Contract flaws increase offshore outsourcing risk

Businesses are increasing the risk of offshore outsourcing disaster by failing to draw up tighter contracts when dealing with overseas service providers, according to analyst Gartner.

Out of the 18 key areas in a standard outsourcing contract - or master services agreement - Gartner has identified 15 that need significant review and modification when going offshore.

The most critical areas that need specially adapting for offshore outsourcing contracts include proprietary rights, security and confidentiality, legal compliance, fees and payment terms, and auditing.

Intellectual property (IP), in particular, is a major issue because different countries and cultures have different attitudes towards IP protection - IP rights enforcement is, for example, weak in China and Russia but strong in Ireland.

The Gartner report warns: "Find out what IP rights enforcement is like in the provider's country. In some areas, data and IP rights are lax and little is done by the foreign government to monitor and control IP."

Before signing an offshore outsourcing deal organisations must determine what legal system, and which country, will govern and have jurisdiction over any contract disputes. Gartner advises that companies insist the contract is governed by the laws of their own country and not those of the overseas service provider.

Gartner said: "Be aware, though, that some courts in foreign countries will claim jurisdiction, regardless of what the contract says."

Security and auditing are also key considerations in any offshore outsourcing contract negotiations. Gartner's advice is to establish the right to audit whatever locations are being used to deliver the offshore services, and to stipulate who will be performing audits.

Gartner analyst Helen Huntley said in the report many organisations that are looking to establish global outsourcing contracts with offshore service providers mistakenly believe the terms and conditions are about the same as onshore contracts.

She said: "This can lead to contractual risk for liability, regulatory compliance, legal enforceability, service performance and privacy breaches, among other things, when outsourcing to a foreign service provider. Outsourcing contracts structured with in-country providers will not work as templates for global outsourcing without significant modification."