CHALLENGES, RISK AND LEGAL

CONSIDERATIONS OF OUTSOURCING
 GROUP MEMBERS

• SAMIUDDIN KHAN
• SHAHZAD SALIM
• YASEEN GHOURI
 INTRODUCTION
A Working Definition of Outsourcing
INTRODUCTION

Services
COMPANY OUTSOURCER

Outsourcing is made up of two words “out” and “sourcing”;

sourcing refers to “the act of transferring work, responsibilities
and decision rights to someone else”. Companies must source
out work because there are others who can do it cheaper,
faster, and better
 INTRODUCTION
WHAT
A Working Definition of IS OUTSOURCING?
Outsourcing

OUTSOURCING –

Outsourcing means use of a third party to perform material

activities normally to save money and/or use the
skills/technology of another entity on a continuing basis that
would normally be undertaken by licensed institutions.

WHY OUTSOURCE?
If one doesn’t have the time, money or skill to do the job
internally, or if there is a function that is a burden or detrimentally
affecting other parts of the business, outsourcing is worth
considering.
WHY DO COMPANIES OUTSOURCE?
 STRATEGIC REASONS FOR OUTSOURCING

• Specialization coupled with greater economy of

scale
• Third-party service providers make extensive
investments in technology, methodologies and
people
• Outsourcing shall, as far as possible, be limited
to areas in which there is little requirement of
maintaining secrecy. The following non-core
functions are
 NON CORE FUNCTIONS
i. Collection & Recovery
ii. Sales
iii. Marketing
iv. Call Centre Management
v. Business Development
vi. Data Entry
vii. IT Support
viii. Cash sorting
ix. Security
x. Muqaddam
xi. Cash carrying
xii. Sports support
xiii. Verification (internal/external customer’s credentials)
xiv. Janitorial Protocol
 MATERIAL OUTSOURCING
• Potential to significantly impact Bank’s business
operations, reputation or profitability.
• Importance of the business activity
• Cost of the outsourcing as a proportion of total
operating costs of the Bank.
• Aggregate exposure to a particular service provider.
• Impact on data privacy and security
• Adequate flexibility to switch service providers.
 OUTSOURCING AGREEMENT

• Adequate and measurable service levels.

• Service provider's physical and data security standards
• Provision for timely access to all sorts of information.
• Penalty clause in the agreement
• Report change in ownership structure
• Procedure for monitoring performance of service
provider
• Right to terminate an outsourcing agreement
• Set out service standards/Performance Standards
RISKS IN OUTSOURCING JOB
• Strategic Risk

• Reputation Risk

• Compliance Risk

• Operational Risk

• Legal Risk

• Exit Strategy Risk

• Country Risk
 OFF-SHORE OUTSOURCING SERVICES
 Arrangements shall only be entered into with parties
operating in jurisdictions generally upholding confidentiality
clauses and agreements.

 The relevant off-shore regulator will neither obstruct the

arrangement nor object to SBP Inspection visits/visits of
Bank’s internal and external auditors.

 The regulatory authority of the offshore location does not

have access to the data relating to operations of the Bank
simply on the ground that the processing is being
undertaken there
 DUE DILIGENCE OF SERVICE PROVIDERS

• Service provider’s expertise, past experience and

competence
• Financial stability and ability to service commitments even
under adverse conditions
• Onsite visits to the service provider, independent reviews
and market feedback shall also be obtained
• Sub-contracting of material outsourcing arrangements is not
allowed.
• To avoid over exposure, a single service provider will be
limited to perform outsourcing function to the extent of 25%
of the total outsourcing cost of the Bank
• Doesn’t enter in to any agreement, whose ownership fully
partly include management management/employees
 OTHER RISK MITIGATION MEASURES
• No person on the strength of service provider is allowed to mark attendance
in attendance register of Bank/ Company.
• Ensure that service providers are working on assignment as per scope of
work/TORs
• Clause for providing SBP access to documentation and accounting record
• No official is authorized to receive or entertain request for any resignation
from the resources/representatives/agents/staff
• resource of service provider shall be rotated periodically to prevent instances
of fraud
• Ensure that the Direct Sales Agents / Direct Marketing Agents/ Recovery
Agents are properly trained.
• Recovery Agents refrain from action that could damage the integrity and
reputation of the bank and that they observe Fair Debt Collection Guidelines
Outsourcing
Advantages of Outsourcing

Expertise
Speed
Cost Reduction
Risk Sharing
Time Utilization
 Focus on Improvement
Expertise:

Your core team might be fantastic at a few things, but nobody is perfect
at everything. By outsourcing particular tasks, companies are often able
to substantially improve performance by drawing on the niche skills of
experts in certain fields.
Speed:
One of the top reasons small businesses tend to outsource work is
because it will get done quicker. If you’re working with a limited
number of staff members, you can get things done a whole lot quicker
by passing time-consuming tasks on to freelancers or external
agencies.
 COST REDUCTION:
Cost of sales: Product inventory, raw materials, manufacturing equipment, shipping, packaging, shipping
insurance, warehousing. A substantial amount of upfront money is needed to fund your initial product
inventory for sale.

Professional fees: Setting up a legal structure for your business, trademarks, copyrights, patents, drafting
partnership and non-disclosure agreements, attorney and accountant fees for ongoing consultation.

Technology costs: Computer hardware, computer software, printers, cell phones, website development and
maintenance, high-speed Internet access, servers, security measures, IT consulting.

Administrative costs: Various types of business insurance, office supplies, licenses and permits, express
shipping and postage, product packaging, parking, rent, utilities, phones, copier, fax machine, desks, chairs,
filing cabinets—anything else you need on a daily basis to operate a business.

Sales and marketing costs: Printing of stationery, marketing materials, advertising, public relations, event
or trade show attendance or sponsorship, trade association or chamber of commerce membership fees,
travel and entertainment for client meetings, mailing or lead lists.
Wages and benefits: Employee salaries, payroll taxes, benefits, workers compensation .
Risk Sharing:

One of the most important factors in any project is risk assessment

and analysis. By outsourcing certain campaigns or processes on to
experts in their respective fields, you will benefit from their enhanced
ability to plan and mitigate potential risks.
Time Utilization:
One major benefit of outsourcing digital work overseas is the substantial
differences you might encounter in terms of time zones and holidays.
Although this can pose an initial hurdle logistically, once overcome it can
effectively mean your business is running even while you’re fast asleep.
Focus on Improvement:
Another benefit of outsourcing tasks is enhanced freedom. By
passing on supporting processes, you’ll be able to concentrate your
skills on strengthening and improving the core processes that help
make your business tick.
Challenges of Outsourcing
Managerial Control
Hidden Cost
Security Risks
Quality Control
Translation Risk
Motivational Damage
Managerial Control:

When you sign a contract to have another company perform the

function of an entire department or single task, you are turning the
management and control of that function over to another company.

You will have a contract, but the managerial control will belong to
another company. Your outsourcing company will not be driven by
the same standards and mission that drives your company. They
will be driven to make a profit from the services that they are
providing to you and other businesses like yours.
Hidden Cost

Although outsourcing work is generally considered cheaper, you

must also beware of them. Outsourcing companies or big agencies
will typically ask business owners to sign lengthy contractual
agreements, and they’ll include plenty of fine print. If you don’t read
the terms carefully, you could get hit with unexpected costs.
Security Risks:

In this age of data protection, it’s essential that you exercise caution
whenever using customer data. If you plan to outsource processes
that require personal data, you could be placing the privacy of
others or security of your business at risk by passing that data on to
other people.
Quality Control:
Outsourcing companies and some freelancers may often be
motivated by profit rather than a job well done. That means the
work you send out may come back quickly, but will lack
the standard and quality that customers have come to expect
from your products or services.
Translation Risks:

It doesn’t matter whether you’re dealing with overseas

freelancers or some talented expert just up the street – but if
you’re handing out remote work via email or telephone,
important instructions are often lost in translation. That could
cause you serious time, money and hassle.
COMPARATIVE ANALYSIS OF PERMANENT AND
CONTRACTUAL STATUS.

Permanent 3rd Party Contract

1. Benefits as per law (Gratuity, Bonus,
Leaves, WPPF etc) 1. Wages on daily basis. Deductions on
2. Benefits as per company policy absenteeism.
(Increments, Picnic, Loans, grants 2. No Leaves, No Gratuity, Bonus etc
etc) 3. Contractual Worker works for short
3. Permanent employee works for long duration.
tenure 4. Very easy to remove worker from the
4. It is difficult to take disciplinary action premises.
and do dismissal
 RISKS IN OUTSOURCING JOB
• Strategic Risk

• Reputation Risk

• Compliance Risk

• Operational Risk

• Legal Risk

• Exit Strategy Risk

• Country Risk
 RISKS OF OUTSOURCING UNDER
CONTROL TEST OF SUPREME COURT
JUDGEMENT ON FAUJI FERTILIZER

1. Core Jobs are outsourced. It is very commonly seen that instead of odd and pety
jobs core jobs are out sourced. Such cases can be challenged in the court of law.

2. Direct involvement of principle employer in appointment of 3rd party worker is the

violation of SC judgment. If proved principle employer can face problems.

3. It is often observed that supervision of 3rd party workers is under the employees of
principle employer. If this is challenged in the court the principle employer will face
the consequences.

4. If the principle employer is involved in the dismissal of 3rd party contractual worker,
such incidents can revert back against the principle employer
 RECENT CHANGES IN SINDH LABOR
LAWS.
Definition of Worker under Sindh Standing Order 2015
“worker” means any person employed in any industrial establishment or commercial
establishment or a mine to do any skilled or unskilled, manual or clerical work for hire or
reward
and includes permanent, probationer, badli, temporary, apprentices and contract workers, but
does not include occupier and manager having the hiring and firing authority; provided that
no worker shall be employed through an agency or contractor or sub-contractor or
middleman or agent, to perform function relating to their contract of employment.

Definition of Worker under factories act 2015

worker” means a person employed in any manufacturing process, or in cleaning any part of the
machinery or premises used for a manufacturing process, or in any other kind of work
whatsoever, incidental to or connected with the subject of the manufacturing process and
includes clerical staff, but does not include occupier and manager having the hiring and
firing authority; provided that no worker shall be employed through an agency or
contractor or sub-contractor or middleman or agent, to perform production related work.
SCENERIO AFTER THE LAW CHANGE

1. Panic situation arising in the industry

2. It is extremely difficult to replace the outsourced
service with permanent staff.
3. Notices are received to some companies regarding
abundant the outsourced services.
4. Employers are seeking legal opinions.
 RECOMMENDATIONS

1. Outsourcing agreements must be designed smartly

2. Agreement must cover the aspect of test control
mentioned by supreme court.
3. Avoid to award new labor contracts
4. Encourage service contracts.
5. Award contracts to professional contractors
6. Don’t out source the core area of your industry,
7. Ensure all the contractors are fulfilling the legal
requirements.
8. To avoid litigation, settle issues out of court