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At the recent Outsourcing World Summit, David Barrett of Simmons & Simmons gave an interesting keynote speech on “outsourcing’s new global deal model”. He discussed why outsourcing contracts between global companies, operating in different countries require special care.  Although, in the end, the purpose of a contract does not change; dimensions of the contract change quite significantly in this new environment. 

As defined in Wikipedia:  “A contract is a legally binding exchange of promises or agreement between parties that the law will enforce.” David defined outsourcing as “A results-oriented strategic business relationship with risk-sharing.”

As outsourcing becomes a global engagement, various laws and within different countries practices impact the promises and agreement.  In this short article, I will try to highlight some of these aspects and will use David’s presentation as a guide (for more information, look at the OWS proceedings available as a resource on the website).  This article is not meant to be a guide on all aspects of an outsourcing contract but highlights some of the nuances of the “globalness” of a contract.

1. Since a contract is an exchange of promises and documents the common understanding of expectations; it is important that the negotiating parties take the cultural and business background into account when defining the contractual term.  David, in his presentation, referred to this as “political and social context.” For example; in many Asian cultures, a non-compliance to a promise is a significant personal negative.  If the contract then adds other penalties, it is almost like creating a “double jeopardy” for the company. In such circumstances, the two parties can agree to identify non-performance and establish how the offending party can “make good” on their promise without establishing rigorous penalties.  Another example of this cultural diversity is recognizing cultures where identifying “bad news” is not accepted well.  A good contract in such an instance will make sure that there are processes established to “report” all news (whether good or bad) and therefore, provide the forum for revealing bad news without putting a spot light on it.

2. Global outsourcing contracts are now driven by the recent emphasis on governance and compliance with various protection act; such as Sarbanes-Oxley Act in U.S., Data protection (Safe Harbor provisions) acts of Europe, Basel agreements for banking.  These acts and their applications are not uniform throughout the world and as a result, in a global agreement, both the parties have to recognize the different applicability and help the other party comply with them.  This is what David refers to as one of the dimensions of a “win-win” agreement.  One of the better known example is the “Acquired Rights Directive” of the European Union (and associated legal requirements of member countries) which protects the rights of employees as they transfer from one company to another. Since, U.S. based companies do not have to deal with a similar provision, they need to be mindful of the European company’s requirements when drafting an agreement for the transfer of employees.

3. Yet another dimension of the global aspects of an outsourcing agreement is dealing with pricing issues.  The currency fluctuation and economic factors impacting the costs of services can dramatically alter the basis for the outsourcing agreement.  For example, the Indian economy is growing at a fairly dramatic rate and is creating an ever-increasing gap in the exchange rate between Rupees and the U.S. Dollar.  The salaries are also growing at a rate far greater than the rate of inflation and comparable wage growth in the Western world.  A contract that establishes a rigid baseline for currency exchange in such a changing environment will create an undue stress for an Indian service provider and will not result in a “win-win” model of a good contract.

4. In recent times, U.S. companies have become more aware of their corporate responsibility. David pointed out that these corporate responsibilities deal with issues such as “green environment”, “ethical employment practices” and “community involvement.” The definition and applicability of these principles are different in different parts of the world.  Although, there are base acceptable standards for businesses globally (such as employment practices dealing with underage children), recognition and interpretation of these requirements varies widely. For example, in an emerging nation, a green environment takes a back seat to fulfilling basic human needs. 

5. Since a contract is supposed to assure that the agreement is legally binding; global dimensions of enforcement need to be understood and agreed upon.  This not only means recognizing the basis for the contract law of different countries, but also how those laws are applied and judgments enforced.  A good contract will have made sure that both parties understand these differences and have reached an agreement on dealing with them.  After all, as David points out, the contract is also about “risk sharing” and establishing an “openness” in the relationship from the outset.

Maybe in a world that is “flat”, these differences will slowly disappear and contracting between two parties will remain as simple as defining “promises” and reaching “agreements”.  Until then, contracts will have to deal with the global differences in an outsourcing world and account for the differences.  That will create the true “win-win” agreement and a longer term success for both the parties.

We would love to hear from all the lawyer and non-lawyer members, with your thoughts and experiences on the topic.


Published 5/15/07

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