Advantages and disadvantages of bpo

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Special Issues in Agreements Involving Outsourcing

The trend towards outsourcing will continue				temporary agency, or similar entity
to grow as market pressures force
corporations to be more tightly focused on				is not a guarantee against misclassification
core business functions, gaining competitive				under the joint employer rule applied by the
advantage and reducing costs. Outsourcing is
an attractive alternative in good times and				Ninth Cir. Court in Microsoft III. If a
bad times. Shifting back end administrative				misclassification does occur a firm may
and business functions to an external				qualify for
provider in good times, may be a means for
quicker time to market and focusing resources				an IRS Section 530 "safe harbor" exception
on core business activities to grow the				if it can show the following:1. Reasonable
business. In bad times, outsourcing is a				basis for classification of individuals as
means for streamlining the enterprise by				ICs based on:- Reliance on a relevant court
eliminating functions, which create a drag on				case, the advice of a qualified accountant or
capital and/or do not provide any competitive				attorney,
advantage.In the current economic
environment, concerns over, shrinking				or IRS ruling;- The IRS did not reclassify
margins, liquidity and the				the same or similar workers in a previous
				audit;- It is standard industry practice to
need to reduce operating cost structures is				treat the particular workers as ICs.2.
accelerating a trend towards shifting certain				Consistently treated same or similar workers
				as ICs in the past.3. Consistently filed
back office administrative functions to				federal tax forms 1099 on these same or
outside suppliers. This trend is seen as a				similar workers.Outsourcing any critical
major				business function and especially one like HR
				must be carefully
paradigm shift within enterprises, which
have realigned their internal corporate				planned and executed to be an economic and
				strategic success. HR operations require
infrastructure to focus on more strategic
areas of their core business.Although the				trained and specialized personnel to handle
human resources (HR) function is viewed as				complex processes and manage the
critical within corporations,
				compliance responsibilities created under
increasingly, small, medium and even large				the myriad of federal and state employment
corporations are moving to outsource this
				regulations. Outsourcing of this function
service.The case for outsourcing has three				carries the risk of losing qualified
basic rationales. First the regulatory				personnel and

compliance obligations imposed under ERISA,				a degradation of the function. A firm can
COBRA and IRS regulations, have				ill afford the risk of entering into a
				relationship
become extremely burdensome and expensive
for companies. Consequently, avoiding				with a vendor whose lack of expertise in
				payroll and benefit administration causes
major legal problems and financial liability
requires substantial investment in resources				disruptions and a loss of efficiency. This
				may, in the worst case, demoralize the work
and capital in an area outside of the core
business of most companies. This makes				force and expose the firm to significant
				legal liability. Partial success in this area
outsourcing a viable option even if it does				can
not necessarily result in a cost savings in
the				mean total failure and the loss of strategic
				initiative.Contracting of the outsource
near term. Second, the need to upgrade HR				service is a process which requires inputs
systems and invest in new technology is				from all of the

increasingly difficult when companies are				stakeholders (HR personnel, users of the
hard pressed to invest in functions aligned				service, and the management team) and those
with
				persons within or outside of the
the core competency of the enterprise. HR				organization with expertise in the function.
outsourcing service providers are better				Before talks

positioned to invest in new technologies and				are ever initiated with a vendor, the key
software more likely to conform to "best				goal is to define the scope of the service
				and the
practices" for delivery of the service.
Third, for companies with global operations,				performance metrics, which will be applied
				to measure success. The use of metrics will
employee self-service can substantially
reduce costs and improve employee				be covered in greater detail below in
satisfaction				respect to Service Level Agreements
				(SLAs).Important to both parties in the
with the service. However, this requires				transaction, is defining the kind of
integration of all processes- HRIS, payroll				relationship, which
and
				must be established for the arrangement to
benefits administration- across the entire				succeed. If the entire HR Dept function is to
HR operation including its global
ones.Because of the business exigencies				be outsourced then it will be in the
driving the shift towards HR outsourcing, the				interest of both parties to enter into a
industry				long-term

is expected to grow to $37.7 Billion in				relationship that will justify the up-front
2003.				costs and investments that will be required
				of
Currently HR outsourcing services fall
primarily within three categories:				each of them. This type of arrangement as
Professional				previously mentioned is subject to the firms

Employer Organization (PEO), Business				particular circumstances, and will probably
Processing Outsourcing (BPO) and Application				result in selecting either the BPO or PEO

Service Providers (ASPs).4				alternative because of the broad scope of
				the outsourced service. For the buyer this
PEOs assume and take full responsibility for				type
the human resources administration,
				of wholesale delegation is expensive,
including the legal liability for the				complex and risky. If it doesn't work out,
company's workers. It becomes in essence a				the
coemployer
				buyers will incur significant costs and,
with final say over, hiring, firing, and				disruption to the business in replacing the
compensation decisions. The PEO				vendor

becomes a partner, in the non-legal sense,				or in bringing the function back
with ownership of the HR function while the				in-house.Typically, total outsourcing of a
				function is a major undertaking with broad
company retains responsibility over all				implications
business matters.BPO refers to all business
processes and not just HR. Typically this				for both the buyer and vendor. In this
involves transferring				situation the preferred relationship is one
				that is
the entire function to a service provider
and is differentiated from PEOs because it				more of a partnership, in the non-legal
				sense, where the parties view their interests
usually involves introducing new				as
technologies and processes to bear in the HR
service.				mutually benefited by the relationship.On
				the other end of the continuum is the
Because of the complexity of HR systems in				outsourcing of processes, like payroll, which
large corporations, shifting to BPO may be				is

more expensive in the short term. However,				very specific and straightforward and can be
long term it can result in benefits because				executed on a short-term basis.

large HR outsource providers will invest in				Normally, in the HR area, firms will retain
systems and technology viewed as				part of the function in-house, and delegate

prohibitively expensive within a firm where				those functions to an ASP or BPO, which
this function lies outside of its core				require major investments in technology or
business.The BPO services market is growing
rapidly with analyst projecting revenues of				software. An outside supplier whose core
$128				compency lies within function is better able
				to
billion this year and growth to $234 billion
by 2005.Finally, ASPs host software on the				absorb the costs, based on economies of
web and rent it to users. The most commonly				scale. This type of arrangement will
known				generally

of these packages is "People Soft". The				result in an intermediate term relationship
latter application and other packages are				where the parties will have to develop close
used to
				collaboration but will not have to incur the
manage payroll, benefits, head count and				high costs, and investment of resources
other HR processes.Each of the HR outsourcing
services described has advantages and				required in a long-term
disadvantages for				relationship.Partnership arrangements require
				provisions that maximize the flexibility of
particular enterprises depending, on the				the vendor in
number of employees, affordability of the
				performing the service. Typically because
service, type of business and the degree to				such relationships are appropriate in
which an enterprise desires to retain control				contracts
of
				with long terms of duration, typically five
this function in-house.This paper will				to seven years, and complex service
briefly cover the legal aspects of HR
outsourcing and will discuss some				arrangements, the approach ought to be less
				prescriptive with respect to the scope and
of the most common contract issues faced in
outsourcing relationships, essential items				level of service.

that ought to be considered by the parties				In shorter-term arrangements more typical of
and key provisions within outsourcing service				supplier/purchaser relationships, contracts

agreements.As previously discussed,				need to be more prescriptive in defining the
companies facing pressure to reduce costs or				scope of the services and the client
address the
				requirements.Generally contracts ought to
personnel shortages due to corporate down				build in some level of flexibility to allow
sizing have several different outsourcing				for changes in:business circumstances,

alternatives available to them to delegate				technology
back-end administrative functions. Typically,
				and the needs of the buyer.Transfer of
the first alternative firms look to before				Personnel and Assets:Outsourcing arrangements
looking outside, is to retain control of the				may require the transfer of assets and
				personnel to the vendor.
function in-house and reduce employment
related costs (taxes, benefits, headcount),				Defining the terms covering the transfer of
by				affected personnel will generally have

using contingent staff or (temporary				important implications for the buyer and its
workers) or persons classified as				employees with respect to employment or
"independent
				employment rights. When wholesale
contractors" (IC) to perform the work.				outsourcing of groups or functions occur, it
Though this may be an appealing solution for				is

many firms, given the legal and economic				important for firms to take measures to
benefits, improper classification of someone				preserve the general morale, of those
as				remaining

an IC, consultant or temporary worker, who				and communicate openly and honestly with
is later deemed an "employee" carries				those persons transferred under the

serious financial risks.Friction has				outsourcing agreement. Contract terms need
developed between the growing use of contract				to address how the outsourcing of the
workers in lieu of full time
				function and subsequent transfer will affect
employees and, the public policy aims of				benefits, pensions and pay of personnel
providing workers with protections under
				moved to the service provider. Consideration
federal labor laws to take the Employment				should also be given to the rights, if any,
Retirement Income Security Act ("ERISA")
				the transferring firm may have to either
and state law employee remedial measures. In				enforce special terms affecting transferred
addition to the tax risk of an IRS audit, the
				employees or the right to retain these
risks are higher today that workers will				employees in the event of contract
bring claims for social security, workman's				termination.

compensation or other actions challenging				With respect to equipment and other assets,
the misclassification, so that they may				terms governing the use by the vendor of any

participate in lucrative benefit programs				equipment made available to it by the buyer
provided by the employer.				should specify rights of ownership and other

The case that brought these issues to the				matters related to the transfer of equipment
fore was Vizcaino v. Microsoft Corporation				or other items of value.Defining the rights
				to intellectual property (IP) is critical in
("Microsoft I") and its progeny of cases. In				all outsourcing agreements.
Microsoft I, plaintiffs, employees designated
				Typically the vendor will want to retain
as temporary workers or "free lancers",				rights in any IP developed by it in the
brought an action against the corporation to				course of

recover savings benefits under ERISA and for				the arrangement. The thought being that it
stock option benefits offered through a				is providing a service and not being paid to

stock purchase plan, that were available to				develop IP. The buyer on the other hand will
regular employees.6 The Court framed the				want all rights to IP developed based on the

legal and public policy issues in the				transfer of proprietary or confidential
opinion's opening statement:				information to the vendor and any work
				product
"Large corporations have increasingly
adopted the practice of hiring temporary				developed in performing the service. This
employees or				issue will usually be resolved through

independent contractors as a means of				negotiation.
avoiding payment of employee benefits, and
thereby				Related to this are confidentiality
				provisions, which provide important
increasing their profits. This practice has				contractual
understandably led to a number of problems,
legal and				protections with respect to each party's
				right's in and use of IP in the
otherwise. One of the legal issues that				arrangement.Services
sometimes arises is exemplified in this
lawsuit. The named				This is will probably be set out in a
				schedule and negotiated based on the scope of
plaintiffs, who were classified by Microsoft				the
as independent contractors seek to strip that
label of				services and the functions or processes that
				will be outsourced. As stated previously, the
its protective covering to obtain for
themselves certain benefits that the company				nature of the relationship, partnership or
provided to all of				supplier/purchaser will determine how
				detailed
its regular or permanent employees."The
problems for Microsoft arose as a result of				and specific this ought to be.In any event
an IRS tax audit for tax years 1989 and				there should be sufficient clarity and
				definition for the parties to be able to
1990. The IRS examined the company's
employment records to determine if it was in				set mutual expectations and understand the
				deliverables that must be produced under the
compliance with tax laws. Applying the
common-law principles defining the				agreement.
employer-employee relationship, the IRS
concluded Mircosoft's "freelancers" were not				Termination

independent contractors but employees for				Defining the terms for exiting an
withholding and tax purposes.				arrangement is one of the most critical
				issues in an
In reaching this conclusion, the IRS applied
the test set out under the common law of				outsource agreement. Generally, early
				termination provisions, which set out rights
agency, which requires, in determining if a				and
hired party is an "employee", consideration
of				applicable penalties due in such event,
				should be a matter of last resort except in
the hiring party's right to control the				cases, of
manner and means by which the product is
				material breach or force majeure.Default
accomplished. The IRS applies a 20 factor				provisions should set out escalation clauses
"control test" to "assess all of the				and a reasonable cure period to
incidents
				ensure the parties have procedures for
of the relationship" with no one factor				resolving disputes and issues related to the
being determinative of the employment
				performance of their respective obligations.
relationship of the parties.9 The US Supreme
Court reached asimilion conclusion in				There should also be provisions governing
				the management of the exit. These should
Nationwide Mutual Insurance Company vs.
Darden party not to adopt the IRS factors				include the vendor cooperation in
				facilitating the transfer of the service to
and, instead applied a twelve factors that				another vendor
it considered. In assessing the relationship
of				and the return of any equipment or other
				items to the buyer, which were used by vendor
the parties the court decided for
determining whether an individual qualifies				during the contract.
as a
				Consideration should be given to other
"common law employee".Microsoft, on first				provisions, which might help to reduce the
impression, appeared to have taken the				level
appropriate measures to avoid
				of disruption to the buyer's operations as a
stumbling into an employer-employee				result of the termination of the
relationship- the workers were told they were				agreement.What is a Service Level Agreement
				(SLA)?SLAs in an outsourcing arrangement
freelancers and signed various agreements				identify the service levels or performance
classifying them as independent contractors,				standards

that included provisions that the workers				that the vendor must meet or exceed. The SLA
would be responsible for paying their own				also specifies consequences for failing to
taxes
				achieve the minimum service level set by the
and benefits. However, after having taken				buyer.
these steps with respect to the form of the
				SLAs should be applied to the key parts of
relationship, the court found that Microsoft				the outsourced service and not necessarily to
had fully integrated these workers into its
				every aspect. The purpose of SLAs is to
workforce, placing them alongside regular				ensure the buyer has the means to control the
employees, sharing the same supervisors,
				level and the consistency of the service
performing identical functions and working				received from the provider.
the same core hours. Because Microsoft
				Generally, the minimum level that ought to
required them to work on site, they were				be set is that which is required to support
given admittance keys, office equipment and				the

supplies of the company.Even after the IRS				buyer's on-going business operations and HR
determined that plaintiffs were "common law				requirements. An important rationale for
employees", Microsoft
				outsourcing should be to improve the level
attempted to use a temporary agency to				and quality of the function that is being
"house" these workers as employees of the
				outsourced. Therefore the minimum level of
agency, so that it could continue to use				service should be at least equal to the level
them in the same manner previously described.
				that existed before the function was
On review in Vizcaino v. U.S. Dist. Court				outsourced to the provider.
for Western District of Washington, 173 F.3d
				In the HR area metrics are difficult to
713 (9th Cir. 1999) ("Microsoft III"), the				establish because much of what is being
Court in striking down the District Court's				measured

modification of the class of plaintiffs,				is intangible. For example if buyer wants to
which it deemed a contravention of its order				determine the success of a web based
on
				application for benefits, this can only be
remand, rejected the lower court's assertion				ascertained by surveying user satisfaction.
that the eligibility for benefits of these				As

temporary agency workers turned on whether				such questionnaires and employee
they were employees of the Company or				satisfaction surveys become essential tools
				for
the agency. The District Court's view
precluded the possibility that the agency and				measuring the performance of the vendor.SLAS
				must reflect the agreement understanding of
Microsoft could jointly employ the				the parties as to what constitutes a
plaintiff. The Court held that at common law
it was				good result and with respect to measuring
				performance, their agreement on the
possible for the plaintiff's to be employees
of both the temporary agency and of the				mechanisms used to measure the result.

recipient of their services (Microsoft), if,				The SLA should also cover what constitutes
based on a determination using the Darden				the best and the worst-case level of service.

factors, an employee-employer relationship				In this regard the buyer will want to
existed. In essence the agency and Microsoft				incorporate service credits, which may become

were joint employers and the triangular				applicable in the event the vendor fails to
relationship that Microsoft created was not				meet minimum service levels. At the same time

viewed as precluding or as being mutually				it is also appropriate to consider
exclusive of a two- party relationship that				incentives or bonuses, which the vendor can
				receive for
existed between the company and the
temporary workers. So what are the lessons				achieving the best-case level of service.The
gleaned from the Microsoft cases?- Review the				point of any negotiation ought to be that it
language in the company's benefit plans to				is in the interest of both parties that the
ensure "covered
				vendor meet or exceed the service levels set
employees" is properly defined within the				in the SLA. The buyers should not exploit
plan and not left to statutory or judicial
				the use of SLAs, to reduce costs through the
interpretation.- The mere classification of				application of credits or penalties, because
workers as independent contractors is not
sufficient,				this will only inject an unnecessary level
				of contention into the relationship that will
and behavioral, financial and the type of
relationship between the hiring party and				under cut the development of a partnership
				between the parties.
the workers must support the
classification.- Users of outsourcing				SLAs should not have a distorting effect on
services should apply the 20 IRS factors to				behavior, where the vendor becomes focused
conduct a selfassessment
				only on those aspects of the service, that
of the relationship between the parties.-				are measured, at the expense of other
Consider using only ICs that are incorporated				aspects,
so that the relationship is between
				which may not be weighted as heavily in the
entities and not an individual and an				evaluation process. The vendor's goal
entity.- Ensure that the agreement reflects
the 20 factors, so for example: allow the IC				should be to meet, or exceed expectations in
to				every area covered by service.Born in Havana,
				Cuba, Mr. Rojas immigrated to the United
determine the means and the methods for				States in 1961 and lived in Ohio and the U.S.
delivery, limit the agreement to the				Virgin Islands before settling in Florida in
				1967. He studied computer programming for
project, and ensure the contract calls for				three years in a high school "magnet" program
the IC to cover its expenses and benefits.-				and earned his B.A. in English and Philosophy
Require that the IC submit an invoice prior				from the University of Florida in 1978, with
to receiving any payments.- Avoid placing IC				honors in Philosophy. Mr. Rojas then attended
in situations where work is subject to the				law school at the University of Miami where
direct supervision of a				he received his J.D., with honors, in 1981.
				In law school, Mr. Rojas was an Articles and
company employee.- Avoid imposing				Comments Editor of the school's International
administrative requirements on the IC, which				Law Review and served as a member of the Moot
are applicable to				Court Board.Mr. Rojas holds the highest
				ratings assigned by Martindale-Hubbell, and
employees.- Allow the IC to hire and				he is listed in several "Who's Who"
delegate the work to its employees subject to				publications including Marquis' Who's Who in
the				American Law, Who's Who In Florida's Latin
				Community, Who's Who In Intellectual
requirements of the project.In particular,				Property, and Who's Who in International
the fact that a worker is employed by a				E-Commerce. He is fluent in Spanish.

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Special Issues in Agreements Involving Outsourcing

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