As organisations have increased their global footprints, demand for the provision of outsourced services to multiple countries has risen. Multi-jurisdictional outsourcings share many of the legal and commercial issues experienced with more straightforward single-country scope outsourcings but a global service offering adds another layer of issues to the mix, and holds many traps for the unwary. We explore here some of the key structural options for such deals and aim to help parties conduct negotiations and implement contractual arrangements in the most effective way.
Choosing the Basic Contract Structure
The three most established approaches to structuring a multi-country outsourcing contract are:
- a single global outsourcing contract to which ‘local’ customers and suppliers, although not named contract parties, may have rights as third parties to receive the benefit of the services and potentially exercise rights under the contract;
- a collection of individual local agreements based on a pre-agreed standard form; or
- a hybrid approach under which a single ‘master’ outsourcing agreement sets the framework for local ‘call offs’ or ‘work order’ agreements which incorporate, and are subject to, the terms of the master agreement.
For any particular project, the appropriate structure should be identified early on, the decision being a practical as much as a legal one. A key consideration is the operating basis of the customer. For example, do its local businesses expect (or accept?) decisions from their corporate centre or is the organisation more federal in nature, with decision-making highly dispersed across the globe? Governance frameworks in different jurisdictions impose varying requirements for independence of local entities. In addition, consideration should be given to local law and/or technical requirements and the extent of homogeneity in services being provided in different countries.
In practice most projects involving significant volumes of service provision in multiple jurisdictions follow a hybrid model, as we demonstrate below.
The Hybrid Contracting Model
Any relationship operating in multiple countries raises questions of governing law and jurisdiction. A centrally run customer will probably favour having a master agreement and all local agreements subject to a single governing law and the jurisdictions of the courts of that country (on possibly a ‘neutral’ arbitral forum). It is essential in this regard to avoid the mistake of having one governing law for the master agreement and a different one for each local agreement (which then incorporates the terms and wording of the master agreement but then make them subject to a different legal system). Although that may seem superficially attractive so as to account for ‘local preferences’ as to the application of their own ‘local’ laws, the same words can have a very different meaning under different laws, and different systems will also have different approaches to the inclusion of implied terms etc., meaning that the contract could then end up having a very different meaning to what was intended. For example, English law does not imply a general obligation to act ‘in good faith’, whereas many civil law jurisdictions do; equally a provision to exclude any limitations of liability in relation to ‘gross negligence’ would work for a contract made subject to German law, but may cause problems of interpretation if used in a contract subject to English law. Ordinarily, therefore, a ‘fat’ master agreement contains comprehensive legal terms with a single governing law (which will generally be enforceable in most if not all countries in which services are to be provided) whilst the content of ‘thin’ local agreements is restricted to ‘local variations’.
Depending on the jurisdictions involved, mandatory local law issues will vary in extent but are inevitable in most cases. For example, there are elements of employment legislation, data protection and IP related requirements which local courts will apply regardless of the choice of the governing law for the contract. Sector specific regulatory compliance within a particular country or region might also come into play. To be fully cognisant of and up to date with these requirements, the ‘belt and braces’ approach is to obtain local legal advice in all relevant countries and to ensure that the local agreement then contains appropriate provisions to cater for them. In practice, advisors and providers with significant global outsourcing experience should have a good understanding of local ‘red flags’ and be able to direct a possibly limited legal spend accordingly.
Service issues and commercial requirements should also be considered and, even if the overall objective is to have a consolidated and harmonised service offering set out in one place, there will frequently be local ‘nuances’ or exceptions to be catered for. In most cases it is easier to do this at the local agreement level rather than in lengthy lists in the master agreement, which would have to deal with all of the exceptions from all of the in-scope countries. In particular there may be divergences in service levels or additional services which are relevant only to a particular customer entity in a single jurisdiction.
Key Contracting Decisions
Services and service levels
Few services are truly global in application. Equally, some suppliers are unable to deliver all services, to the same service levels, in multiple locations. Reasons for these challenges can include reliance on local staff and/or sub-contractors and limitations imposed by local market conditions and/or infrastructure.
Several approaches have been successfully implemented by leading service providers in the business process outsourcing (BPO) market to harmonise provision of a diverse range of services across multiple countries. Attaining and maintaining independently verified ISO certifications on an international basis can provide comfort to clients regarding consistency of procedural approach across multiple locations, particularly for accounting services where the work product of many countries feeds into a global accounting and audit process at group level. Assigning responsibility for service delivery, service levels and variations to dedicated client management personnel at international level can improve the client experience. Additionally the Client Account Manager can act as the central point of contact for the client for all cases or any escalations from the local level.
Even if limitations exist they are not necessarily problematic for the customer; in all likelihood not all services being offered will be required in all locations, to the same overall standard. Taking desktop support as an example, local stocks and/or existing support personnel are unlikely to be readily available at more remote locations, which will necessarily affect response and fix times. However, the customer may really require a fast response only for core infrastructure run from its main locations, and in other regions it may therefore be able to tolerate a slower response.
Another key consideration is whether to have service levels measured purely on a local agreement by local agreement basis, or to aggregate them to be measured at the master agreement level, or perhaps on a regional basis. This allows a wider view to be taken of the global service delivery, but might also mean that serious issues arising in a single jurisdiction do not trigger a significant level of service credits. The service provider may also prefer to tie service credits to the individual country where any issues have arisen, so as to link the ‘risk’ of service credits with the ‘reward’ of the level of billing in that jurisdiction.
Liability
Always hotly negotiated, the multi-country aspect adds an extra level of complexity to the liability provisions in a multi-jurisdictional outsourcing contract. For example, will the liability cap be set on the basis of a single cap which reflects the level of billing under all of the local agreements around the world, or will the limits instead be set on a local agreement by local agreement basis? Although one might assume that customers would favour the former approach, this can create intra-group political issues if one affiliate fears that it will be left without a remedy if one of its ‘cousins’ in the group has a large claim which comes in before their claim and thereby exhausts the limits of liability.
Any direct relationship between local legal entities adds to the complexity. Many master agreements require ‘claims herding’ by which claims by multiple local entities must be channelled through the parties to the master agreement and heard as a consolidated claim by the court. Alternatively, the contract structure might allow claims between local parties at the local level, at least vis-à-vis matters which do not impact the provisions of the services beyond that individual jurisdiction.
Termination
The key issue in relation to termination is the linkage between the master agreement and each local agreement. For example, if a material issue were to arise in one country, would any associated termination rights be ‘ring fenced’ to just the impacted local agreement, or can it have a domino effect so as to enable the customer to terminate the master agreement and/or other local agreements as well? If so, would other agreements be treated as being terminated for breach or on a ‘termination for convenience’ basis, in the latter case perhaps with modified/reduced termination fees?
Managing the Outsourcing
Operations
The day-to-day operation of a multi-country outsourcing unsurprisingly flows from the structure which underpins it. As a rough rule of thumb, a ‘centralised’ customer is more likely to want to retain operational control within its dominant country (or countries). A more ‘federal’ organisation will likely disperse operational ownership around the globe, and perhaps seek a looser steering committee style arrangement to provide for coordination at the top level.
Accordingly, available customer resources in each location should be considered. A well-resourced operation in a particular country may be best controlling at least some operations, whereas a location with little resource may require, and even welcome, a degree of assistance from elsewhere.
For the service provider assigning responsibility for service delivery, service levels and variations to dedicated client management personnel at international level can improve the client experience for ‘centralised’ or ‘federal’ clients. For a ‘centralised’ client, a Client Account Manager can act as a central point of contact for all issues so that minimal local to local contact is needed on the part of the client. For a client with a ‘federal’ model, the role of the Client Account Manager may be more limited, although it will still be useful, particularly for escalations requiring detailed knowledge of the central contract and a more client centred take on inconsistencies between providers in different countries.
Governance and reporting
Where both the master and local agreements are governed by English law, English jurisdiction is sensible. To facilitate resolution, the contract should build in, and require adherence to, robust governance processes at the local, regional and global level. Frequency and location of any required meetings should be clear, as should the required management information; again this should be consistent across the various locations to aid comparison and aggregation.
Escalation processes should strike a balance between resolving issues at the local level and escalating them where required. Again, the agreed process should be led by the control and resources which are available at the local level for the particular organisation involved.
Dealing with change
Change in any large outsourcing project is inevitable, and multi-jurisdictional projects are no exception. What is important to consider, however, is the extent to which the local entities will be given the means or authority to negotiate or agree changes without ‘central’ approval. This is not simply a budgetary matter; it may also be preferable to ensure that service delivery methods/scope does not start to diverge in such a way that the original strategic aims of the parties may begin to be undermined.
Whilst there are many additional issues to address for a multi-country outsourcing project, many successful projects have been seen in the market, and huge benefits have been realised for customer and supplier organisations. Experience suggests that thorough planning prior to contracting is important to identify the specific challenges the contract will need to address. An experienced provider with dedicated personnel with international experience will spend time with a client at this important stage providing guidance and sharing experience from successfully completed projects in order to predict and surmount contract issues. In terms of external support, expert legal counsel and/or other advisers can provide valuable support, particularly on complex technical or cross-jurisdictional aspects.
Kit Burden is a Partner at DLA Piper. Simon Ducklin is Senior Legal Counsel at TMF Group.
