Outsourcing and offshoring have become hot political topics in the United States and the EU. However, this is not the first time that offshoring became a political issue in the United States. One only needs to go back to the mid-1990s when independent presidential candidate Ross Perot colorfully declared that the loss of American jobs to Mexico as a result of the passage of NAFTA would lead to a “giant sucking sound”. Even Germany?s politicians have borrowed a page from U.S. political style when Chancellor Schr?der recently accused German companies of being “unpatriotic” if they engage in offshoring.

What is meant by “outsourcing” and “offshoring”? On a fundamental level, outsourcing is a contractual relationship whereby a third-party vendor performs a contractor?s specified tasks according to predetermined performance criteria. This may involve the transferring of staff or resources. Offshoring is outsourcing?s not so distant cousin as it involves the transferring of such tasks to a different country. Since offshoring is currently such a politically charged word, companies sometimes prefer to use euphemisms such as “global resourcing” or “co-sourcing”.

For U.S. companies, offshoring often involves moving tasks to India (sometimes referred to as the “world?s back office”), China, the Philippines and South America while for EU companies, eastern European vendors ? and to a lesser extent, Indian and Chinese vendors ? are typically the primary beneficiaries of offshoring.

Offshoring provides various distinct advantages, the most well-publicized of which is cost, i.e., for many companies the lower cost of labor serves as the sole (or at least primary) impetus to offshore some of its tasks. However, if a company is engaged in offshoring merely to reduce costs, it is quite possible that it is not doing itself a favor. Unreliable vendors, lack of sufficient know-how by vendors, lower productivity and work being completed too slowly may not only add to increased frustration, but in the long run, to increased costs. Other commonly listed benefits of offshoring include that it permits a company to focus on its core competencies, permits access to different skills and/or technologies and allows for greater flexibility.

What types of tasks are being outsourced? Primarily high- volume manufacturing, IT services, call centers and help desks, technical support, service and repairs, labor-intensive and standardized business processes, distribution and other logistics systems and software development. However, companies are becoming increasingly creative in terms of offshoring. Nowadays, U.S. companies may offshore their standardized legal work to Indian vendors, and the Austrian Ministry of Justice recently announced that it will soon outsource to Romania the task of imprisoning Romanians who are currently serving prison sentences in Austria.

Whether to engage in offshoring requires the review of a number of business, financial and legal matters. As a result, if a contractor decides to go forward with an offshoring arrangement, it should undertake a business, financial and legal due diligence review. Legal considerations for an offshoring arrangement should include at least the following (obviously, this list could include other legal matters depending on the type of tasks being offshored):

Corporate and Commercial Matters. When concluding offshoring contracts with vendors, companies need to be aware not only of the risks involved with offshoring, but also what rights they may have if the vendor?s performance is inadequate or untimely. Also, they should focus on how long the contract with the vendor is to last; whether, and to what extent, the vendor needs to provide information regarding certain milestones; whether incentives should be provided for exceeding benchmarks; and to what extent export laws ( e.g., regulations limiting the export of encrypted software) may apply.

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