OFF SHORE OUTSOURCING OF COMMERCIAL CONTRACTS MANAGEMENT

Here is a published article I wrote about contracts management off shore outsourcing:

* The Off Shore Outsourcing of Commercial Contracts Management (Original) – NCMA CM Magazine in April 2009 -

OFFSHORING OF COMMERCIAL CONTRACT MANAGEMENT

This article is not intended to be the definitive discussion on the offshore outsourcing (offshoring) of commercial contract management. However, it is designed to make you think a little bit about the offshoring of certain aspects of the commercial contract management business process. (Although the primary focus of this article is commercial contract management offshoring, obviously many aspects of this article also apply to government contract management too).

The offshoring of certain aspects of the commercial contract management business process is a heated topic filled with controversy and difference of opinion. However, it is a topic that certainly needs to considered today by contract management professionals. In my 30 year contracts management career, I have seen a lot of changes and trends in the contract management field. Some of the current commercial contract management offshoring activities may be the start of one of the biggest changes in the field of commercial contract management in the last few years.

Contract management involves working with an entity’s contracts to meet that entity’s business requirements while concurrently minimizing risks.[1] Effective contract management is a vital component of an entity’s overall risk management activities.

Offshoring (for the purposes of this article) is defined as the movement of a business process done at an entity in one country to the same or another entity in a different country. Many times, the business process is moved due to a lower cost of operations or due to more efficient operations in the new location.

Ten advantages of the offshoring of certain aspects of commercial contract management:

1. High quality cost-efficient attorneys and other contracts professionals are readily available in India from top India schools (at the top of their class) who have extensive training in US contract matters to perform day-to-day commercial contract administration tasks at a substantial cost savings. The quality of the work is not sacrificed due to the substantial price differential. There are, of course, other countries now and in the future that can also do what India is doing regarding commercial contract management offshoring.

2. The offshore contract management resources can operate like an extension of the US entity’s contract or purchasing department.

3. Offshoring certain aspects of contract management frees-up the entity’s US based contract management or purchasing personnel to work on more complex strategic matters that can have a greater revenue impact thus allowing the US based team to move up the value chain.

4. Properly selected offshore resources can provide the requisite data security and confidentiality.

5. The time differences between the US and India allow the offshore resources to work while it is night time in the US thus improving deliverable response time. This creates a follow-the-sun capability for the US entity to work on contract management activities on a non-stop 24/7 basis with their counterpart offshoring team.

6. Done properly, offshoring can produce improvements in service. These highly motivated offshore workforces are very capable. The benefits of learning to do the job better are obviously not limited to cost alone.

7. Offshoring can improve quality. Quality can be improved by spending substantially more time on a task due to the lower labor costs in India thus making the deliverables more robust and complete.

8. The US team will have the ability to send overflow work to their offshore team in India.

9. The legal system in India is similar to that of the US. This is an important feature in commercial contract management offshoring since it provides valuable initial training for offshore resources that is comparable to the US legal environment.

10. It can potentially create a competitive advantage for the US entity by enhancing productivity and innovation.

Ten disadvantages of offshoring certain aspects of the contract management business process:

1. It could result in a loss of managerial control, because it is more difficult to manage offshore service providers than managing one’s own employees in the US.

2. Often there are hidden costs in offshoring that are difficult to prepare for or calculate. These hidden costs include legal and administrative costs related to putting together an offshore agreement between the US entity and the offshore entity as well as the time spent to administer coordinate the ongoing offshoring contract.

3. Offshoring can create a potential threat to security and confidentiality. The US entity must be very careful not only in selecting an offshoring entity but also in choosing which contract management business process activity it wants to offshore.

4. It could result in a possible loss of flexibility in rapidly reacting to changing business conditions.

5. It can potentially create export compliance problems.

6. Potential conflict of interest issues may arise unless initial and ongoing due diligence is exercised.

7. Should something go wrong, it is a long distance between the US entity and the offshored facility which can lead to expensive and long trips to deal with matters.

8. Potential cultural issues in the offshore country can cause problems.

9. Political instability in the offshore country can sometimes be a problem.

10. Potential intellectual property risks can develop with the offshore entity.

Four commercial contract management offshoring models:

1. Captive centers in India formed by US entities and their subsidiaries: A captive center is an entity’s own internal captive center resource (or its subsidiary’s captive center resource). This model is not likely to succeed unless it can grow to at least 100 professionals. Captive centers smaller than 100 professionals will probably be unable to provide good career paths to its professionals, who are likely to leave, especially because the job market in India is expected to remain ‘hot’ for the next few years.[2]

2. Joint ventures by US-based entities: Rather than opening their own captive centers, several US-based entities have joint ventures with firms in India. However, since statistically most joint ventures fail – especially in India – one needs to be cautious while pursuing this potential solution.[3]

3. Third party offshore vendors providing services: This would be an offshore third-party provider of contract management services who works directly with the US entity.

4. Third party US based outsourcing vendors with offshore resources: In this model the US outsourcing provider has offshore resources that it provides to the US entity.

An example of how one of the many aspects of the commercial contract management business process is being offshored today:

Some organizations require a large number of contracts and agreements to be drafted, which include incoming and outgoing non-disclosure agreements, products and services sales agreements, teaming agreements, subcontracts, software licensing agreements, software evaluation agreements, beta test agreements, software training agreements, software support and maintenance agreements, software services agreements, ASP agreements, consulting agreements, technology licensing agreements, supplier agreements, service provider agreements, lease agreements, vendor agreements, OEM agreements, VAR agreements, distributor agreements, statements of work, and service level agreements. Since each agreement typically follows an entity’s standard template, Indian contracts professionals can produce the initial drafts of such agreements, which can then be reviewed and modified by their US client. Indian contracts professionals can also be used for doing initial reviews of such documents, proofreading documents, “red-lining” documents, providing comments about the agreements, and ensuring these documents follow the guidelines provided by their US client.

Other aspects of the commercial contract management business process are also being offshored, such as assisting with RFI and RFP development, assisting with cost and price analysis, pricing assistance, preparing contract summaries to enhance contract awareness, preparing contract obligations roadmaps, assisting with contract modifications, reviewing subcontractor certificates of insurance, tracking deliverables, tracking contractual issues and risks, and other similar tasks.

Three thoughts about the future of commercial contract management offshoring:

1. Globalization of the commercial contract management business process will roll forward using the offshoring process. Given what is happening to the economy, entities will continue to be under increasing cost pressures that will force them to look at more ways to reduce expenses. So, entities will be looking at the offshoring of certain aspects of commercial contract management much more seriously. Entities will be looking for ways to take costs out wherever they can. Offshoring of certain aspects of the commercial contract management business process will continue to gain momentum at a much greater pace than most predict.

2. Offshoring will continue to move up the value chain to encompass more aspects of the commercial contract management business process. This process migration is inevitable.

3. India’s domination of the commercial contract management offshoring sector will continue due to India’s labor arbitrage, English-speaking capabilities, huge talent pool, somewhat similar legal system to the US, local government backing, use of technologies, improving telecom systems, improving infrastructure, use of processes, and established management skills. However, in time, other offshore entities in China, Philippines, South Africa, Mauritius, Barbados, Romania, Eastern Europe, Malaysia, Morocco, and other countries will become worthy competitors trying to expand their sweet spots to reach certain aspects of commercial contract management offshoring.

George Burns (the American comedian) once said: “I look to the future because that's where I'm going to spend the rest of my life.” [4] Likewise, we need to look to the future by planning and preparing for the offshoring of many aspects of the commercial contract management business process.

About The Author

JOHN (“JOHNNY”) E. MILLER, a Texas and Missouri attorney, is a contracts management consultant who has worked in contracts management for many companies in the last 30 years. He is a member of the Greater San Antonio Chapter of NCMA. Send comments about this article to cm@ncmahq.org.

End Notes:

[1] “Minimizing Risk Through Streamlined Contract Management Processes”, Sandra Levy, “The Metropolitan Corporate Counsel”, December 2008, page 28.

[2] “Legal Process Outsourcing (LPO) – Hype vs. Reality”, Evalueserve, http://www.evalueserve.com/Media-And-Reports/HTML-Press-Releases/Recent/Legal_Process_Outsourcing-Hype_vs_Reality.aspx , accessed December 31, 2008

[3] “Legal Process Outsourcing (LPO) – Hype vs. Reality”, Evalueserve, http://www.evalueserve.com/Media-And-Reports/HTML-Press-Releases/Recent/Legal_Process_Outsourcing-Hype_vs_Reality.aspx , accessed December 31, 2008

[4] “Future Quotes”, http://thinkexist.com/quotations/future/4.html, accessed January 4, 2009.