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Outsourcing helps companies successfully reach their goals and requirements. However, this strategy also involves risks.
Delegating operations to a third-party organization might eventually lead to problems. That is why decision-makers must understand laws, regulations, and contractual obligations to protect their business interests.
This article is for business owners, legal professionals, compliance officers, and executives involved in or considering business process outsourcing (BPO) arrangements. It covers legal considerations in BPO, including data security and protection understandings, quality control agreements, jurisdictional issues, and more.
Keep reading to gain insights into the legal complexities of BPO for better decision-making.
What Are the Legal Considerations in BPO?
The legal considerations in BPO include non-disclosure agreements (NDA), labor laws, data security and protection standards, jurisdictional issues and choice of law clauses, and ownership arrangements. They also cover quality control protocols, business continuity and disaster recovery (BCDR) procedures, and cancellation and exit strategies.
Below are the legal issues companies must examine before collaborating with an outsourcing partner to delegate their business processes.
Non-disclosure Agreement (NDA)
A primary legal consideration to remember in BPO is the NDA. Also known as a confidentiality agreement, an NDA is an official agreement between two or more groups that specifies the confidential and private data the parties can disclose. This legal and binding contract prohibits the sharing of information with non-affiliated parties.
The most frequent type of NDA between the client and the outsourcing company is unilateral. This type of NDA only needs one party to keep private the sensitive information of the other party.
Here are some objectives of the NDA:
- To defend against violations of intellectual property rights (IPR)
- To safeguard business concepts, ideas, and plans
- To keep confidential information and any additional proprietary data stated in the NDA
- To withhold source code information
Ensure the service provider signs the NDA before discussing outsourcing operations in detail. Additionally, specify in the confidentiality agreement how long it will stay valid, the remedies in case of breach of contract, and the legal processes applicable to resolve disputes.
Labor Laws
One of the legal considerations in BPO is the country-specific labor laws and regulations of outsourcing destinations. Offshore, nearshore, or onshore companies can work on delegated business operations; however, expect different rules if sourcing from multiple providers.
Each nation has unique labor codes and employment policies that can affect outsourcing costs. If labor costs are high due to strict laws, the BPO company will likely charge potential clients high service fees to recoup its operating expenses.
For instance, BPO providers in Mexico are legally mandated to share 10% of their taxable income with workers under a profit-sharing program. The share per employee cannot exceed three months of salary or the average profit-sharing amount received in the last three years.
Similarly, BPO companies in the Philippines must provide 13th-month pay to regular employees based on their national labor code. BPO providers must also offer other privileges, such as minimum wage, specified working hours, leave entitlements, social security benefits, and tax-free compensation.
Some objectives of labor laws in outsourcing are as follows:
- To monitor working hours
- To promote equal opportunity regardless of gender, race, age, and religious beliefs
- To guarantee fair pay
Data Security and Protection Standards
One legal consideration in BPO is data security and protection. Companies might experience a data breach while working with a third-party provider. Breaches will likely occur when storing and accessing critical information on an unreliable database system, exposing it to unauthorized entry, cyberattacks, theft, and ransomware.
The service provider needs legal permissions, including access to client data, before outsourcing operations. This data might involve bank accounts, insurance details, usernames and passwords, credit card numbers, and residential addresses. As such, business owners must know what BPO providers’ security standards are.
To address this legal consideration in BPO, the company must get assurance from the potential outsourcing partner that its data policies are highly secure and compliant with national and state laws and industry regulations. The provider must fulfill all the government mandates to improve data security and prevent high financial costs due to data breaches.
Jurisdictional Issues and Choice of Law Clause
One primary legal consideration in BPO is the governing law or choice of law provision that enables the client and the third-party provider to accept a specific law to interpret the outsourcing contract.
In most cases, both parties live in different states or countries. Choosing which nation or state will have authority over the contract and which laws apply are jurisdictional issues that must be examined and resolved. In outsourcing, the neutral location for contract arbitration and enforcement is typically London for Europe and Singapore for Asia.
What if the client is an American company, the BPO provider is in the Philippines, and both parties agree to use Philippine laws? The mediation and execution of the laws will be performed in a Singapore court to avoid biased decisions should disputes arise.
When creating a business process outsourcing agreement with the service provider, the client must include a choice of law provision. Hiring outsourced legal experts is recommended to help the client make better decisions.
Ownership Arrangement
A principal legal consideration in BPO is the ownership of intellectual property (IP) and other related data or services, which might cause problems when taken for granted during outsourcing.
For instance, the BPO partner modifies the client’s proprietary technology. If IP ownership is not established or clarified beforehand, the company might be unable to access the altered system if it malfunctions without prior permission from the service provider. The IPR might go to the outsourcing partner without a clear ownership agreement.
To deal with this legal consideration in BPO, the company must include an IPR ownership arrangement clause. Parties can agree to share responsibilities and have joint ownership, or the client can claim all IPR but allow the provider to utilize IP with permission.
Additionally, the client can require the BPO partner to sign an NDA and/or non-compete agreement. These agreements prohibit the service partner from accepting projects or contracts from the client’s competitors for a specific period.
Quality Control Protocol
One of the legal considerations in BPO is quality control. The client must enforce a collection of processes to guarantee that outsourced services comply with a predetermined set of quality standards or fulfill the client’s needs.
The end goals of outsourcing are cost savings and time to focus on core competencies. However, transferring most of the control over processes to the BPO partner might lead to declining quality standards if clear agreements are not implemented.
Quality control is essential in outsourcing since the client has less control over the assigned activities and resources. It must be included in the official contract that the third-party agents, management policies, equipment, facilities, and service provider’s workflow follow the client’s guidelines and objectives.
To remedy this legal consideration in BPO, the company must write the quality standards to meet and define what constitutes a contract violation. Measures such as people scaling and upskilling are also recommended.
Business Continuity and Disaster Recovery (BCDR) Procedures
Another legal consideration in BPO is BCDR. It comprises procedures that assist an organization in recovering from an emergency and returning to regular business activities. It covers the responsibilities and duties of information technology (IT) and management after an unfortunate event.
Some examples of relevant emergencies or disruptions are:
- Major cyberattacks
- Staff dismissal, resignation, disability, or serious illness
- Force majeure incidents (e.g., wars and natural catastrophes)
- Sudden shifts in regulatory laws
- Supply chain, logistics, or distribution problems
To properly manage this legal consideration in BPO, the client must include the BCDR clause in the contract. If any of the events listed above occur, the BPO provider can be freed from its responsibilities and return the IP, resources, documents, and records to the client.
If the provider cannot deliver the agreed-upon commitments owing to an unanticipated delay or disturbance, BCDR assures that company activities can continue without interruption.
Cancellation and Exit Strategies
Among the legal considerations in BPO are the termination of the outsourcing contract and an immediate exit strategy if the business partnership falls through. Exiting is as important as entering an official deal because it can impact the reputation of the client and the BPO provider.
The reasons for termination can be one or more of the following:
- Material breach or failure to perform the obligations stipulated in the contract
- Convenience or cancellation of the agreement without cause and at any time by sending the service provider a written notice 30 days prior
- Particular events, such as the third-party provider’s insolvency or management change
- Specified breaches, including IP breaches and confidentiality violations
To responsibly oversee this legal consideration in BPO, the client must add pre-termination and termination clauses to allow it to take charge of the outsourced processes. The company can move the operations back in-house or transfer them to another third-party provider.
However, the exit process typically takes a while. So, the client must draft robust exit plans and incorporate them into the BPO contract to minimize potentially costly delays.
The Bottom Line
Companies must conduct due diligence before signing an outsourcing agreement to ensure the partnership with the service provider will be based on trust, responsibility, and openness.
Enterprises must investigate the track record of the potential BPO partner, including its accomplishments, industry reputation, and client testimonials. Seeking professional assistance from consulting firms can enhance their research.
Additionally, businesses should connect with legal experts in the country where the outsourced processes will be performed. This move will help them become more familiar with the applicable laws, provisions, and statutes.
Let’s connect if you want to learn more about the legal considerations in BPO!
