Legal Implications of Outsourcing

When choosing to outsource business processes, it’s critical to consider the legal implications of outsourcing involved with contracting services in other countries as there are differing legal and regulatory requirements. Certain industries are regulated by federal and state laws, such as banking, healthcare, and insurance. There are no generalized laws that govern business process outsourcing, only legal specifications, and mandates according to the unique function.

Current limitations of being able to procure qualified resources in the job market to build out capabilities with quality solutions put pressure on companies to seek offshore solutions. Organizations who are preparing strategies regarding the utilization of offshore resources have to carefully consider outsourcing rules and regulations that impact procuring services from outsourcing providers.

Staying apprised of all the legal implications of outsourcing helps both businesses, and outsourcing providers prepared to adhere to laws and regulations, avoiding potential negative consequences and financial penalties.

Outsourcing Strategy Development

Companies have to be aware of outsourcing contracts and the impact of the services. There are three crucial aspects that organizations should educate themselves on as they develop their outsourcing strategies:

  • Risk profile
    and global sourcing model:
    Businesses must scrutinize outsourcing contracts, identify if termination rights contain partial opportunities, and what occurs in the instance of applied automation. Tax implications from negotiating contractual agreements with outsourcing service providers may affect a business’s sustainability.
  • Automation
    Automation may impact the work that businesses have already outsourced to a third party by eliminating some or all of the work. Companies need to consider a succession plan as well as determining how the outsourcing provider plans to retool and reskill the personnel that they are leveraging about automation.
  • Supply
    Companies need to assess the talent provided by an outsourcing agency and consider analyses gaps and how outsourcing agencies are retaining a human workforce with emerging automated technologies.

Implications and Impact

There are numerous laws about important issues such as data protection, employment, and environmental protection, which vary by state, a federal entity, governing body, and the nature of the outsourcing arrangements.

Outsourcing agencies should abide by international Codes of Conduct to ensure compliance with various laws concerning sensitive material, IT and cloud operations, legal processes, etc. Non-compliance with outsourcing regulations can lead to fines, penalties, legal fees, reputation damage for all involved parties, the severity of which depends on individual case.

These legal implications aren’t hazardous solely for businesses; they also can affect outsourcing agencies who face the risk of consumer class-action suits based on theories of negligence or unfair competition. So, there are incentives for third-party providers to maintain compliance, as well.

Regulations, Compliance, and Legalities

The Luxembourg Financial Sector (CSSF) is an example of legal implications of outsourcing and how the law impacts the regulating of IT and cloud-based outsourcing to third-party providers. It outlines circumstances in which financial service institutions can outsource IT tasks, stressing the need for consistent policies based on risk assessment, with all service levels and specifications formalized in writing. This can be addressed if the financial institutions comply with regulations, and control risks like the lack of segregation on a multi-tenant infrastructure, or lack of system/data portability.

Another example of a specific federal regulation that impacts outsourcing pertains to the healthcare industry, which follows the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH). Both serve to protect personal health information, creating standards for the development, utilization, and disclosure of personal health information that’s transmitted and electronically maintained.

Other examples of legislation that impact statutory, and regulatory compliance:

  • Gramm Leach Bliley Act: Compliance standards for IT outsourcing.
  • Foreign Corrupt Practices Act and the Sarbanes-Oxley Act: Establishes requirements concerning technology governance.
  • Federal Financial Institutions Examination Council (FFIEC), National Institute of Standards and Technology (NIST), the Payment Card Industry Data Security Standard (PCI DSS) and the Cloud Security Alliance (CSA): Standards for managing data, information governance, and security.

Superior Licensed Outsourcing Operations

BackOffice Pro (BOP) ensures that contract negotiation and outsourcing arrangements are developed in respect to legal implications of outsourcing, and are supported by clauses that identify service models, performance capabilities, and all other specifics. BOP demonstrates transparent disclosure of processes, strictly following legal formalities and data protection mandates that promotes excellence in service for over a decade. To learn more about our adherence to outsourcing laws and regulations and to explore our engagement model, contact us today.