Offshore Contracts Basics

In general the language you put in contracts will not change the nature of the business, will not counter the Fundamental Laws of Outsourcing, and won’t prevent things going south. Yet it is impossible to overstate the importance of a well-written contract. The goal is to develop the contract in a way that it encourages / enforces desired behaviors and provides a framework for dealing with issues, complications, and disputes. That applies to both parties – the contract has to work for you and your vendor, in that light, considering the nature of the engagement, nothing is as important when developing a contract as keeping a win-win mind.

A typical offshore contract includes two major components: a Master Service Agreement (MSA) that acts as an umbrella document covering specific terms and conditions of the engagement, and series of documents covering the specifics. Individual tasks and assignments are usually covered by documents such as Task Order, Statement of Work, Work Order, etc.

An MSA typically is negotiated once and stays in power through the life of the relationship. There are many important elements of an MSA that define the fabric of the relationship. To some degree they are vendor and even offshore agnostic. These elements fall in a “vanilla” category and typically require just basic template and a lawyer. However even these items can create a serious obstacles and require tooth and nail negotiations. Here are the main items that fall in that category:

  • Term, renewal and extension
  • Legal framework / Changes in laws and regulations
  • Security and privacy
  • Confidentiality / Audits
  • Proprietary rights / IP ownership
  • Legal responsibilities of parties
  • Indemnitification

The second group of MSA articles defines specific aspects of the relationship and should be in general agreed to prior to getting legal departments involved. One of the reasons that should be done is that there is still a long way from general to specific T&C. For example people rarely discuss the penalty for late payments before MSA is on the table. When the initial draft is presented by the vendor the number is typically 2.5% monthly which is completely ridiculous – that is ~35% on annual basis and beats some of the worst credit cards.

  • Definition of services
  • Responsibilities of parties / roles of the parties as it applies to executing the engagement
  • Payments and other financial aspects, terms and conditions
  • Initiation / Setting up ODC and other (“hidden”) fees
  • Termination

This group of the MSA articles requires very detailed analysis as it will impact Total Cost of Outsourcing in the most dramatic manner. The last article in that list, Termination, requires especial attention and a legal eye. As a buyer of offshore services you want to make sure that you can get out of the contract easily in case anything goes not the way it was planned. This is not a symmetrical clause – the vendor’s right to terminate contract should be limited to legal or financial bridge of the contract on your part.

The last group of MSA articles is not typically found in the initial draft. These are clauses that are specific to your company and nature of the engagement. Developing that list and negotiating each point is not a trivial exercise, and deserves a separate post, which I shall have shortly.

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