.
  F&A outsourcers’ livelihood comes from their contractual work. At a minimum, outsourcing in general does not increase risk. Problems presented by the risks of mathematical errors, incompleteness of records, lost records, and inappropriate classification of transactions for accounting purposes, for example, are at least as likely to occur among F&A departments of businesses that retain F&A functions as they are among F&A outsourcers. But in general, F&A outsourcers minimize these risks because F&A is their exclusive function; if they make these kinds of mistakes routinely, their business stands to pay a substantial material price. (In response, the enterprise needs to consider who is better at assuming the risk of making and making good on the typical types of errors associated with a particular business process.)

Questions that enterprise customers want answered

The prospective customer is considering handing over his business’ finances to another business. That is an inherently delicate process, especially if the prospective customer is not already acquainted with the outsourcer. Customers expect answers to the following questions:

• Why should I outsource when I can retain control by insourcing?
• for what functions is the outsourcer responsible?
• Is the outsourcer reachable, or do I have to call between 9 a.m. and 5 p.m. to get in touch with a responsible person?
• What attitudes and cultures should I look for in a “good” service provider?
• How will outsourcing my F&A functions increase my firm’s competitiveness?
• Will outsourcing allow the CFO to be more effective and act more strategically?
• Will outsourcing increase our risk? Even if outsourcing can increase quality and reduce cost, the customer wants to know what the risks of outsourcing are, and whether and how they can be managed, before he closes a deal.
• How do I assure that the outsourcer will track what we need to track, including possible fraud in its own operations?
• What alternatives exist to outsourcing this function? Would an investment in software “solve the problem” of managing the particular F&A function?

Friction points

In outsourcing arrangements as in any transaction, friction points arise particularly when responsibilities are poorly defined. As in other types of outsourcing, F&A outsourcing involves classic issues that need resolution in planning and contracting.

• Scope of services must be defined. If the scope of services to be performed by the outsourcer is left vague by the parties in their contract, serious problems can arise. The customer must know what responsibilities he is contracting to the outsourcer and what functions he retains. Likewise, if the number of hours or amount to be billed by the outsourcer is left open-ended, opportunity for customer-outsourcer friction increases.
• Due dates for projects must be spelled out in advance by contract where appropriate. Outsourcers cannot be expected to respect informal internal agreements customers may have been accustomed to when F&A functions were in-house (“Frank always got me the numbers on Fridays—I don’t see what the problem is”) unless they are specified up front. But this is a problem inherent in any transaction, in outsourcing and insourcing.
• Software compatibility is generally not an issue.
  This is a major concern for customers—how much of my standard operating procedure will I have to change to accommodate the outsourcer?, they frequently ask. The answer can be “none.” Generally F&A outsourcing firms do not impose tech solutions on their clients when transactions are light. Platform compatibility can become an issue, however, as the complexity of the mathematics increases. Some outsourcers are “platform agnostic” regardless of the volume of transactions involved, while others may require their high-volume customers to use Solomon or SAP.

Transitional Issues

A business’ decision about whether to outsource any function, F&A or otherwise, often hinges on the cost of transitioning responsibilities to the outsourcer. The slope of the customer’s learning curve and the amount of time required to make the transition depends on the number and importance of the outsourced functions. It also depends on the particular outsourcing firm.

Timing.
Some firms require four to six weeks to take over bookkeeping responsibilities from their customers; others do it in as little as two weeks. Outsourcing a whole F&A department could take as long as a year, or as little as a month

Transition Planning Toolkit.
Firms will often require their customers to fill out a questionnaire detailing business expenses to help acquaint the outsourcer with the customer’s regular expenses. This helps accelerate the transition. However, some pain occurs when the enterprise of the customer has to modify its process to accommodate the new outsourced business process.

Comparison with In-sourcing.
Some F&A outsourcers assert that transition costs entailed in a switch to outsourcing are not necessarily higher than those of hiring a new person in-house, and can often be recouped much more quickly. However, in a larger organization, the degree of change management is much greater when transitioning to an outsourced process.

Conclusion.

F&A outsourcing contracts may still represent a small minority of total outsourcing arrangements. Yet businesses are increasingly looking to F&A outsourcers to take over certain high volume, low risk, F&A functions with a modest degree of discretion or judgment. The trend in outsourcing towards allowing smaller and smaller businesses to outsource has taken hold in the F&A area as well. Small and mid-sized businesses (“SMB’s”) and startups can often find it profitable to outsource a variety of different F&A functions that would only have been profitable for major corporations to do just a few years ago. F&A outsourcing is becoming increasingly common among businesses that want to reduce risk and optimize their competitiveness and are willing to invest in strategic sourcing plans and skilled contract lawyers.

Effective risk management requires effective legal contracting. Given to complexity of F&A outsourcing, careful contracting is required.

Outsourcing Law & Business Journal™: January 2009

January 1, 2009 by Bierce & Kenerson, P.C.

OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com for commentary on current events.

Insights by Bierce & Kenerson, P.C., Editors.  www.biercekenerson.com

Vol. 9, No. 1 (January, 2009)
___________________________

1.  Identity Theft in 2009: Compliance by Business Owners and Government Agencies under Draft Federal Data Breach Notification Act.

2. Codes of Conduct in the Outsourcing Environment: Practical Scenarios after Wipro Debarment and Raju / Satyam Fraud.

3.  Humor.

4.  Conferences.
___________________________

1.  Identity Theft in 2009: Compliance by Business Owners and Government Agencies under Draft Federal Data Breach Notification Act. Personally identifiable information is the core to the global economy. All businesses, large and small, rely upon information technology, outsourced to external service providers, to process such information for a wide range of uses, including HR payroll and administration, purchase orders, accounting, finance, credit card payments, debt collection, tax compliance, records management, procurement, engineering, market analytics, business intelligence, e-discovery, legal services, and logistics.   All businesses must comply with data breach notification laws.  In the U.S.,these laws will likely be extended and federalized in 2009. For more information on pending federal legislation as of January 2009, click here for the full article, and, for a copy of the draft 2009 federal Data Breach Notification Act, click here.

2. Codes of Conduct in the Outsourcing Environment: Practical Scenarios after Wipro Debarment and Raju / Satyam Fraud. Implementing lessons learned from Enron and the Sarbanes-Oxley Act, “codes of conduct” have become an integral ongoing concern in supply chain management applicable to employees, suppliers, contractors, consultants, captive affiliates, outsourcers and joint venture partners. When a trusted supplier breaches that code of trust, the enterprise customer needs to identify available remedies and make informed choices about enforcing legal rights and effectively mitigating the risks. This article makes recommendations for best practices in risk management, business continuity planning, disaster recovery, and legal rights and remedies in case of adverse events associated with a breach of a code of conduct or code of ethics due to senior management fraud or innocent “improprieties” that were fully disclosed but not permitted. It takes inspiration from the Raju /Satyam fraud in early 2009 and the debarment of Satyam Computer Servers Ltd., Wipro Technologies and Megasoft Consultants from the World Bank list of eligible contractors for corrupt practices. For the full article, click here.

3. Humor.

Change Control, (n). (1) a majority of voters on election day; (2) lobbyist’s draft legislation to block competitors from changing the rules of the marketplace; (3) Darwinian Evolution of Species, applied to business process transformation; (4) periodic brain dump.

4. Conferences

February 9-10, 2009, 9th Annual e-Services Philippines Conference and Exhibition and Next Wave Cities for Global Sourcing Council’s Multi-National Teleconference in Manila, Philippines and Hoboken, New Jersey.  The Global Sourcing Council will join with a session at the 9th Annual eServices Global Sourcing Conference and Exhibition taking place in Manila, The Philippines, to focus on “Next Wave Cities”. In the U.S., this event will take place at the Stevens Institute in Hoboken, New Jersey, beginning at 7PM; refreshments will be served, followed by an international video conference at 8PM. A keynote speaker and panel will be present in each location. The Stevens Institute site will focus on key factors that client companies seek in their sourcing locations. In a bid to be the next e-Services hub, invited cities present their development plans and competitive advantages. Vendors and buyers/influencers will exchange perspectives on current demand and supply requirements; presentations from new eligible locations in the Philippines, Asia and Europe will be given and this conference will provide business matching and lead development opportunities. To register, click here.  For more info on the 9^th Annual e-Services Philippines Conference and Exhibition, visit their website.

February 10-11, 2009, American Conference Institute (ACI) Reducing Legal Costs, New York, New York. Corporate legal departments are under the gun to reduce costs, and the pressure on them to do so will only mount as the economy struggles. American Conference Institute’s 2nd Annual Corporate Counsel Forum on Reducing Legal Costs has been tailored to provide in-house counsel with the knowledge they need to successfully employ cost-reducing procedures both internally and externally.  Don’t miss this unique cross-industry benchmarking forum on keeping legal department costs in check, led by a spectrum of leading companies. For more info, click here.

February 11-13, 2009 NASSCOM Leadership Forum 2009, Mumbai, India. The NASSCOM India Leadership Forum 2009, a milestone event that will mark NASSCOM’s 20th year, will bring under one roof industry leaders, thought gurus, analysts, Government decision makers, academia and IT users from across the world. For the very first time, the global conclave will journey through three key themes-one for each day-to completely transform the experience for delegates. For more info, click here.

February 16-18, 2009 IAOP 2009 Outsourcing World Summit, Carlsbad, California. In its 12th year educating the world’s outsourcing professionals, IAOP™’s 2009 Outsourcing World Summit is a one-of-a-kind opportunity. Come to learn the very latest in how to create competitive advantages for your company through outsourcing. For more info, visit their website.

February 23-24, 2009, American Conference Institute LPO Summit, New York, New York. ACI’s Legal Process Outsourcing Summit is designed for both in-house counsel and law firms who are still evaluating the viability of offshore outsourcing, plus those who already have outsourcing operations in place but who want to stay ahead of the latest industry developments to optimize their business practices. For more info, click here.

February 23-25, 2009, IQPC 6th Annual Procure-to-Pay Summit, Miami, Florida. SSON and IQPC’s Procure-to-Pay series returns with the 6th installment this February!  Following the tremendous success of the last events and traction from leaders in the space, the 2-track agenda promises to deliver tools to help bridge purchasing with payables and enable process excellence throughout each and every segment of the P2P cycle, including improving the bottom line, optimizing available resources and managing process change. For more info, click here.

February 26, 2009, Global Services Conference, New York, New York. This year’s theme is “Revisiting Global Sourcing in a Challenging Economy”.  The financial crisis and the economic meltdown have put pressure on organizations of all types. In a more globalized world, the dimensions of global engagement have increased and so has the impact.  In challenging economic conditions, global sourcing of services throws up new opportunities.  The 2009 Global Services Conference will have expert discussions around how customers of business and technology services can revisit their global sourcing strategies to tap into these opportunities. In a jam-packed day filled with thought-leaders, peer discussions, workshops and real-world case studies, the 2009 Global Services Conference breaks new ground in providing content to help executives determine how to establish business value in outsourcing engagements. Global Services will also present the findings of its annual Global Services 100 research study at an awards and cocktail reception. Click here for more info.

March 22-26, 2009, IQPC’s 13th Annual Shared Services Week, Orlando, Florida. SSON’s Shared Services Week™ is the community event for all levels of Shared Services professionals around the globe. With over 900+ past attendees from 22+ countries each year, it is the “Can’t Miss” event for everyone involved with shared services. In it’s 13th year, the event is bigger than ever! We have added additional tracks, more expert speakers, a larger exhibit hall and new content. Experience the most renowned Shared Services conference ever and take away key insights you will learn no where else. Network with experts in the industry and create contacts for life. Receive a 30% discount when you register by using code IUS_OSL_#3. Call 1-800-882-8684 or visit us online.

April 27-29, 2009, IQPC’s 7^th Annual e-Discovery Conference, San Francisco, California. Join this year’s conference to learn more about managing the process of electronic discovery files and to explore options that are available for this task. Proactive e-discovery solutions are more critical to legal departments yet the solutions for costs, implementation, and management are still widely unknown. This conference will provide strategies for e-discovery success including proactive strategies for record management; global privacy issues, data security laws, regulations; specific cost control options; judicial perspective; and cutting edge software solutions. For more info, click here.

May 5-6, 2009, 7th Annual HRO World ^TM Conference & Expo at NY HR Week ^™ , New York, New York. Hear from the HR outsourcing industry’s most respected practitioners, analysts and vendors. Register by April 10 with Source code HROL and save $100. Register here online or call 1-800-727-1227.

May 18-20, 2009, 6th Annual HR Shared Services & Outsourcing Summit, Denver, Colorado. The 6th Annual HR Shared Services Summit is the most important event of the year for HR leaders seeking to re-align their services with the strategic requirements of the business. This successful event brings together senior HR leaders in an exciting interactive forum, delivering best practice case studies aimed at optimizing every stage within the HR transformation process. Given historic economic conditions, it’s more important than ever that HR leaders exploit the dramatic economies of scale that are available to them through shared service structures. And for more mature companies – those that have already made the transition to an HR shared service model – there is an urgent need to re-align the kinds of services they offer with increasingly tough business challenges. Click here for more info.

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FEEDBACK: This newsletter addresses legal issues in sourcing of IT, HR, finance and accounting, procurement, logistics, manufacturing, customer relationship management including outsourcing, shared services, BOT and strategic acquisitions for sourcing. Send us your suggestions for article topics, or report a broken link at: webmaster@outsourcing-law.com The information provided herein does not necessarily constitute the opinion of Bierce & Kenerson, P.C. or any author or its clients. This newsletter is not legal advice and does not create an attorney-client relationship. Reproductions must include our copyright notice. For reprint permission, please contact: publisher@outsourcing-law.com . Edited by Bierce & Kenerson, P.C. Copyright (c) 2009, Outsourcing Law Global LLC. All rights reserved.  Editor in Chief: William Bierce of Bierce & Kenerson, P.C. located at 420 Lexington Avenue, Suite 2920, New York, NY 10170, 212-840-0080.

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