Important Considerations in Negotiating Outsourcing Contracts with by liuhongmeiyes

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                     IMPORTANT CONSIDERATIONS
                     IN NEGOTIATING OUTSOURCING
                     CONTRACTS WITH INDIAN
                     SERVICE PROVIDERS


                     Sandip K. Beri
                     Genpact


                     The author wishes to thank his friend and colleague Arjun
                     Nath of Genpact for his insights and help in preparing this
                     paper. The views expressed here do not necessarily
                     represent the views of Genpact or any of its customers.
                                            2




Important Considerations in Negotiating
Outsourcing Contracts with Indian Service
Providers




                 Sandip K. Beri
                                                               3




                 Biographical Information

Sandip Beri is Sr. Vice President and Asst. General Counsel
of Genpact. Sandip has the unique experience of working as
a corporate lawyer in both U.S. and India, including with
Unilever, Sidley and Austin, and GE Capital. Most recently,
Sandip worked with GE Consumer Finance where,
among other things, he spearheaded outsourcing initiatives as
the lead lawyer.

Sandip was a key member of the team that set up and
provided leadership to GECF's Legal Outourcing center in
India and also took a lead role in its expansion to other GE
businesses. His current responsibilities include handling
various outsourcing deals for Genpact as well as leading the
expansion of its legal outsourcing center. Sandip holds law
degrees from University of Delhi (1983) and
University of Wisconsin (1995). Contact:
sandip.beri@genpact.com, telephone 203-252-1903.
                                                        4




                        Table of Contents




A. Introduction                                         4



B. Certain Contract Terms and
   Important Considerations                             4

   I.     Compliance with Laws                          4
   II.    Arbitration/Litigation                        6
   III.   Background Checks                             7
   IV. Attrition                                        9
   V.     Sensitivity to Competitors                   12




C. Some Issues Bubbling on the Backburner               15

   I.     Employee Unions in the BPO Industry          15
   II.    Cross-Cultural 15000M Sprint to the Finish   16
                                                                5




  Important Considerations in Negotiating Outsourcing

         Contracts with Indian Service Providersi


                        A. Introduction

This paper seeks to highlight certain considerations-legal,
cultural, and practical-in negotiating outsourcing contracts
with Indian Service Providers. In doing so it draws on the
author’s experience as a lawyer in India and the U.S., on the
customer side and service provider side, and learnings from
working in GE, the company that is an acknowledged leader
in outsourcing to India, as well as learnings from conducting
negotiations on behalf of an Indian Service Provider. The
paper uses some of the most heavily negotiated provisions as
examples, highlights sensitivities on those provisions, and
suggests alternative approaches.

Some of these considerations are not necessarily unique to
negotiations of outsourcing contracts with Indian Service
Providers, but have been included in this paper nevertheless.

In closing, the paper will leave you with a few thoughts on
non-contractual developments that may impact global
offshoring relationships in the near-term.

         B. Certain Contract Terms and Important
                       Considerations

                 I.      Compliance with Laws

There are three principal components of a Compliance with
Laws provision:

i) Monitoring
                                                              6




ii) Interpretation

iii) Compliance

Too often these get mixed up. Let’s start with (iii)
Compliance, the least controversial of the three. Indian
Service Providers should not have, and do not have, any
issue with agreeing to comply with not only laws governing
the provision of services in the jurisdictions in which they are
located (e.g., India) (“Service Provider Laws”), but also laws
that govern the customer and its industry (“Customer Laws”),
as long as the Customer Laws are communicated in the form
of specific requirements or standard operating procedures.

Indian Service Providers are not, however, comfortable
taking on the burden of the other two principal components
of a Compliance With Laws provision with respect to
Customer Laws--(i) Monitoring and (ii) Interpretation. The
reason is simple: Indian Service Providers do not have the
infrastructure or experience to do so…they’re not a law firm
or accounting firm which has expertise to track and interpret
laws in other jurisdictions. Also related to this issue is the
often unstated reason…pricing. The amount that a customer
pays for someone to process invoices buys you just that…
associate(s) who are very good at implementing standard
processes and procedures. It does not buy you the expertise
needed for tracking and interpreting laws. Lastly, monitoring
and interpreting laws requires a lot of conceptual
knowledge…knowledge of a country, its legal system, its
regulators, the particular industry of the customer, and so on,
which Indian Service Providers do not have. Since the
primary responsibility for breach of applicable laws would
most likely fall on the customer and at the very least,
irrespective of covering indemnities from the Service
Provider, may result in undesirable media/market attention
for the customer, it would seem reasonable for the
appropriate function in the customer’s organization to
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shoulder the responsibility of monitoring and interpreting
Customer Laws.

Understanding of the Indian Service Providers’ reasons for
resisting what customers consider a reasonable ‘Compliance
with Laws’ provision can greatly help agree on a fair solution
to this most contentious of issues.

                  II.     Arbitration/Litigation

         It is a widely prevalent practice, with justifiable
reasons, to insist on arbitration as the preferred dispute
resolution method in outsourcing contracts involving India.
The principal reason (apart from the usual reason of avoiding
a “public” dispute) is the notoriously slow legal system in
India. Nani Palkhivala, India’s best known lawyer, eminent
jurist and constitutional expert (and a former Indian
ambassador to the U.S.) used to say: “Litigation in India
makes eternity intelligible!.”

        However, while arbitration should continue to be
preferred from a customer perspective, a couple of things
should be kept in the back of mind while drafting and
negotiating dispute resolution provisions with Indian Service
Providers. First is that Indian courts are, and always have
been, very efficient in granting interim reliefs. In fact, the
disparity between the speed of interim orders and final
resolution, has led to obvious litigation strategies. It is good
to keep that in mind. Interim relief in a servicing relationship
is absolutely key to protecting critical business
functions…whether it is dealing with the situation of
wrongful refusal to render services, or impending breach of
confidentiality, or any other situation that customers are
concerned about. Second, although slow, India’s legal system
and courts are among the most sophisticated and savvy in
commercial matters. Third, for those who may not be
focusing on this, India is a common law country, and its legal
                                                              8




system and laws are based on a mix of U.K. and U.S. laws
and legal systems. For example, Indian constitution has a
bill of rights, provides for a parliamentary system and, most
important, follows the principle of separation of powers.
English is generally the language of the law, courts,
government and the business. Even Indian legal education is
similar to these two countries. On the whole, therefore, it is
easier for U.S. businesses and legal counsel to navigate the
laws and legal system of India than laws and legal systems of
some other countries.

                     III.      Background Checks

        India does not have a comprehensive organized
system of background checks that involve investigating an
individual’s credit or criminal histories. So don’t be surprised
when an Indian Service Provider pushes back on what can be
covered under this requirement. At the same time, clearly it is
one of the very important steps towards protecting critical
business functions for a customer. Here are a couple of ways
to work around this:

               (i)          National Skills Registry (NSR)

Initiated by the National Association of Software and Service
Companies (NASSCOM), the key features of this registry
are:
     - Open to all Indian employees of IT/ITeS employers;
     - A general guideline that new employees be hired only
        upon registration with the NSR;
     - Resumes, personal history, fingerprints, etc. will be
        uploaded;
     - The data is 'owned by the employee'. Only the
        employee can authorize a third-party (aside from
        current employer) to view his/her information;
     - No employer can unilaterally add anything to the
        registry except purely factual data;
                                                             9




   -   In supplement of the NSR-conducted process checks,
       employers and employees can request for additional
       or confirmatory background checks by reputed
       agencies;
   -   Employees are able to view the results of the checks
       equally;
   -   Employees of vendor companies (transport, canteen,
       security etc.) will be included in the database as soon
       as possible.

   Given the sensitivity with which customers globally view
   background validation as part of the hiring process, it is
   not surprising that every single services offshoring
   contract contains provisions regarding the matter, in
   greater or lesser detail. It is becoming equally common
   for customer legal counsel, especially those with
   consultant advisors, to anticipate the challenges several
   providers face in being able to conduct the kind of
   rigorous checks (such as criminal) that are commonplace
   in places like the United States. To pre-empt the
   objection, a customer instead requires the Indian Service
   Provider’s personnel to be duly registered on the NSR, a
   move which is welcomed by the service provider as well.


               (ii)   Passport Requirement

In the absence of a centrally-administered database of arrests
and convictions in India, Service Providers often contend that
possession of a valid passport does at least imply that the
passport-holder is not currently an under-trial, and that the
permanent residence has been verified by the police
authorities.

       Also, as we know, background checks are just one
way to protect your key functions. There are additional steps
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that should be taken, carefully defined security procedures
and audit rights for instance.

                          IV.     Attrition

        I noticed last year a very savvy Fortune 50 customer’s
senior negotiator chose to spend an inordinate amount of
time negotiating attrition related issues. This is completely
understandable, especially when you take a close look at
operations, and the impact attrition has on operations. For the
Operations leaders on the customer side, this is a top 5
issue…. no questions about it. However, the solution is not
to ask for a particular attrition level as a service level, but to
approach it as a problem to be solved with mutual
collaboration.

       Here are a few things that customers have started to
appreciate and deal with this issue accordingly:

        (i)     Foremost among these is that, especially in
                the Indian context, the Service Provider plays
                only a small part in controlling attrition. The
                more important part is played by the
                customer. An Indian Service Provider does
                not view attrition as only a Service provider
                issue; an Indian Service Provider views it as a
                joint issue. In my opinion, rightly so. Here’s
                why:

                a. “Employees” of the Customer--At the
                   bottom of the relationship lies the fact
                   that, even though technically employees of
                   the Service Provider, the associates are
                   really members of the customer’s
                   extended team. It follows, therefore, that
                   what a customer does to make its
                   “employees” feel part of its team has a
                                               11




   much bigger impact on attrition than is
   usually acknowledged. For instance,
   contentment levels are much, much higher
   in cases where Service Provider’s
   employees are copied on customer emails
   on its business direction and goals, new
   initiatives, key developments and so on.
   Employees feel they are a part of the team;
   they understand the bigger picture and
   become more effective in the delivery of
   service. Indian associates also take pride
   in thinking of themselves as members of a
   ‘multinational team’, rather than as just a
   Service Provider employee. For the
   reasons mentioned above, it is not
   practical to require that a certain attrition
   level be treated as a ‘service level’ with
   attendant service level credits. Regardless
   of attrition levels, all contracts require that
   the Service Provider’s commitments
   regarding service levels, adequate
   replacements, etc. are fulfilled, so it would
   seem a reasonable argument by a service
   provider that attrition is a matter of
   internal management. A preferred
   alternative is to set a target, and require
   mutual discussion and action plans when
   the target is not met. It is surprising to see
   how effective such collaborative efforts,
   supplemented by Six Sigma and other
   tools, can be in tackling this major issue.

b. Service Provider’s incentive--It needs to
   be emphasized that Service Provider has
   major stakes in controlling attrition.
   Attrition makes it harder to manage
   operations, live upto service levels (failure
                                             12




   to meet which attracts a financial penalty),
   and drives up costs of hiring, training and
   retention. Moreover, a reputable Indian
   Service Provider does not want to be
   known as a ‘turnover’ shop…it hurts.
   Some providers have, therefore, taken
   various steps, including conducting Six
   Sigma projects, to determine root causes
   for attrition, and figured out ways to
   increase retention (for instance, university
   affiliations to promote ‘earn-while-you-
   learn’ initiatives, parent connect programs
   that encourage families of employees
   (who are often teenagers) to visit the site
   and interact with senior management,
   enhanced reward and recognition, rigorous
   internal job posting, etc.).


c. Impact of Cooling off requirements/non-
   compete -- A related item to keep in mind
   is the impact of other contractual
   provisions on attrition. The current
   generation of employees in India is very
   enthusiastic and ambitious. Indian Service
   Providers and Customers have a joint
   interest in recognizing this and facilitating
   career development, or else you are going
   to lose these people. It does not help to be
   overly aggressive in certain contractual
   provisions. Take for instance the cooling
   off provisions which require that certain
   key employees will not be assigned to
   work for other customers (generally
   competitors) for a certain period of time
   after their tenure, or the provisions which
   require key employees to stay in their
                                                              13




                     roles for a defined period. Reasonable
                     periods of time in both scenarios are
                     understandable. But guess what happens if
                     you put very severe restrictions. Here’s
                     how a conversation would go when the
                     HR leader is trying to hire a smart
                     candidate to work on your account:

               HR: Congratulations on the new and exciting
               position being offered to you on the XYZ
               account!

               Candidate: Thanks. Before I accept, may I
               know a little about my growth and career
               prospects with the company after, say, 6
               months of brilliant performance on this
               account?

               HR: Well, you’re bound to the process for a
               minimum of 2 years (unless due to injury or
               death). Then, you can’t be assigned to 99% of
               our other customers for 1 year. But after that,
               the sky’s the limit!

               Candidate: I’d like to reconsider the offer
               please.

                V.       Sensitivity to Competitors

        Indian Service Providers are sometimes reluctant to
“co-operate” with other third party Service Providers if they
happen to be competitors. For example, they’ll not agree to
let such competitors enter their premises even if it is to act on
behalf of the customer. This stance comes as a surprise to
customers who, in their own country, appear to be used to
greater cooperation among their service providers. There are
three situations in which this issue comes up:
                                                                14




                i.        On-going cooperation (e.g., allowing
                          competitor to visit for a specific
                          purpose for a specified duration and
                          upon Customer authorization).

                ii.       Divestitures to /Acquisition by or of
                          a competitor. Indian Service
                          Providers are reluctant to agree to
                          clauses requiring continued service
                          to a divested entity if the divestiture
                          is to a Service Provider competitor.
                          This reluctance is understandable,
                          but often frustrating for customers
                          who do not want any limitations on
                          their ability to engage in such
                          corporate transactions.

                iii.      Termination Assistance/Reverse
                          Transition. This is where customers
                          are really puzzled by a Service
                          Provider’s reluctance. After all,
                          except in the rare case where
                          Customer takes over operations
                          itself, all reverse transitions involve
                          a ‘competitor’! Clearly, the
                          customer’s business requirements
                          and timelines must drive the process
                          of transition, so it becomes a matter
                          of great importance that the exit
                          rights in a contract retain this right to
                          the customer.

         Here is a perspective. Let’s take (iii) Termination
Assistance first. Indian Service Providers are not reluctant to
‘cooperate’ entirely. What they are usually concerned about
is really only access to their facilities. This is partly due to a
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desire to protect confidentiality and security, but in the Indian
context where employee morale and attrition are huge issues,
this is also due to a desire to avoid giving competitors an
opportunity to be even seen by employees who may be
tempted to be hired… equally it is due to a desire to avoid
talk that the company is losing a customer to a competitor.

        A suggested approach is to agree on a ‘knowledge
transfer’ laboratory at a neutral or customer location. Also
keep in mind that after 5 years of operations at a good
Service Provider, procedures and information are so well
documented and shared that the need for physical access is
questionable.

        Re (ii), a suggested approach is for the Service
Provider to define a reasonable notice period during which
the customer that is divesting to the Service Provider’s
competitor can identify and contract with a suitable
replacement.

        Re (i), Service providers need to step up and provide
access subject to various safeguards.


         C. Some Issues Bubbling on the Backburner

                       I. Employee Unions in the BPO
                          Industry

In 2005, the left-affiliated Centre of Indian Trade Unions
(CITU) sparked a public debate by announcing that it had
taken first steps toward forming a union of IT- and ITES-
industry employees. CITU claimed to have initiated the
union successfully in Kolkata, adding that it hoped to register
a national body in 2006.
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Given the union movement’s stated objective of protecting
and improving the lot of workers, it is ironic that the Call
Centers Association of India (whose members comprise the
employees of the IT/ITeS industry) unequivocally rejected its
call to unite on the grounds that any such move would
prompt global businesses to outsource processes to India’s
rival countries.

Sifting through all the talk about equality and fraternity, it
seems that the push for a BPO-industry specific trade union
centers around 3 arguments: Firstly, that Indian employees
do the same work as their foreign counterparts, for a fraction
of the compensation; Secondly, that conditions in the work
space are stressful (due, apparently, to the odd shift timings
and interaction with irate customers) and; Thirdly, by way of
preemptive defense, that the union would not encourage
strikes or other disruptive activities, but would only act as a
forum to promote job security and better working conditions.
Admirable objectives, one could argue, but hardly grounded
in reason.

Let’s not forget that cost- and time-arbitrage are the primary
benefits received by global businesses through off-shoring;
increasing the cost involved, and demanding ‘normal’ shift
timings, could remove the very reason for the existence of
the BPO industry, thereby rendering unemployed all the
active members of the proposed trade union (union comes
into existence and makes demands…BPO industry gives in
to the demands and goes out of existence…union follows
suit. Catch-22). Besides, no one can claim that working
conditions in the industry are inhumane: where else could
high-school seniors expect salaries far in excess of those
commanded by even graduates in some disciplines AND
regular 8-hour workdays AND health/insurance benefits
AND conveyance/cafeteria arrangements AND exposure to
international-standard training?
                                                               17




The jury’s still out on whether the move to promote unionism
in the BPO industry will succeed and, if it does, what exactly
it hopes to achieve.

                       II.     Cross-Cultural 15000M Sprint
                       to the Finish

Thanks in large part to Indian Service Providers’ initiatives
(such as robust Voice and Accent Training, more flexible
‘scripts’ and constant real-time supervision), the
controversial days of radio jockeys across the world airing
mock conversations with Indian call center operators seem to
be past. However, the probabilities of a cultural mismatch
occurring in any cross-border outsourcing relationship
remain high, particularly when the nature of services requires
the provider’s personnel to interact directly with the
customer’s clients. Even in non-voice processes, the
importance of communication is largely underestimated. We
have heard of instances where the customer had threatened to
withdraw an FAO project even though the crackerjack
accountants in India were far exceeding their committed
service levels, simply because the catch-up conference calls
with the customer’s process owners were unsatisfactory. The
actual work on paper was flawless, but there were
misunderstandings in the verbal walk-through exercises.

Indians, as pointed out in earlier sections, are by and large
very comfortable with written and spoken English. Though
technically correct, Indian English, like other types of
English, has its own oddities of usage and pronunciation. For
instance, written English can be relatively more formal, and
spoken consonants are delivered differently. However, this is
only to be expected, and a concerted effort on the customer’s
part to become involved in the hiring approval process, and
willingness to train-on-the-job, can mitigate the issue to a
large extent by allowing both teams time to interact and gain
comfort. It is in the interests of both parties, and the industry
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at large, that this comfort level be achieved expediently – the
ready enthusiasm with which Indian employees currently
attempt to adapt to a more customer-familiar accent is a
cultural attitude, and attitudes tend to change as the
confidence levels and market value of the service providers
increase.

There are a few other interesting observations one can make
highlighting the differences between U.S. and Indian
business practices (such as decision-making process and
attitude toward senior management), but that is outside the
scope of this paper. I would be happy to engage separately
with those of you who may be interested in the subject.




i
  The author wishes to thank his friend and colleague Arjun Nath of
Genpact for his insights and help in preparing this paper. The views
expressed here do not necessarily represent the views of Genpact or any
of its customers.

								
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