The outsourcing market is facing some not inconsiderable
challenges at present; the collapse of Carillion in the UK has led to calls for
public sector outsourcing to be reined in or even reversed, whilst traditional
models of service delivery have been variously undermined or transformed by new
technology developments. At the same time, the move towards national
protectionism in trade terms places pressures on the availability of skilled
overseas labour and is raising the prospect of tariffs on cross-border
services, which would impact upon the considerable proportion of outsourced
services that are provided from offshore.
It is clear that the future of the outsourcing market – and
the lawyers who support it – will be different from the past, and perhaps
radically so. What, then, can we expect to see in the years to come?
Reinvention ‘as a
service’
Outsourcing is of course a large-scale service engagement. However,
deals which might previously have been described (and set up) as a kind of
managed service/outsourcing agreement are already being re-cast as
software-enabled cloud services arrangements, and on the basis that both the
outputs of the services and the
contract provisions which wrap around then are treated on a more commoditised
basis.
What does this then mean for the legal community? Well, if
contracts are more ‘standard form’, their degree of negotiability will likely
decrease, meaning less time in redrafting the legal provisions. However, there
is potentially also then a different (and potentially equally – if not more –
important) role for lawyers in advising clients as to the wider risks and
mitigants associated with a shift of services, operational and data into the
cloud. By way of example, the current draft EBA guidelines on outsourcing (as
applicable to banks etc) place a clear emphasis on the need to have both
undertake a detailed risk analysis and to be able to demonstrate that it has
been done. Many of the considerations in this regard pertain to issues of legal
and contractual risk, on which the advice of experienced lawyers will be
required.
The robots are
coming
Software automation is already having a major impact on
outsourcing, and in particular upon BPO engagements where there are palpable
(and potentially very significant) opportunities to increase the use of
straight through processing, to use software to replace human labour and
inputs, and also to start to use AI to improve data analytics and decision-making.
In practice, this will require significant changes to
charging models and service level regimes, in particular. For example, simply
setting a simple SLA regime as a ‘snapshot’ at day one of the contract which
will then continue in force for the duration of the term would fail to reflect
the major improvements in speed and accuracy that could follow from the
successful implementation of an AI/automation led approach. Equally, the shift
to an automated model will impact on other deal-related economics, such as the
like reduction in the need for carbon labour (eg human beings), and the
resulting likelihood of there being redundancy costs to have to factor into the
overall deal economics.
More fundamentally, should the move to AI enabled services
and RPA give rise to a re-think of the liability provisions? Current market
norms in terms of the setting of liability limits and the like are based upon
the underlying premise that ‘people make mistakes’. Software can make mistakes
too, of course, but will do so in a very different way, and with different
consequences (eg it may not ‘realise’ it has made a mistake and so could
potentially keep making the same error 24/7, and possibly at great speed….!). One
might therefore question whether a different liability model is called for (eg where
there is no liability for the supplier at all until a certain threshold level
is reached in terms of loss but, on the basis of a quid pro quo, there is then
a higher liability cap thereafter and fewer heads of excluded loss).
Another important consideration for the lawyers will be the
treatment of IP in such projects, and in particular the IP in any ‘taught’
version of automation/AI software that has been used in relation to the
delivery of the services. If the customer is not careful, it might find that
the outsource supplier can simply take the relevant data schema and
prediction-based weightings away with it upon contract termination or expiry,
such that there is a potential ‘poison pill’ consequence which would make such
a course of action unpalatable for the customer; the customer may no longer
have the employees who ‘taught’ the software in the first place, and so may not
be able to replicate the process with a new supplier.
The boomerang effect
An obvious feature of outsourcing in the last 20 years
has been how closely synonymous it became with offshoring; for many forms of
outsourced service, it would not be a matter of whether the services would be offshores, but instead how much of them would go offshore. India
and the Philippines have been particular beneficiaries of this as they have
been able to capitalise on their language skills, availability of skilled
labour and cost arbitrage.
However, the result of the application of the new
technologies mentioned above means that these advantages – whilst not yet
eliminated altogether – are being increasingly undermined. Equally, there are
political pressures being applied, as the US and EU both seem set to move to a
phase of increased protectionism on the trade front, which will likely lead to
decreased availability of visas as well as potential tariffs on service
delivery which is located overseas. This may reduce the cost effectiveness of
offshoring.
As a result, we can anticipate that functions which have
disappeared offshore may be repatriated back to their original host countries,
albeit in a slimmed down, tech-enabled form. The larger offshore outsource
services providers will therefore have to adapt or die (ie by way of a pivot
from being a ‘services’ company to instead being a ‘solution’ orientated one,
as their traditional labour arbitrage advantages reduce and they need instead
to be able to deploy XaaS services as opposed to carbon labour based ones).
Conclusion
There is that well known Chinese curse about living in ‘interesting
times’ and there is no doubt that such a statement currently applies to the
global outsourcing market.
I do not believe that the outsourcing market is dead or doomed,
but it may well be either at or very near to its high-water mark (in terms of
its traditional form at least). Lawyers will need to adapt to the ‘new normal’
both so as to ensure that the contracts we draft and negotiate appropriately
reflect the realities of how the services are to be delivered, and also to meet
the potentially wider requirements of our clients in respect of the impact of
the new models upon their respective businesses.
Kit Burden is a Partner
and Global Co-Chair of Technology Sector at DLA Piper. Kit is an SCL Fellow.
