Traps for unwary outsourcers | In Principle

Outsourcing has been gaining in popularity for years. Alongside the growth in size of companies and their branch offices, subsidiaries and capital groups, they pay more and more attention to operating costs. First it was noted that certain functions, such as personnel, payroll, purchasing and IT, are needlessly duplicated. The next step from there was to hire an outside firm to perform these functions, or to set up a single centre to provide these services to all the affiliated companies in a group. That would allow companies to focus on their core business and cut costs. In addition, if a shared services centre were located in a special economic zone, it could enjoy tax breaks while at the same time helping the economy of neglected regions.

But when institutions operating in highly regulated fields began to take the same approach, regulators grew concerned about the risk that sensitive information could be leaked, or that activities that required licensing from the authorities could be assigned externally. Today, in the case of financial institutions, there is already a legal framework in place for outsourcing. Now we know what can be outsourced and what cannot, who can generally be entrusted with specific operations, or only with approval of regulators, or not at all. Clearly, no one would be surprised if a bank hired an outside firm for such functions as housekeeping, training, or customer mailings.

Outsourcing needs to be considered from three different perspectives. The first is outsourcing by regulated institutions and the types of functions that are outsourced. In this respect we have fairly clear legal rules. The second concerns the companies that perform the outsourced services. Attention should be drawn to the amount of leeway there is in this area with respect to the services that outsourcing companies may perform and the requirements they must meet. There are, after all, certain categories of services that require specific credentials, such as accounting. The third aspect is outsourcing as a way of managing costs within a single capital group.

If a subsidiary is created within a capital group, in order for example to conduct purchasing and perform other types of services, and it is decided centrally at the group level that the Polish group company should use certain services or purchase certain goods, there may be a risk of violation of corporate governance principles within the Polish company, which is a separate legal entity and will thus be responsible for the effects of its business operations, including areas where the decisions are dictated by the group. It is important to seek a golden mean that insures compliance with Polish law but at the same time allows cost efficiencies to be achieved across the group. The golden mean can be found, but the construction requires some legal fine-tuning.

In a world of larger and larger enterprises and an increasingly rational approach to management, a company does not have to do everything for itself. It is important, however, to be aware of the trouble spots in order to insure that outsourcing results in cost savings rather than generating new costs.