1 From PLI’s Course Handbook Outsourcing and Offshoring 2007: Protecting Critical Business Functions #11407 Get 40% off this title right now by clicking here. 31 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: firstname.lastname@example.org, 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 7 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 10 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 15 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. 16 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 18 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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