In both shared services and outsourcing, the most complex aspects of establishing a center, or coming to an agreement with a BPO provider are linked to the legalities involved. Elements such as the location an organisation decides to establish an SSC or the location its contracted-out services are received from can and have been known to have a massive impact on cost, quality of service and even the data protection and privacy of a business.
And, as a shared services organisation matures, these legal issues only become more complicated. This is particularly true if a company starts thinking about adding extra value to its outsourced operations for example, because these activities not only require negotiation, but they must also be written and clearly stated between the customer and supplier.
In light of this fact, and the recent launch of ‘sharedserviceslink’s guide to all you need to know when starting up shared services’ (an online hub packed with informative resources) – I sat down with Mark Lewis, Partner and Head of Outsourcing practice at international law firm Berwin Leighton Paisner to discuss some of the latest trends flooding the shared services and outsourcing industries and their legal impact.
When it comes to outsourcing, there have been many suggestions that companies are no longer just looking at cost – they are looking at what value-adding activities outsourcing providers can offer them. Is this true in your experience?
I challenge that idea because from the surveys I have seen, and based on my own experience, I am pretty sure that most companies if not all are still mainly focused primarily on cost over anything else. Any kind of other efficiency or value add is very much secondary or lower order. There is a tension between ‘value-add’ and what companies actually want from outsourcing. In our experience, companies are looking for shorter term (3- 5 years), standardised, automated (as far as possible) Business Process Outsourcing (BPO) unless they are working in very niche BPO areas.
When companies start talking about value add, generally, they don’t know what they mean. ‘Value add’ is such a vague concept, unless customers have a clear idea of how to translate that into input our output based requirements. But, as a lawyer I can tell you that it’s difficult to write these things into a contract – a bit like the whole gain-share concept. Customers may be exclusively focused on the process that they want to outsource, and often they mostly haven’t thought through, let alone got to the position of being able to write down, what value-add actually means to them. We try to help them frame their intentions, but it’s what drives the business that matters.
But for those companies that do have a direct focus on value-add, what kind of companies are they, and what are they asking for?
In my experience, the companies that start thinking about what additional value can be added are often in fast-moving, customer-facing sectors, like telecoms, consumer technologies, manufacturing, retail, fashion or sportswear - where there is a direct link between the outsourced process and speed to market, customers, customer responses and sales. So, where there is value-add, and customers know what they want from it, the principles are translated into contracts as service requirements and KPIs and they will be around speed-to-delivery, speed to market, customer behavourial metrics, website hits, and so on.
Where other companies talk about value-add, they often mean just technology refresh and continuous improvement.
Overall, in most cases, I question whether ‘value add’ is worth the bother.
Legally, how easy is this to implement?
Lawyers can usually capture quite accurately in contracts concepts that clients communicate to them. So it’s often relatively easy to implement value add terms in contracts and, if the terms are clear, it should then be relatively easy to implement themoperationally. Technology refresh and continuous improvement – as well as value-add generally - fall into the whole value-add description problem. Unless as a customer you have thought through what ‘good’ or ‘top quartile’ looks like for your business, and what inputs or outputs you need to deliver ‘good’ or ‘top quartile’, you are going to struggle to define the provider requirement. What is clear to me is that, unless ‘value add’ is translated to have clear contractual meaning, with enforceable behaviour from providers, you won’t get it. Providers have priced the outsourcing on the basis of what the contract compels them to deliver. No more no less - unless you have an exceptional relationship with your provider. If it isn’t in scope and priced, any value add will fall into the change management process – which is likely to mean only additional cost, unless the change is minimal.
In terms of locations what are the trends you are seeing in terms of outsourcing, and also what are the trends you are seeing in regard re-shoring activities?
I don’t think there has been very much change in the overall desirability of offshoring or near-shoring locations. For offshoring, India remains the number one destination for both IT services, including IT outsourcing, and generic BPO. But there are other countries like the Philippines that have built up a credible offering in CRM and contact centre operations, especially facing off to the US because of cultural and linguistic affinities. My recent experience is that popular nearshore destinations in Europe include centres in Poland, Slovakia and Romania.
Obviously, when you need a particular language or proximity in an offshore or near-shore facility – that will dictate where you go. For Spanish speakers in the US, Mexico and South America are the go-to nearshore destinations. For companies looking strategically at Sub-Saharan African markets, South Africa (especially Gauteng/Johannesburg) is proving a more popular destination.
Overall, however, there is socio-economic and political pressure to repatriate outsourced services onshore because of what developing markets have been and are going through economically. Despite the US and the UK now being seen to be safely out of the recession, there is still pressure in both countries to “re-shore” – though these terms mean different things to whomever is proposing re-shoring. For example, I am not sure that anyone truly understands David Cameron’s recent pronouncements about the need to re-shore to the UK: manufacturing, services, or both?
There are parts of the Eurozone where growth is stagnant. For example in France, growth is slower and there are embedded structural and labour problems that still create strong sensitivity to any kind of offshoring or nearshoring. While Germany is more open to offshoring and nearshoring, labour and works council norms still make migration of services outside Germany a tortuous and costly process.
So, what drives non-politically motivated decisions to re-shore operations, and in which countries?
Economics, customer proximities, efficiencies and speed to market. The US is a good example of this. There has been growing pressure in the US to re-shore manufacturing and services. Because of the size of the US and disparate state economies, it is still possible to re-shore or move processes to much lower costs bases within the country. So, obviously that makes business sense if there are other factors, like customer proximities. What I mean is that, if you are in manufacturing and your customer asks for a modification, by the time you have specified the change and it has been shipped from, say, China, you are likely to be looking at a six-week process at best. Likewise with services: if you need to modify a process it is always easier to deliver the modification from a shorter distance: you are closer to your customers, the market and to your service and operations teams if they are in the same location.
The increase in automation and IT-enabled service in BPO these days could also be a factor in re-shoring. If it is available – and increasingly automation is becoming a viable option – it is much easier to re-shore.
There may be a converse effect here: when you start introducing more automation into BPO you reach the ‘no shore’ effect – one of the apparent benefits of cloud computing. It doesn’t really matter where it is coming from, because it’s technology, and you are not seen to be moving jobs offshore or nearshore. Although the effect of automation is that jobs will be lost, it’s easier to explain on the grounds of technological improvements.
Are there other issues affecting where companies choose to outsource their operations to?
The other big issue we are now seeing affecting location is where your data is being processed and stored. A lot of attention has been focused on this since the Snowden NSA revelations. As a result, businesses outside the US - but most particularly in Europe - are much more concerned to know where their data is going to be processed and to understand data routing. And they want enforceable warranties and assurances built into their outsourcing contracts. This is not just about personal data and privacy, though these issues are of course important, but also about corporate governance and risk management.
Since Snowden, there has been a dramatic move away from certain US cloud providers and an attempt to move away from certain US technologies – especially those suspected of being vulnerable to NSA surveillance and intervention. Any data processing centre that isn’t in the US – including those in Canada – is beginning to benefit from the Snowden revelations
What kind of deals are you seeing at BLP this year and what are some of the issues you are currently dealing with?
We are beginning to see a lot more of shared services within HR, finance and accounting and IT. The legal and regulatory issues still remain a challenge, however, because many organisations tend to forget the regulatory impact, especially in Europe, of rearranging services and moving people, processes and data around, even in their own groups.
For example, there are some organisations whom we have been helping to implement shared services and GBS in Europe who have not factored into their planning the need to consult workers councils and trade unions about moving staff around the organisation or making redundancies. The problem here is the European Acquired Rights directive – more commonly known as TUPE in the UK and even in parts of Europe.
Other challenges tend to involve companies implementing shared services and GBS when they haven’t fully considered how and where their data will be routed among the shared service centres. Again, this is regulated in the EU and certain other countries (like Switzerland). So you need to plan data routing carefully and you may have to obtain local information commissioner consents to move certain kinds of data out of your current locations. This is more than just a timing consideration. Information commissioners can and do refuse consent.
Within Finance and IT processes, which outsourcing companies should we be watching over the next year?
I’d rather not name names, because it’s always a case of particular horses for particular courses.
In principle, I think that customers need to be looking for providers who are integrating more technology into their generic business process services and even specialist business process outsourcing. This now seems to be taking off, though you need to be careful to ensure that the IT-enabled processes are stable, tried and tested.
2014 is supposed to be the year of automation and even robotics, so it’s definitely worth looking at capabilities in that space. There is also a new market growing up around the selection, integration and customisation of automation and robotics, which should make the choice and implementation easier for customers. Although there’s a debate about whether robotics is new or substantive technology, I think the debate is, like a similar debate about the cloud, sterile. If robotics proves to be an efficient and cost-effective economic (rather than technological) form of computing - that’s good, isn’t it?
Finally, I think we should be watching out for outsource providers who make it easier for their customers to choose where the service is coming from. For reasons I’ve given earlier, this is going to be an important decision for customers this year. The providers who don’t will lose out.
Interested to know more or have your own questions to ask? Stay tuned over the next couple of weeks when we will be providing you with the opportunity to submit all of your legal questions regarding shared services and outsourcing to Mark! For more information please contact [email protected]
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