Australia: Off-Shore Outsourcing: Reap The Benefits But Avoid The Perils

Outsourcing business functions to lower cost countries is no longer optional for many businesses - it is a commercial imperative to stay competitive. But there are many pitfalls for the unwary.

The upsurge in outsourcing to other countries shows no signs of abating. In fact, the recent media frenzy over 'off-shoring' is evidence the practice is growing rapidly and is now creeping into new business areas like human resources, finance and legal services

Late last year, Qantas chief, Alan Joyce, made headlines for his alleged plans to restructure Qantas and locate its engineering and maintenance operations in Asia. And, earlier this year, three of the four major retail banks (Westpac, NAB and ANZ) were reported to be off-shoring jobs to Asia. The Sydney Morning Herald reported that ANZ is planning to off-shore at least 1000 roles ranging "from analysts and 'collections associates' (debt collectors) to a health and wellbeing consultant..." to the Philippines.

The drivers behind the overseas outsourcing wave are plain to see. In a global marketplace Australian businesses are challenged by high local labour costs and a strong Australian dollar.

Countries like India, China, Malaysia and the Philippines now have an abundance of highly educated and skilled people ready to service Australian businesses at much lower costs than can be obtained in our own country.

But it's not all about saving money. There are other advantages to off-shoring, including the opportunity to leverage different time zones to operate client service and processing centres 24 hours a day.

Outsourcing also offers the Australian operations of a business the luxury of focusing on core business propositions while support functions are managed expertly off-shore.

But, there's the hitch. When key parts of your business are being managed thousands of miles away, how do you know it's being done right?

There are particular risks associated with off-shoring and managing these is critical if your business is going to reap the benefits. Regulatory compliance, privacy and data security and intellectual property are the most common areas of major risk.

REGULATORY COMPLIANCE

Business processes and white collar roles (HR, finance, legal) are often heavily regulated so you need to carefully assess the ability of off-shore service providers to achieve Australian legal and regulatory compliance (while also complying with applicable local laws).

Examples of important regulatory requirements include the Australian Prudential Regulation Authority standards, Financial Services Authority and ASX reporting requirements and Sarbanes-Oxley;

PRIVACY AND DATA SECURITY

Businesses sending Australians' personal information off-shore must ensure they comply with all applicable Australian privacy laws. In particular, National Privacy Principle 9 requires businesses to ensure the off-shore service provider handles Australian personal information in a manner consistent with Australian privacy law and takes reasonable steps to maintain the security of that information.

Recent legislative reform, including that proposed by the Privacy Amendment (Enhancing Privacy Protection) Bill 2012, takes this further and curtails the transfer of certain personal information and risk of compliance to off-shore service providers.

INTELLECTUAL PROPERTY

Off-shore jurisdictions may have a very different approach to the creation, protection and enforcement of intellectual property rights. Business should take steps to ensure their portfolio of valuable intellectual property is not compromised. This may include entering into ancillary instruments or registrations to ensure that a business' intellectual property rights may be protected and enforced in the relevant off-shore jurisdiction.

The reality is that many established off-shore service providers are already well versed in meeting the operational, legal and risk mitigation requirements of Australian businesses. According to a McKinsey & Co article, many such providers "have made significant investments in the control and monitoring mechanisms required for regulatory requirements, and complex finance processes such valuation reviews, legal entity control and tax preparation. Some have even hired risk-and-control officers to deal with Sarbanes-Oxley, Basel II and SEC reporting.".

By engaging the right off-shore service provider under a well-drafted contract, Australian businesses may well enhance their ability to forge stronger ties with Asia and improve their competitiveness in the global marketplace.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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