All abroad

Offshore outsourcing is booming and UK law firms are waking up to that fact. Matt Byrne looks at the progress of the key players, including Bird & Bird, Barlows and Simmons

Later this year, Bird & Bird will go public with one of its most ambitious foreign adventures to date. The technology firm with a rapidly expanding European reach is about to skip a continent and launch a non-exclusive joint venture with one of India's best-known practices. The sole driver behind this strategy? The explosion in the offshore outsourcing market.

The firm's new best friends relationship, which will launch publicly in September, reflects the desire of many UK firms to enter the offshore outsourcing market. Several, such as Simmons & Simmons, claim to have been advising on deals with an Indian portion for at least three years. Others such as Norton Rose are racing to ramp up their ties to the subcontinent with visits to current hotspots Bangalore and Mumbai. As Deloitte Consulting partner Neville Howard points out: “Law firms are only now realising the scale of opportunities in this market.”

India still dominates the market, but other countries such as South Africa, China and several in Eastern Europe have noted its success and are looking to replicate it. Consequently, the firms with the biggest global reach believe they are the ones best placed to take the lead. Baker & McKenzie, with its multi-office approach and long track record in global IT deals, is convinced that it is at the head of the pack.

“Our strategy is to operate a global practice group,” explains Baker & McKenzie outsourcing specialist Rory Graham. “This isn't as special for us as for other firms – it's what we're set up to do. We're not playing catch-up.”

Whether playing catch-up or not, Bird & Bird's initiative is just one of the strategies that firms are using to tap in to this emerging market. Here, The Lawyer reveals the players, the deals and the drivers behind this offshore boom.

Gaining favour

Bird & Bird could hardly have timed its move into India better. Recent statistics highlight the market's scope. The UK offshore outsourcing market alone grew by 27 per cent last year to an estimated £545m. Research company Gartner predicts more than a 40 per cent rise next year. Peter Nowottny, chief executive of outsourcing advisory business Orbys Consultancy, says his company has worked on more than 10 offshore deals so far this year. “At least half of the deals we see have an offshore component,” he reveals.

Major projects by HSBC, Prudential and British Airways (BA) within the past couple of years have moved significant operations – and jobs – offshore. While in some instances the work has been handled in-house, such as on HSBC's call centres in Hyderabad, much has been outsourced. Wragge & Co technology partner Pat Duxbury, for example, helped BA with the deals that took the airline's call centres to Mumbai and Pune in May 2002.

At a conservative estimate, at least 40,000 jobs are expected to move offshore from the UK in the next two years. Figures released this month by recruitment firm Adecco, however, put the figure as high as 100,000 over the next five years from within the financial services sector alone. UK unions have estimated the real figure could even be double that (they are understandably concerned by the growth of this market, as the term 'moving offshore' is merely a euphemism for UK redundancies).

The trend inevitably raises serious employment issues for customers and the UK economy. But the significant cost savings customers can achieve – differentials of up to 60 per cent are often mooted – means interest continues to grow. “Customers can certainly realise 30 per cent,” says Allen & Overy outsourcing specialist Laurence Jacobs. “Costs are going up a little, but the size and quality of the resources means these deals are still extremely attractive.”

If this is the way the market is going, then this will also be the key area of focus for lawyers. “In one to two years' time, you'd expect it to be a large component of a firm's outsourcing practice,” suggests Herbert Smith IT partner Christopher Rees. As Simmons assistant and India specialist Murali Neelakantan points out: “The market being what it is, the only way to make money is to go offshore. The question is no longer 'are you?', it's 'why aren't you?'”

Which firms are doing it?

Many of the leading technology teams are pulling out all the stops to climb aboard the offshore bandwagon. Lovells, which has advised clients such as Standard Chartered on offshore operations, hosted a recent round table talk on the subject, where delegates were given the opportunity to grill Financial Services Authority senior risk analyst Peter McCormack on his views. Addleshaw Goddard partner Paul Renney visited Bangalore last autumn on an outsourcing-related trip, while Tarlo Lyons joint managing partner Kevin Barrow claims the firm has advised on 13 deals with an Indian element in the past year.

Barlow Lyde & Gilbert has been on board for longer than most. The firm recently hosted two seminars on offshore outsourcing, at which two messages were very clear. “The poor beleagured finance directors continue to look at the bottom line,” says IT partner Simon Shooter. “And the offshore option still appears to be the most likely to provide significant savings.”

Slaughter and May typifies the appetite in the market for this work. The firm's technology, media and telecoms team was set up at the height of the boom, primarily to pick up instructions on initial public offerings. With that market dead and outsourcing only set to grow, the team now devotes much of its marketing muscle to winning outsourcing deals. It is hosting a conference on the subject on 1 July, which more than 100 companies, mostly from the financial services sector, are expected to attend.

Potential pitfalls

Questions, though, are already being asked about the quality of these new 'offshoring experts'. “Outsourcing is seen by many lawyers as a relatively easy thing to do from a legal perspective,” says Shooter, “which is why we're seeing rebadged M&A lawyers getting into these deals and calling themselves outsourcing specialists. There aren't that many real specialists in outsourcing.”

Richards Butler intellectual property (IP) and IT partner Graham Simkin agrees: “Everybody is getting into everything they can. Whether they have the expertise to do it, or do it well, is another matter.”

Outsourcing generally, and offshore outsourcing in particular, still has a frighteningly high dissatisfaction rate, says Shooter. Inexperience and a lack of understanding from the client of what is realistic to achieve are major contributing factors, but the attitude of the lawyers is also crucial. “It's a matter of approach and understanding,” he says. “If you go in with a banzai, death-or-glory attitude, born out of a track record in M&A deals where you seek to kill them on every single point, it'll be a very brittle contract. The watchword has to be 'flexibility'.”

Not surprisingly, the boutiques and commercially-focused firms point the finger at an obvious culprit – the magic circle. Slaughters' in-the-firing-line IP/IT specialist Nigel Swycher is certainly no rebadged corporate rainmaker, but his firm's attitude to outsourcing has raised more than a few eyebrows.”There are only so many words you need to become an outsourcing lawyer,” Swycher says alarmingly, before adding:”But you need buckets of experience. My first Indian deal was 18 months ago.”

Slaughters' understanding of outsourcing is also backed by Prudential outsourcing head Robert Holt. He instructed partner Robert Sumroy to draw up a generic contract for outsourcing deals. “To me, a good outsourcing lawyer is a good contracts lawyer,” says Holt. “Slaughters isn't organised along rigid practice divisions, and given the wide commercial elements of outsourcing deals, it's extremely beneficial to have generalists advising.”

The key is the track record. As Simmons IT head David Barrett points out, the firm has been in India since 1993 and has been advising on offshore outsourcing projects for the past few years. During that time it has advised all three of India's leading suppliers. “The thing to remember is that this market has only just really got started,” says Barrett. “We're at the start of a very big curve. The question is, which other firms will be on that curve?”

Offshoring explained
The current boom in the offshore outsourcing market may be new, but the work itself is not. As Herbert Smith IT partner Christopher Rees remembers, offshore outsourcing was also the flavour of the month during the last recession. He recalls speaking about offshore outsourcing at a conference in 1992, where he was asked: “What is it and how can I get some of it?”
“The principles are the same then as now,” he explains. “A customer can achieve significant cost savings by tapping into the cheaper manpower and property costs in India or elsewhere. The big change this time around is globalisation. It makes people more comfortable when dealing with operations on another continent.”
Broadly, there are two types of offshore outsourcing deal. One is the pure-play offshore outsourcing, in which a customer hires an Indian supplier to provide what it previously ran onshore.
The other type is a hybrid, where major players such as EDS, Accenture or IBM subcontract a portion of a usually global deal out of India or elsewhere. “You don't see global deals that don't have an offshore piece,” says Allen & Overy outsourcing specialist Laurence Jacobs.
There are three main service lines for offshore deals. IT – primarily applications development and maintenance – blazed the trail. Business process outsourcing, such as back office functions like HR and accounts, is increasingly active, while call centres, featuring telephone operatives voice-coached on a diet of EastEnders, is perhaps the classic example.
“Almost anything in the back office or relating to IT can be moved offshore,” says Slaughter and May IP/IT lawyer Nigel Swycher. “But it's usually something that can be easily replicated. Functions with routines – not things that involve unique decision-making.”

Regulating offshore
Offshore outsourcing is booming in the US just as it is in the UK. The US government IT market research firm Input projected earlier this year that the current federal spend on IT outsourcing of $6.6bn (£3.9bn) will reach $15bn (£8.9bn) by 2007. Now a number of states are looking to limit these deals for government bodies because of concerns over redundancies. New Jersey is leading the way with a bill pending. “It may only be political posturing,” says Baker & McKenzie outsourcing specialist Rory Graham, “but there's no doubt this is a contentious issue.”
Meanwhile, the World Trade Organization's rolling approach to liberalising services has IT services in its cross-hairs. Its suggestion is to allow an offshore service provider access to the European market for six months, on the condition that European service providers can enter their market for the same period.
Eastern Europe is also increasing in popularity as a site for offshore deals. After the EU's expansion next year, when many of the concerns over data protection are removed, this trend is likely to skyrocket. If it does, it may be that it introduces the next stage in the evolution of these deals.
Norton Rose financial services partner Jonathan Herbst believes next year may see a wave of deals featuring front office functions outsourced to suppliers based in the EU's newest member states. Offshore suppliers are currently barred by the Financial Services Authority (FSA) from operating regulated businesses that sell back into the UK, he explains. Post-expansion, there will be very little the FSA can do to stop this practice.
“There will be some transitional provisions that could stop this happening if it became seriously problematic,” says Herbst. “But in the real world, nobody will be able to stop you coming straight back into the UK.”

Offshore legal tick list
First establish what the client is hoping to get out of the deal and what exactly is to be outsourced. Is it the client's current infrastructure or is it shifting infrastructure? Many clients balk at taking the second route for fear of losing control over this aspect of its business. Once that is established, there are a number of key legal issues to consider. These include:
• Governing law (usually English).
• Jurisdiction and enforcement. This should be clearly set out, ensuring that if all goes wrong, you can recover against the supplier.
• Force majeure and disaster recovery. What in an English contract is boiler plate becomes crucial where events of civil unrest are not just possible but actually likely, and power outages are a near inevitability. India is more prone to earthquakes than Staines. A dialogue about the location of the disaster recovery site is advisable.
• Data protection. Exporting data offshore outside the European economic area raises issues that need to be dealt with.
• Local law employment advice on Tupe equivalent if you close the operation, or transfer from one supplier to another.
• Corruption. “This is a live issue,” says Barlow Lyde & Gilbert IT partner Simon Shooter. “Tata, for example, included by reference in its contracts a massive anti-corruption commitment that obliges clients to police their staff in this regard in a two-way process. Query any supplier that won't commit to this sort of thing.”
• Exit management (either bringing the service back onshore or swapping to another supplier). Most customers do not think of how they are going to exit the deal. They should.