UK: Is It Too Hot In India? Practical Tips To Avoid The Heat

Everyone involved in the outsourcing world will know the outsourcing boom in India has led to a dramatic transformation in its economy. Insurance and financial organisations, amongst many others, have "piled into" the region in search of reductions in cost and potential improvements in service.

One of our many roles as external legal counsel is to keep an eye on the "run-away train" and explain to clients where key risk areas may lie. We share our thoughts below on three key areas of risk.

Issues

Given the continued growth of the outsourcing industry in India, it may come as little surprise that some companies are now facing a potential shortage of appropriately skilled employees. Some commentators have placed this shortfall in the high 100,000s. Others take the view that the pool of skilled employees is actually constantly being replenished and accordingly no substantive issues should arise. As is usually the case, the truth will probably be found somewhere in the middle of these two extremes.

Where there is a shortage of personnel there is a natural tendency either to reduce quality in order to service insatiable client demand (replacing the "A" team with the "B" or "C" team) or increase salaries to attract (or retain) better quality candidates, such costs eventually being passed onto the client in the form of higher deal prices. Either option could seriously adversely affect the longevity of an outsourcing relationship unless appropriate safeguards are built into the contract.

Key issues which you should cover in the outsourcing contract are as follows:

• You should ask the supplier to identify in its tender documentation whether (a) it has the requisite personnel already within its organisation to deliver the service or (b) if not, the mechanism through which it will obtain such personnel. The success or otherwise of this mechanism in previous supplier deals should be highlighted. In either case, such commitments should be transferred into contract language;
• In the case of communication skills (language in particular), do not rely on contractual commitments that personnel will have "adequate and appropriate" skills. Instead, ensure that personnel have been graded against an appropriate benchmark (whether internationally recognised or bespoke);
• The supplier should be under a contractual obligation to minimise staff turnover on the client account. Tracking procedures should be set up to ensure that staff turnover is monitored and that "hard" consequences are imposed on the supplier in the event it breaches such obligations.

Issues

It is fair to say that poor infrastructure still remains an issue in India. With pressure on premises growing, many companies are now looking at "tier 2" locations where the infrastructure may not be adequately developed. As a result, some of the previous problems relating to infrastructure may start to re-appear with increasing regularity. Any client undertaking an outsourcing transaction should be very wary of being the "test bed client" for a new physical service location.

• Ensure that the precise location of the services is fixed (down to the name of the building if required) and cannot be moved without your prior consent;
• As far as possible, conduct due diligence on the proposed location. This should take into account not only the state of the proposed location but also what is happening in the surrounding areas. For many clients, regulatory and insurance requirements mean that questions such as these should be built into any outsourcing tender process.

Issues

One only needs to take a look at certain recent events and circumstances to obtain a glimpse of the types of issue which have an adverse impact on commercial life in India. For example: (i) in July many died in the Mumbai train bombings; (ii) monsoon rains recently led to a third of Mumbai being left under water, with roads collapsing and transport links being left at a standstill; and (iii) when well-known Indian actor Rajkumar died aged 77, this reportedly led to a "shut down" of certain areas of Bangalore as a result of people mourning his death.

The UK foreign office website states there is currently a "high risk of terrorism" in India. Given this and examples such as those set out above it is understandable why some people are still wary of outsourcing to India.

The key to successful outsourcing to India is not to hope that adverse events will fail to materialise or to build into contractual documentation an increased acceptance of failure. Rather, specific consideration needs to be given to disaster recovery and business continuity requirements. These need to take into account specific Indian cultural, political and geographical issues as opposed to merely being based on standard client or supplier forms.

There is little doubt that outsourcing to India still offers potential strategic and financial advantages. To that extent little has changed. However, the position of the Indian market at present does mean that it is even more important to ensure that your contractual agreement adequately covers risks such as those highlighted above. When the going gets hot in India, an agreement which is full of holes may not afford your organisation the necessary shade which it requires.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.