5 Key Issues When Outsourcing a Business

ENTITY FORMATION:

There are five main options for outsourcing your business. Each option carries with it certain pros and cons.

  1. Create your own business in another country
    • Pros:
      1. More control of the business (you decide how the business is operated)
      2. Usually a more affordable business to operate (do not have to pay another entity to run the business)
      3. Ability to hire and select your own personnel (you can create your own work culture)
      4. Various tax incentives offered to startup entities
    • Cons:
      1. More time consuming to develop your own business (have to consider setup and selection of employees)
      2. Unpredictability of personnel (whereas a preexisting business should have reliable employees in place)
      3. Variable regulatory issues abroad (it can be difficult to set up a new business in certain countries)
  2. Buy an existing business in another country
    • Pros:
      1. Less time consuming (the business is already setup and running)
      2. Already have an established management team operating the business
    • Cons:
      1. Typically more expensive (have to buyout another entity)
      2. Less tax incentives than a startup entity
  3. Establish a Joint Venture with an established company in another country
    • Pros:
      1. More cost effective than going through a vendor
      2. Offers more control over business operations that going through a vendor
      3. Can offer some of the same tax incentives as a startup, depending on how you form the business
    • Cons:
      1. Have to share profits and control with your business partner
      2. Hard to unwind the business and/or terminate the relationship
  4. Hire an Independent Contractor (Vendor) to start your foreign company
    • Pros:
      1. Can be done quickly
      2. Typically, not as many regulatory issues to consider
      3. Easy to terminate a relationship with independent contractor
    • Cons:
      1. Typically, less cost effective than owning your own business (have to pay vendor)
      2. Less control (independent contractors have more discretion to run the business)
      3. Less tax incentives than owning your own business
  5. Build, Operate, Transfer (BOT): third party builds and operates business before transferring to you
    • Pros:
      1. Can be done quickly
      2. Less regulatory issues
      3. Offers more control than going through a third party vendor
      4. Easy to terminate the relationship and unwind the business
    • Cons:
      1. Often offers less control of the business (vendor has lots of discretion)
      2. Typically more expensive (have to pay vendor to setup and operate the business)
      3. Unpredictability of vendors (have to carefully select management to operate the business)

LOCATION, LOCATION, LOCATION:

Where will your facility be located? You must consider several issues, including the following:

  1. Regulatory Issues:
    • You must consider the regulatory issues in each country.
    • Some of the relevant regulatory issues include the following:
      1. Subsidies, Taxes and Banking
      2. Prevailing Wages
      3. Import and Export laws
      4. Registration
      5. Repatriation
  2. Workforce Quality:
    • You must consider the quantity of workers available in each country
      1. Consider demographics and population sizes
      2. Consider how many workers, among that population, are actually trained
    • You must consider the quality of the workforce in each country:
      1. Education
      2. Language barriers
      3. Specialized experience in a particular field (e.g. India’s IT industry and workforce)
  3. Worksites:
    • How many worksites are available?
    • How are worksite inspections governed?
  4. Local Community:
    • How good are the local infrastructure and communications systems?
    • How efficient are the local power and utility companies?
    • Other considerations (e.g. food, healthcare, etc.)?
  5. Security:
    • Are there any security concerns in your country of choice?
    • Consider your personal security and data/network security.
      1. Personal security:
        • What is the crime rate?
        • How efficient is the police force in that country?
      2. Data/Network security:
        • Protection of confidential information
        • Source code and other data protection
  6. Intellectual Property:
    • You must consider how intellectual property rights are governed in each country.
    • How are patents, copyrights, trademarks and trade secrets governed, if at all?
    • Pay attention to the following contractual provisions concerning IP:
      1. Licensing; Work for Hire
      2. Non-disclosure/Confidentiality

QUALITY CONTROL:

How will you ensure:

  1. Specifications:
    • Whatever your Product, you must consider the rules that will govern your business
    • Your agreement should spell out any relevant Specifications that govern the relationship between the parties.
    • The Specifications should list relevant defined terms related to the business and Product
    • Always be sure to address the minimum level of service to be provided
  2. Inspection of Worksite, Employees, etc.
    • In order to ensure quality control, you want to be able to inspect the worksite to ensure the Specifications are met
    • If performance falls below Specifications levels, the inspecting party might have the right to terminate

EXPORT CONTROL:

  1. How is the export of technology governed? What about other goods and services?
  2. Consider the various statutes and regulations that govern U.S. exports, which include:
    • Export Administration Act
    • Export Administration Regulations
    • Foreign Assets Control Regulations
    • International Emergency Economic Powers Act
    • Atomic Energy Act
    • Arms Export Control Act
    • International Traffic In Arms Regulations the U.S. Munitions Act

CONTRACTUAL PROVISIONS:

What are some key contractual provisions you should keep in mind while operating abroad?

  1. Choice of law/forum. Which countries laws govern your business/contracts?
  2. Dispute resolution. Where will all legal disputes related to your business/contracts take place?
  3. Confidentiality/non-disclosure. How is confidential information to be protected?
  4. Intellectual Property. See Above
  5. Non-compete agreements. What are the reasonable standards for such agreements?
  6. Independent contractor relationships. How is this relationship defined? How does local law affect this relationship?
  7. Force majeure. “Acts of God” are more common in certain countries than others. Boilerplate language might be infective in certain countries.

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