7 Tips from an Attorney for Avoiding Perils of Outsourcing

If you’re a newbie to outsourcing and offshoring, it may look like the details behind the legal aspects of the work are simply meant to drag down the momentum of transforming your company. But the fact is that making the wrong choices or decisions in outsourcing can result in dragging down your entire company.

Marc S. Friedman, a member of the law firm Sills Cummis Epstein & Gross Sills Cummis Epstein & Gross attorney Marc S. Friedman(and named a “Super Lawyer” for 2006 in the state of New Jersey), specializes in intellectual property and technology litigation, an area that he has spent decades focusing on. In this article he shares seven tips for protecting your intellectual property, preserving data privacy and making sure you get what you’re paying for. One hint: It involves hiring a law firm to help you with the details.

Tip #1. Make sure your outsourcing contracts cover the basics.

Outsourcing contracts need to address issues such as intellectual property protection and confidentiality provisions — and that’s even more compelling in situations where the work is crossing borders.

“A typical outsourcing contract would have a very strong confidentiality provision,” Friedman pointed out. “It would provide remedies for the company whose operation is being outsourced in the event there was a breach in the confidentiality agreement. It would hopefully provide easy and quick access to the appropriate courts and jurisdictions to enforce those rights, but it also could involve additional penalties as well.”

Friedman said he prefers to look at those provisions in the broader context of whether the offshoring of work to a particular destination is a wise idea. As an example, he said, “It is our belief that in certain areas of the former Soviet Union, not much attention is paid to the protection of intellectual property. When I have a client who is contemplating outsourcing a part of its operation, for example, to a company in Kazakhstan, I will discuss with the client whether that really makes sense, in light of the fact that the company in Kazakhstan is going to have access to certain confidential and proprietary information.”

Friedman asserted that a confidentiality agreement is no guarantee or foolproof solution, but shouldn’t be overlooked due to its value as a potential deterrent. He advises his clients to “do an extreme amount of due diligence, because they’ve got to understand that in many instances, what they’re doing is putting the crown jewels of their companies into the hands of someone who is maybe [6,000] miles away.”

Tip #2. Make sure your due diligence is substantial enough to cover the broader agreement, as well as the finer details as the project gets carried forward.

Due diligence, as it relates to confidentiality agreements, should ensure that “all those who are working with the confidential and proprietary information be required to sign a copy of the agreement,” said Friedman. He believes that act can serve as a disincentive, for example, to a rogue programmer who considers placing a backdoor into your new order entry system or sending the latest version of the code to his personal email address. “Is it a foolproof solution? Absolutely not,” he said. “Is it an insurance policy? No way. Could it be a deterrent in a given situation? For sure.”

He also recommends doing “the best due diligence you can on the company you want to do business with, to be satisfied that it is a company that acts with integrity. Once [you have] determined that, enter into a contract that has very explicit and tight provisions that are designed to prohibit [unacceptable] conduct.”

Tip #3. Don’t expect to put in a contractual provision mandating continuity of personnel.

Calling programmers the “most transient group of people I have ever met,” Friedman said the best you can hope for is adding a provision that states that if certain people are working on the project, “they can’t be replaced without the consent of the client. Continuity is certainly desired, but it’s frequently very difficult to obtain.”

Tip #4. Retain the services of qualified professionals in the interest of protecting your assets — i.e. hire attorneys with experience.

Creating a contract adequate to protect your interests requires hiring the right kind of lawyer. “There is an art to crafting an arbitration provision,” said Friedman. “And I would suggest that they should be crafted by lawyers who have experience in arbitrating cases because there are many aspects to it that most lawyers and certainly most clients would not be sufficiently sensitive to.”

He cited a case in which he acted as arbitrator, in which it was alleged that the company that was to provide the services failed to do so and “fraudulently induced the claimant into entering into the outsourcing agreement.” The damages being sought by the client range from $30 million to $100 million. In that situation, said Friedman, “just to say that a contract should have an arbitration provision doesn’t answer the question.” The bottom line: It’s not boilerplate language that can simply be plugged into the contract.

Tip #5. Nobody likes to pay an attorney. So consider your upfront legal fees an investment in the future of your company.

Particularly in the IT realm, getting sufficient legal assistance in negotiating and drafting confidentiality provisions and other protective measures should be considered risk management, Friedman said.

“In almost every IT transaction that I’ve been involved in, it’s very easy for me to see how the damages that my client could suffer — the transaction goes awry — will exceed by many, many times the purchase priceÉ The necessity for paying a lawyer has to be judged, not on the purchase price of the transaction as much as the risks associated with that transaction should it go afoul.”

Tip #6. Make sure your contracts adequately address the complexity of the issues involved in your outsourcing agreement.

Some considerations that need to be included in outsourcing contracts are import and export regulations, tax issues, labor and employment issues — different aspects of compliance regulations to ensure that a company’s bases are covered. Friedman himself doesn’t hesitate to consult with other lawyers due to the complexity of the issues he frequently ends up facing.

“When issues [surrounding labor laws and human resources] arise, I work closely with the labor employment lawyers here at the firm, because frequently the issues are too technical or complex for me to be able to address them adequately by myself,” he said. “For example, there can be a transaction where the client is shifting some of its employees to the employment of the outsourcing company. That raises compensation issues, possibly retirement plan issues, benefit issues, a whole panoply of issues.”

Tip #7. In the event that your company needs to sue for remedy, you can’t assume you’ll be able to enforce the judgment — particularly in cases where the company is located offshore.

“If you get a judgment in the U.S. courts against a company that is located, for example, in Nepal, that judgment is not going to be enforceable,” said Friedman. “And it may be necessary to go to Nepal to get a judgment against a Nepalese company in order to be able to use its assets to satisfy the judgment. [These situations] require very discreet informed judgments to be made, which are best made by lawyers who deal with this subject matter on a regular basis.”

Seeking adequate legal counsel makes sense in the face of the multitude of issues one can end up facing in today’s strategic sourcing environment. Minimizing your risks from the outset is the best form of “insurance” you can buy.

Useful Links

Sills Cummis Epstein & Gross P.C.

Marc S. Friedman’s bio

“Do You Own Your Own Software? Your Website? MAYBE NOT!” by Marc S. Friedman and Sayuri Rajapakse

“The Most Counterintuitive Legal Principle — the ÔWork Made for Hire’ Doctrine” by Marc S. Friedman and Sayuri Rajapakse

Kristi P. Carter contributed to this article.