Pros and Cons of Outsourcing | In Principle

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Pros and Cons of Outsourcing

Outsourcing continues to be an appealing solution for businesses. But for it to generate benefits rather than legal problems, a number of issues must be analysed—from the liability rules governing the parties to issues of state aid and data protection.

The concept behind outsourcing is to rationalise costs by drawing on the services and resources of specialised external firms. By outsourcing, businesses benefit from the knowledge and experience of professionals in the given area without having to invest in an in-house unit. It is easy to find an external contractor that will execute less-complex tasks, usually technical and repetitive, without having to create dedicated in-house positions and a system for managing them. And in capital groups, companies sometimes needlessly duplicate the same tasks, which ends up being more expensive than if these tasks were performed by one unit, either external or internal.

The tasks companies outsource most often are associated with IT systems and HR management (e.g. recruitment, payroll, training, and personnel records), sales and marketing, customer service (call centre), accounting and administration (bookkeeping, invoicing and purchasing), and logistics (e.g. transport, distribution, warehousing and order completion).

The outsourcing services market is one of the fastest-growing sectors of the Polish economy. An estimated over 560 centres employ about 170,000 people and the forecast for the end of the year is for an increase in employment by another 10,000–20,000. Investors choose Poland as a location for services due to the proximity of potential customers in Western Europe, a large supply of skilled personnel with a particularly good knowledge of foreign languages, relatively low labour costs, and good modern infrastructure. Kraków was recognised in the Tholons Top 100 Outsourcing Destinations 2016 report as the best European city for outsourcing services and 9th globally, and two other Polish cities—Warsaw (25th) and Wrocław (58th)—were among the world’s top 5 movers. Kraków accounts for about 25% of the market for modern business services in Poland, with about 40,000 people employed there in that sector.

Outsourcing agreement

When planning and performing outsourcing, it is crucial to clearly specify the purpose of the outsourcing, provide an analysis of the involved costs, benefits and risks, determine the exact extent of outsourced tasks, and ensure that the terms of the contract with the external service provider are properly structured.

The contract should guarantee the outsourcer’s right to oversee the execution and outcome of outsourced work, contain provisions for protection of data and personal information as well as clear rules for the use of the outsourcer’s premises and equipment by the business performing the outsourced tasks, and clearly define the terms and procedures of contract termination. Liability issues are equally important, as they govern the corporate responsibility of the outsourcer’s management board for contracting out the tasks.

The scope of liability of the service provider is governed by the terms of the contract and is only constrained by rules of civil law prohibiting an exclusion of liability for intentional injury. In other respects the parties to the contract can freely determine the scope of liability for non-performance or improper performance of services, and possibly provide for contractual penalties so long as they are reasonable. The amount of a contractual penalty is not tied to the actual amount of the loss, but if the outsourcer wants to ensure the right to seek damages in excess of the contractual penalty this must be stated in the contract.

When outsourcing services are governed by specific laws and overseen by an industry regulator, both sides to the outsourcing contract must ensure absolute compliance with the applicable regulations.

Selection of service provider

A series of regulations opening up access to certain professions have recently come into force. This means, on the one hand, that the supply of specialised services will increase, but, on the other, it creates the need to exercise particular diligence when selecting an outside contractor, as an incorrect choice may entail negative consequences for the outsourcing company and members of its governing bodies. The risks of outsourcing primarily involve the risk of harm to reputation and the connected risk of losing customers, as well as the risk of civil and criminal liability of the company and the members of its management board. Contracting out certain tasks does not mean that the liability for performing them is shifted to the contractor. On the contrary, it makes it necessary to manage the risk of liability to customers or employees for actions by the outside third party.

When outsourcing accounting services it should be kept in mind that the manager of the in-house unit overseeing these services remains responsible for the execution of accounting tasks also when they have been entrusted to an outside contractor. If the unit is managed by a group of people and there is no single individual bearing overall responsibility, then that responsibility is shared by all group members.

It is important to specify in the outsourcing contract the scope of entrusted tasks and the related rights and obligations of both parties. This can be vital for determining whether the contractor’s obligation is to make its best efforts or to achieve a particular result. If the services are of poor quality, this poses a risk also for the outsourcer, as in most cases it will not be a defence that it contracted the services out to a third party. Therefore, the outsourcer should secure for itself in the contract the right to continual supervision of the performance of the outsourced services and the right to receive real-time information on the progress of performance. Depending on the nature of the services, it should establish a contingency plan in case the contractor runs into difficulties in delivering the services. It is also necessary to decide in the contract whether the service provider may subcontract the performance of the services, and if so, under what conditions and on whose responsibility.

Data protection

The Personal Data Protection Act provides for criminal sanctions for unauthorised release of personal data, failure to adequately protect personal data, or non-registration of personal data processed by the data controller. In addition to criminal liability, there is also a risk of civil liability for personal losses. It is therefore necessary to determine to what extent the external contractor will have access to legally protected information concerning customers and to ensure that this information is properly protected. The outsourcing contract should expressly state that personal data has been entrusted for processing only to the extent specified in the contract and obligate the external contractor to meet the organisational and technical requirements provided for data controllers. The outsourcer is responsible for data processing performed by external contractors.

Adequate protection of classified data such as corporate or professional secrets and other confidential information must also be ensured. If the performance of outsourced services necessitates transferring this type of data, it should be done cautiously, to the extent justified by the type of outsourced services, and providing the outsourcer the ability to inspect the classified-data protection system. (For more on data protection aspects of outsourcing, see also the articles “New era for personal data protection” and “Transfer of personal data to the United States: Privacy Shield v Safe Harbour.”)

State aid

Companies intending to establish an outsourcing hub may be interested in related financial incentives, particularly those based on location. Investors should consider the benefits of setting up business in a special economic zone, taking advantage of assistance programmes, obtaining reimbursement for the costs of equipping work stations or providing training, and accessing direct aid.

Doing business in a special economic zone under a licence provides the opportunity for exemption from corporate income tax. However, it should be noted that licences are not granted to businesses engaged in regulated activities (particularly financial institutions).

Poland is one of the largest beneficiaries of EU funds in 2014–2020. These funds are distributed to businesses through assistance programmes. The assistance may be allocated to various business projects. Businesses can apply for assistance through competitions organised by the implementing institutions and receive the funds under an agreement signed with the institution.

Reimbursement of the costs of equipping work stations is available if the employer meets certain criteria, for example hiring people registered as unemployed, submitting an application to the local authorities and signing an agreement with the municipality. The beneficiary is required to maintain employment at subsidised positions for a specified period.

It is possible to receive a partial refund of training costs (up to 80% but not more than three times the average monthly wage) on the basis of a training proposal submitted to the county administrator, after conclusion of the relevant agreement. The subsidy does not usually exceed 50% of the training costs.

Obtaining direct aid is possible on the basis of a proposal adopted individually for a specific project by the Council of Ministers for investment and employment costs. Direct aid is granted following negotiations which are not restricted in scope or duration, concluding in signing of the relevant agreement. Such aid must be notified to the European Commission.

Danuta Pajewska, Paweł Mazur, Outsourcing Practice, Capital Markets Practice and Financial Institutions Practice, Wardyński & Partners