Editor’s note: John Yates Chairs the Technology Group of the law firm Morris, Manning & Martin, LLP. David Quillian is the former General Counsel at Magnet Communications.Outsourcing is a topic for discussion in virtually every Boardroom in corporate America, particularly in the technology and call center/customer service communities. Like it or not, outsourcing services are an economic weapon that many of the best companies in the U.S. are using to become more efficient and cost effective than their competitors. As always, faster, better and cheaper usually wins in the marketplace, and outsourcing abroad is helping many companies to achieve this goal.

In 2004, technology companies of all sizes should consider outsourcing as a potential part of their business model. The following checklist identifies important considerations for tech companies that desire to remain competitive in this outsourcing business environment:

1. Assess the Economic Potential for Outsourcing in your Business: Analyze the areas of your business that could be outsourced to generate potential cost savings. To perform this analysis, segment the multiple tasks that must be performed as part of your business model. Then determine those areas that can be isolated and assigned to a more economical outsource service provider for completion.

For example, if your company is involved in software development, it may be more cost effective for your user interface development to be outsourced to an IT shop in India or the Far East. On the other hand, your software architecture, design and the coding of your core functionality and other proprietary technology may remain in the U.S.

Today, even small software companies are using offshore development services. Several Southeastern startup technology companies have outsourced rudimentary software coding projects to offshore services in India. Furthermore, some venture capitalists are even requiring the U.S. technology companies in which they are investing to establish plans for offshore development before becoming eligible for venture capital investments. The word is out that outsourcing certain services can make a company more competitive, thus increasing the likelihood for a positive return on investment.

2. Consider the Use of an Agent to help you Procure your Offshore Services: Most U.S. companies are clueless as to how to develop an offshore outsourcing relationship with a qualified service provider. Rather than jumping naked into the process, many U.S. technology companies retain an agent to analyze their outsourcing needs.

As part of the process, an agent can analyze a business to discern those processes that can most effectively be outsourced. Once the analysis of needs and opportunities is complete, such a qualified agent can recommend several alternative outsourcers, identifying the strengths and weaknesses of each and the potential benefits that the customer can expect to gain. Serious problems may be avoided by working with a consultant with experience in the right and wrong ways to outsource services overseas.

3. Consider National Security, Litigation and Practical/Managerial Disadvantages of Outsourcing: Many companies refuse to outsource for good practical reasons. In the case of technology companies in the security arena, outsourcing may require the disclosure of sensitive information or technology, such as encryption capabilities. These secrets may have potential applications for foreign military forces or terrorists, beyond U.S. borders. The export of such technology may be precluded by U.S. law or may be a violation of a non-disclosure arrangement entered into with a software tools provider.

Similarly, outsourcing services or product development creates problems where legal disputes arise between your company and the offshore service provider. If the relationship with the outsourcer sours, you may be faced with the difficulties of a legal action and potentially a lawsuit in a non-U.S. jurisdiction. The costs associated with the filing of a lawsuit in India, the Far East or Eastern Europe can be enormous, not to mention the unpredictability of determining the possible outcome.

In addition to the purely legal concerns, consider the practical complications that will arise if you and your customer are involved in a legal battle. If the dispute includes software code or technology developed offshore, then witnesses, depositions, and related legal matters may require extensive travel and significant costs and inconvenience above and beyond legal fees and court costs. You also may be dealing with individuals with whom you have had limited (or no) contact other than via telephone or email. The risks are further compounded by distance, cultural challenges and differences in legal systems.

Finally, in the event that software or technology development is being performed offshore, it is likely that at least some designs, specs or other intellectual property that is proprietary in nature will be in the hands of the service provider with whom the relationship has collapsed. Depending on the strength of the legal system in the foreign country and the integrity of the outsource service provider, it may be impossible to ever regain complete control over that proprietary information.

4. Consider an Outsourcer with a Strong U.S. Presence: The economic benefits of outsourcing are recognized largely through the wage and benefit differences between the U.S. and offshore labor markets. However, the larger outsourcer service providers have recognized many of the difficulties that prevent numerous U.S. companies from pursuing an outsourced solution.

Many of these concerns can be allayed, in part, by the offshore service provider opening a U.S. office to provide account and relationship management services. While the U.S. office may be small in size, its mere existence will provide a level of comfort and reassurance to the American company. A U.S. presence may mean that many of the troubling problems that may potentially arise with outsourcing can be addressed through a local representative in the U.S.

5. Be Aware of the Potential Public Relations and Political Risks Associated with Outsourcing: Finally, there are public relations and political risks associated with deciding to outsource beyond our borders. In a weak domestic economy in which good, high paying and stable jobs are hard to come by, there is increasing public and political resistance to allowing foreign workers into the U.S. This resistance is reflected in a reduction in the number of U.S. visas being issued, and political resistance to outsourcing work overseas. Such resistance has been expressed in the recent passing of laws prohibiting the outsourcing of certain state funded call center operations to service providers overseas, notably in New Jersey.

Also, if the economy weakens it is possible that there will be political pressure to pass laws barring the procurement of technology developed overseas by any state or the federal government.

Furthermore, be on the lookout for large scale consumer backlashes
against companies that make extensive use of offshore outsourcing arrangements to reduce costs. It is clear that many companies are concerned about potential public relations issues based on the efforts that companies undertake to avoid revealing the fact that they use offshore service providers.

For example, companies using offshore call centers often give their call center employees, who are typically in India, extensive training in “American” accents and adopting an “American” name to use with customers on the phone. Other companies that make use of extensive offshore development capabilities are reluctant to make that fact publicly available due to the public relations backlash that may result. Consequently, these “marketplace” considerations are additional factors that must be taken into account in deciding both whether and how to pursue offshore outsourcing alternatives.

This column is presented for educational and informational purposes and is not intended to constitute legal advice.

David Quillian is the former General Counsel at Magnet Communications, an Atlanta-based software company serving the financial services market that was recently acquired by Digital Insight.

John Yates Chairs the Technology Group of the law firm Morris, Manning & Martin, LLP, which has offices in Atlanta, Charlotte and Washington, D.C. He can be reached at jcy@mmmlaw.com and (404) 504-5444.