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Offshore contracts: The finer the print, the better

Off the shelf might be just fine for IT services, but offshore contracts should be custom-made. Gartner offers tips for "contracting effectively in a globally sourced world."

ORLANDO, Fla. -- Companies that have become expert procurers of information technology services on domestic shores...

need to be hyperdiligent when they contract offshore. Standardization might be the way to go for IT services, but offshore contracts should be custom-made, says research firm Gartner Inc.

"Don't sign a template deal from a provider. I'd rather you procure a baseline contract from a lawyer or a consultant that you can customize to your needs," said Gartner analyst Helen Huntley, who spoke at the Stamford, Conn.-based firm's recent outsourcing conference. "And don't sign deals that will be in the jurisdiction of the offshore country."

The warnings stem from Gartner research on global deals that have failed and, in particular, on how standard master service agreements fail to address the risks associated with offshore outsourcing. Indeed, of the 18 articles Gartner typically sees included in a standard master service agreement, 15 require modification "to go global successfully," Huntley told a group of IT executives.

Some of the modifications seem like common sense. Companies doing business offshore, for example, need to include a definition of time zone in their contracts and to spell out holiday schedules, she advised, adding that CIOs are often surprised when employees observe the holidays of the foreign country.

Companies should define the percentage of onshore and offshore personnel needed at milestones in the project, and state where key individuals are expected to be located at these intervals. If it is important that offshore employees speak English, that needs to be in writing too. The contract should also state in which language the documentation and data will be written.

High staff turnover is a "productivity leach," said Huntley, especially when the skilled workers initially assigned to the project are replaced by low-skilled recruits. The contract should spell out the skill requirements and provide a way to track attrition.

Other contract oversights addressed by Huntley were less obvious. Benchmarking should be part of every deal, but companies often fail to state against whom the provider will be benchmarked. Will service levels be compared with in-country peers or multinational contractors? "Take the mystery out," Huntley said. Companies should also examine their third-party contracts before signing an offshore deal. "You may have some third-party licenses that don't transfer to a foreign country, and you don't want to have to buy software," Huntley said.

Most companies will want to pay for the work in their own country's currency, said Huntley, but there can be benefits to paying in the local currency. Companies also need to examine the tax implications of sending work offshore, including whether they will continue to be eligible for existing research or other tax credits if the work is outsourced.

In addition to fees and payment terms, other hot-button issues include audit rights, intellectual property rights, security and confidentiality, and legal compliance. Huntley recommends that companies have a point person for compliance matters. Subcontractors in the deal should be held to the same security standards and confidentiality provisions as the provider.

The biggest risk that companies face is legal, she said. The contract should include language about where disputes will be adjudicated (even if it doesn't fly), she said. Contracts should clearly define dispute procedures. Ireland is a popular, if expensive, place for American and U.K. companies to outsource to because the legal system is similar.

One surprise was Huntley's recommendation for the length of a deal. With first-time providers, a two- to three-year deal is a "safe range," she said, given how quickly the political landscape can change. Companies should also watch out for consolidation among providers. The merger-and-acquisition mania infecting U.S. companies is spreading offshore, as Electronic Data Systems Corp.'s recent bid for MphasiS BFL Ltd., the Bangalore software provider, makes clear. Contracts should stipulate the right to look at a deal in the event of an acquisition.

Let us know what you think about the story; email Linda Tucci, Senior News Writer.

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