Special Issues in Agreements Involving Outsourcing

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The trend towards outsourcing will continue to grow as market pressures force corporations to be more tightly focused on core business functions, gaining competitive advantage and reducing costs. Outsourcing is an attractive alternative in good times and bad times. Shifting back end administrative and business functions to an external provider in good times, may be a means for quicker time to market and focusing resources on core business activities to grow the business. In bad times, outsourcing is a means for streamlining the enterprise by eliminating functions, which create a drag on capital and/or do not provide any competitive advantage.

In the current economic environment, concerns over, shrinking margins, liquidity and the
need to reduce operating cost structures is accelerating a trend towards shifting certain
back office administrative functions to outside suppliers. This trend is seen as a major
paradigm shift within enterprises, which have realigned their internal corporate
infrastructure to focus on more strategic areas of their core business.

Although the human resources (HR) function is viewed as critical within corporations,
increasingly, small, medium and even large corporations are moving to outsource this
service.

The case for outsourcing has three basic rationales. First the regulatory
compliance obligations imposed under ERISA, COBRA and IRS regulations, have
become extremely burdensome and expensive for companies. Consequently, avoiding
major legal problems and financial liability requires substantial investment in resources
and capital in an area outside of the core business of most companies. This makes
outsourcing a viable option even if it does not necessarily result in a cost savings in the
near term. Second, the need to upgrade HR systems and invest in new technology is
increasingly difficult when companies are hard pressed to invest in functions aligned with
the core competency of the enterprise. HR outsourcing service providers are better
positioned to invest in new technologies and software more likely to conform to “best
practices” for delivery of the service. Third, for companies with global operations,
employee self-service can substantially reduce costs and improve employee satisfaction
with the service. However, this requires integration of all processes- HRIS, payroll and
benefits administration- across the entire HR operation including its global ones.

Because of the business exigencies driving the shift towards HR outsourcing, the industry
is expected to grow to $37.7 Billion in 2003.
Currently HR outsourcing services fall primarily within three categories: Professional
Employer Organization (PEO), Business Processing Outsourcing (BPO) and Application
Service Providers (ASPs).4
PEOs assume and take full responsibility for the human resources administration,
including the legal liability for the company’s workers. It becomes in essence a coemployer
with final say over, hiring, firing, and compensation decisions. The PEO
becomes a partner, in the non-legal sense, with ownership of the HR function while the
company retains responsibility over all business matters.

BPO refers to all business processes and not just HR. Typically this involves transferring
the entire function to a service provider and is differentiated from PEOs because it
usually involves introducing new technologies and processes to bear in the HR service.
Because of the complexity of HR systems in large corporations, shifting to BPO may be
more expensive in the short term. However, long term it can result in benefits because
large HR outsource providers will invest in systems and technology viewed as
prohibitively expensive within a firm where this function lies outside of its core business.

The BPO services market is growing rapidly with analyst projecting revenues of $128
billion this year and growth to $234 billion by 2005.

Finally, ASPs host software on the web and rent it to users. The most commonly known
of these packages is “People Soft”. The latter application and other packages are used to
manage payroll, benefits, head count and other HR processes.

Each of the 特集| 資格と宅建士|宅建ならきりんのブログ described has advantages and disadvantages for
particular enterprises depending, on the number of employees, affordability of the
service, type of business and the degree to which an enterprise desires to retain control of
this function in-house.

This paper will briefly cover the legal aspects of HR outsourcing and will discuss some
of the most common contract issues faced in outsourcing relationships, essential items
that ought to be considered by the parties and key provisions within outsourcing service
agreements.

As previously discussed, companies facing pressure to reduce costs or address the
personnel shortages due to corporate down sizing have several different outsourcing
alternatives available to them to delegate back-end administrative functions. Typically,
the first alternative firms look to before looking outside, is to retain control of the
function in-house and reduce employment related costs (taxes, benefits, headcount), by
using contingent staff or (temporary workers) or persons classified as “independent
contractors” (IC) to perform the work. Though this may be an appealing solution for
many firms, given the legal and economic benefits, improper classification of someone as
an IC, consultant or temporary worker, who is later deemed an “employee” carries
serious financial risks.

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