Outsourcing offshore — is it too good to be true?

Outsourcing offshore — is it too good to be true?

A surprising number of companies outsource their IT-related services to providers based in India and China. Or maybe it isn’t so surprising when one considers the potential cost savings associated with going offshore.


What is particularly interesting to me about offshore outsourcing is that many companies have hopped on the “labour is so cheap” bandwagon without thoroughly assessing the risks and other hidden costs associated with sending work overseas.

It goes without saying that there are lots of highly skilled people in both India and China. For my purposes, I’m going to focus on India. It is a common-law country, English is a dominant language, and labour is very inexpensive. Or is it?

Wages are apparently on the rise, so over time, the cost of labour in India, in the IT sector at least, may become a more significant factor in determining whether or not to outsource there.

Apart from access to an inexpensive workforce, what are some of the other advantages of outsourcing to India? Access to a significant brain trust for one.

With a population of just over a billion, this isn’t especially surprising. Enterprising business people have established all manner of IT-related companies in India, including call centres, data management, transcription, engineering, software development, research, and health-care services.

By all accounts, India is the place to be, if you know what you are getting into.

Cost-benefit is not just about the financial risk-reward, however. It is also about the legal and other business implications of making a decision to outsource offshore, which could be disastrous for a company if things go awry.

Let’s talk contracts. Beyond the cultural considerations of doing business in a country like India, there are certain contractual considerations that should be kept in mind.

For instance, are you sure your contract will be enforceable in India, if your choice of law is Canada? Even if you have a binding arbitration clause, are you sure that anyone is going to show up from Bangalore if the venue for the arbitration is Toronto?

There is an even more obvious practical reality at play here: ask yourself whether you going to be able to collect damages from the company in any event. In truth, the same question should be asked regardless of where or who the contracting parties are. Practically speaking though, cross-jurisdictional and cross-cultural enforcement is just that much trickier and more expensive.

Considering potential privacy and data use/retention/disclosure issues is also an important exercise. Take “cloud computing” for instance. Cloud computing generally relates to web-based services provided by way of hardware and software that is managed by third parties. Data, if stored offshore, will be subject to local laws, which could be very problematic in terms of potential privacy risks.

Indeed, the privacy commissioner of Canada just announced her office will be consulting with Canadians on issues of privacy in cloud computing over the coming months, so clearly even companies outsourcing offshore should give due consideration to privacy and data-related obligations.

Although seeing the word “tax” doesn’t usually conjure up the happiest of feelings, there are a few reasons why it might. For instance, beyond the federal Scientific Research and Experimental Development Tax Incentive Program that supports research and development initiatives, there is also the Ontario Interactive Digital Media Tax Credit, which is “a refundable tax credit based on eligible Ontario labour expenditures and eligible marketing and distribution expenses claimed by a qualifying corporation with respect to interactive digital media products.”

While these tax credits are not available to all IT-related products and services, and may not ultimately impact a company’s decision whether or not to outsource offshore, the government does have other programs available that support IT-related businesses in Canada.

Also, banks like the Royal Bank of Canada have innovative programs for funding technology companies (even the smaller ones), so more than ever there are good reasons to stay local.

Project managers within companies looking to outsource offshore tell me it is difficult enough to keep a project nimble in the same city, let alone when the parties are in different countries and time zones, and that cultural differences can be very challenging.

There is no question that the talent is there, as is the technology. But, if a project isn’t being managed constantly at this end, things can go sideways very quickly resulting in late release dates, budgets and client expectations not being met, and escalating costs.

Additionally, I’m told that if only the most senior staff are left in the “home” office, managing offshore projects becomes a less and less efficient use of their time, which can effectively zero out the gain contemplated by outsourcing to save money.

One innovative entrepreneur I spoke with mentioned that his company is going to open an office in London, England with a view to taking advantage of the effects the recession has had in the European Union on labour resources in the IT sector.

He got so fed up with the language barriers and the escalating costs associated with outsourcing to developing countries, he figures he has nothing to lose by entering into the EU and tapping into a market full of talented underemployed developers and other IT-related service providers. When the economy starts picking up again, he’ll decide whether or not to stay in England.

I find it interesting that there doesn’t seem to be a sufficient number of qualified IT people in Ontario/Canada to meet the apparent demand. That, and the salaries being demanded by them are not in line with what IT people in other jurisdictions are prepared to accept just to be employed.

Don’t get me wrong, outsourcing offshore can be a very productive and cost-effective resource for companies to tap into. Knowing and trusting the organization you are working with and being well-informed in terms of actual cost and risk is key though.

Sarah Dale-Harris is a lawyer in the intellectual property, technology & interactive entertainment groups at Davis LLP. Her practice focuses on the creation, development, management, commercialization, and enforcement of technology and life sciences-based portfolios and related intellectual property rights. Sarah can be reached at 416-365-3522 or at sdale-harris@davis.ca.

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