Outsource force

Outsourcing is not a new phenomenon to Ireland – it was the food that nurtured the Celtic Tiger in its early days. Ireland has consistently marketed itself as a good place for organisations to move or outsource part of their business empires to. In the 1980s and early 1990s it was call centres for a wide range of businesses, from airlines to insurance companies, as well as the outsourcing of manufacturing operations for the pharmaceuticals industry. In the 1990s it was the turn of contract manufacturing for the IT sector – both hardware and software. The new millennium has seen Ireland attract a varied array of business process outsourcing industries, particularly in the areas of payroll, accounting services, HR and IT support.

Business process outsourcing is a growth area, particularly for financial institutions in Ireland. Two of the largest outsourcing deals in Ireland last year involved banks and insurance companies. Ireland has seen a full range of outsourcing arrangements, and not just those focusing on business processes and IT services. The outsourcing of utilities management is reasonably new to the Irish market, but is catching on. Contract manufacturing across a wide range of businesses has become popular. The public sector has also, to an extent, embraced outsourcing as a route to cut costs and in some cases to prepare itself for privatisation.

With the growth in outsourcing, the trend in Ireland is to have longer-term contracts. This makes it more financially attractive to service providers, as it is most often the case that the customer does not have the appetite to go through the whole procurement process again for at least five years or, if they can justify it, 10 years. Customers have come to realise that it is important to get it right from the beginning and so will devote quite an amount of management time to the procurement of an outsourcing service provider.

The upshot of longer-term contracts is that the contracts themselves have had to become a lot more flexible. Customers, and to an extent service providers, need the assurance of flexibility in the area of price review, where it is not uncommon to now see a lease-like five-year price review with an accompanying break clause in the event of a failure to agree. Customers are also demanding regular equipment and services upgrades to ensure that they do not find themselves falling behind their competitors. There is also a general requirement to have a robust change control mechanism included in all outsourcing arrangements dealing with as many eventualities as possible, including changing regulatory requirements, labour costs and the changing tax environment.

With the passing of time and the gaining of experience, Irish customers have become more savvy about outsourcing arrangements. The days of the service provider’s terms and conditions being accepted with no material changes are long gone. Customers are now demanding full representations and warranties, detailed specifications regarding the services to be provided and well-documented testing and acceptance procedures (where relevant). In addition, customers usually require a full set of ongoing key performance indicators, backed up by a meaningful – or harsh, depending on what side of the fence you are on – service credit or liquidated damages regime. Gone also is the low cap on the service provider’s liability. You will now see increased caps coupled with significant insurance obligations. As for using a local subsidiary as the service provider’s contracting party, expect to be asked for a parent company guarantee or some form of third party credit support.

The area around the termination of an outsourcing arrangement has also become more complicated. As Ireland has been a home to outsourcing arrangements for some time, there have been the (sometimes acrimonious) partings of the way in outsourcing contracts. As a result, detailed exit mechanisms have become the norm in outsourcing contracts. They usually deal at length with the issues of termination payments (being careful not to be found to be penalty payments and, as a result, unenforceable), continuing obligations during the termination period (particularly relating to the transfer over to a new service provider), ownership of intellectual property and employee-related issues.

The area of employment would fill a number of chapters in a book about outsourcing in Ireland. With the Acquired Rights Directive and its latest form in Ireland, the European Communities (Protection of Employees on Transfer of Undertakings) Regulations 2003, employees are in a relatively strong position when it comes to the outsourcing of their tasks. Many customers and service providers do not focus on employment issues until late in the day – usually to their cost. In most cases an outsourcing arrangement will constitute the transfer of a business for the purposes of the 2003 regulations. As a result, the customer’s existing employees have a right to transfer – on their current terms and conditions and with the benefit of their existing period of service – to the new service provider. They also have the right to refuse to do so.

A service provider cannot ‘cherry-pick’ employees, and redundancies can only be implemented for economic, technical or organisational reasons that must be justified.

Employees also have a right to be informed of the transfer of the business in question and the reasons for it within a reasonable time period prior to the transfer. Before the 2003 regulations came into force, what represented a ‘reasonable time’ was often decided by the customer and the service provider and was sometimes as short as a day or two. Now, however, 30 days’ prior notice must be given to employees in all but the most exceptional cases. This has had a significant impact on the timing for outsourcing transactions in Ireland and needs to be kept in mind when planning an outsourcing deal there.

Finally, on the subject of employees, the Acquired Rights Directive and the 2003 regulations will also have an impact on the termination of the outsourcing arrangement and will need to be factored into any well-documented exit plan. Failure to do so could lead to a costly headache for both sides.

Where to now?

Recently the Irish government and IDA Ireland, one of the main government grant agencies, have been focusing on Ireland as a destination for high-end research and development jobs. Outsourcing will have a big part to play in this. Any company wishing to provide outsourced research and development services to any industry would find Ireland a very welcoming location for its European business. Government grants may well be available and that, coupled with a well-educated workforce, an English-speaking population, a low tax regime and Ireland’s track record as being pro-business and pro-foreign investment, is likely to make it very attractive for high-end research and development outsourcings in the years ahead.

Michael Barr is a senior associate at A&L Goodbody