The law is truly an ass, to paraphrase that famous Dickensian line. Though outsourcing in its current form was not prevalent at the time Oliver Twist was written, Dickens could not have known how perpetually right his turn of phase would be. One of the areas keenly affected by the ins, outs and peculiarities of the law is outsourcing. The trouble is that the law in many countries is based on a body of legislature hundreds of years old while outsourcing as a business process has only come to prevalence over the last twenty years. In effect, the law is still catching up with the outsourcing world, and changes in ‘standard business’ legislation can have unexpected and costly effects on the industry.

A recent example hailed from the European Commission, the part of the EU responsible for new legislative proposals. An update to the 1990 Merger Regulation, which defines the Commission's regulatory role for mergers, saw certain large outsourcing deals brought into the category of mergers and acquisitions. This means that where an outsourcing supplier is buying all or part of the IT assets being outsourced by a company (that has sales over $6.8 billion globally, $340 million in Europe and potential sales in excess of $340 million a year) could go to the European Commission for approval. This change extended certain deal negotiations significantly and even made it possible for suppliers to face anti-competitive scrutiny if they make too many acquisitions in the same sector

Phil McDonnell, head of competition at London-based law firm Addleshaw Goddard, comments: "You have got to build in some time into your procurement to give the supplier time to go through the hoops. There will also come a point where a regulator will say a supplier has too many deals in the same sector," he said. "I don't think we are at that point yet, but that is where it is heading."

This is clearly a big alteration and there have been many other laws which also force significant changes. Another such area was TUPE, the employment legislation designed to protect employees from suddenly finding themselves out of a job when, for example, a company becomes overly reliant on one client and then the client transfers work elsewhere. The regulations stipulate that an employee that has been working entirely on that one client be automatically transferred to their employment. The employee does not have to go but can if he or she chooses. Of course such changes had and still have big implications on the outsourcing world, for example in wrangling over accommodation of staff transfers, redundancy payments, and pension arrangements.

“The application of TUPE can have a very significant commercial impact on the deal itself, both on entry and exit if there are a number of employees whose employment (and therefore the liability to pay wages) transfers with the outsource,” commented Duncan Pithouse, Partner at DLA Piper.

The fact that the outsourcing industry is still relatively young means there is not really any legislation that is specific to the outsourcing space. It is the sector-specific and overarching business legislation that outsourcers need to be aware of.

“Whilst traditionally there has been no "outsourcing legislation" per se…there is a raft of legislation and regulation that affects an outsourcing arrangement, and which can apply on a mandatory basis in all of the countries that are "in scope" of the outsourcing deal, and that differ from deal to deal,” commented Pithouse

Indeed, legal hotshots in the outsourcing space make it their business to stay on top of the implications of new legislature on the industry. Meaning there is usually a lot of speculation and commentary in the run up to changes which in turn helps outsourcers plan ahead. So what are the key issues that the legal world is currently seeking to address?

It’s impossible to get through an article nowadays without some reference to the financial crisis, and to do so would be crass. The impact of a lack of ready finance has driven big changes in outsourcing.

“We have seen that the fall-out from the economic crisis of the past 18 months, and its particular effect on certain vendors, has driven a much greater appreciation of the risks involved in outsourcing key functions to an external party, which in turn has led to a greater focus on appropriate contractual protection, especially in relation to supplier financial standing and termination rights,” commented Mark O'Conor, another partner at DLA Piper.

Trust in business is a rare thing nowadays and outsourcing vendors are not escaping the spotlight. MiFiD, an update to the regulation of UK financial instruments that came into force last year again extended the necessary outsourcing due diligence process.

“The Markets in Financial Instruments Directive (MiFID) has amended the Financial Services Authority's rules on what constitutes a material outsourcing for a regulated financial services entity. As such, certain sourcing and outsourcing arrangements must now feature all of the provisions listed in Chapter 8 of the FSA Handbook,” O’Connor added.

An additional effect of the financial crisis has been a resurgence in protectionist thinking brought on by continuing mass redundancies. The more prevalent redundancies become, the more they are covered in the media which puts outsourcing directly on the agenda. Many companies are being forced into more outsourcing and specifically offshoring, to ensure basic survival. Though outsourcing is a business necessity in most cases, the public do not generally like it and politicians follow suit.

“[We are seeing] a tightening of immigration rules - for example the new requirement that overseas applicants for skilled employment have increased levels of qualification (e.g. a Masters Degree in the case of solicitors). This inhibits the ability of outsourcers to move the most skilled people to the locations at which they will prove most effective except on a short-term basis,” explained, Partner, at Pinsent Masons: Iain Monaghan.

While such changes, this a UK example, do not block sending jobs offshore, they certainly make things more difficult for outsourcing and offshoring to operate effectively. The rules also necessitate an increased understanding of rules around visas and work permits in outsourcing circles.

Outsourcers have clearly had to deal with a lot to derive those wonderful cost and skill benefits they covet. But there is something else rapidly breaching outsourcer’s legal horizons that is possibly the biggest re-thinking of the business they have faced to date. Environmental issues have been bubbling away on business radars for a long time now but years of mass inaction from government and business have brought the law into play.

“The push towards "Green IT" brings in a whole host of European and worldwide legislation linked to environmental concerns and climate change. These include the Batteries Directive, the suite of Directives known as REACH (concerning the regulation of certain chemicals) and the revisions to RoHS and WEEE Directives (the "lead directive" prohibiting certain non-biodegradable substances like lead solder in computers) which are relevant to ITO to the extent that these clauses need to be expressly included in the agreement.” Duncan

Legislation linked to the disposal of corporate purchases has been developing for some time and the WEEE recycling directive did cause some turmoil in 2008. The biggest impact of the green wave is still yet to come however. As governments finalise plans for carbon trading schemes such as the Carbon Reduction Commitment planned for 2010, challenges will emerge in the calculation of carbon usage across outsourced relationships. Increasingly green suppliers will likely also prove much more attractive to companies under green governments.

It’s clear that legislative changes provide regular cause for change in the outsourcing industry and also create numerous extra costs. But are the changes all bad? Duncan Pithouse sees it as more of a two way street:

“To the extent the changes drive a greater appreciation of, and treatment of, the risks of outsourcing, the changes are for the better. This simply means that the better prepared both customers and suppliers are, and the more appropriate the contract terms are, the better the ultimate - and long term - deal will be. On the negative side, the changes do mean that outsourcing becomes "harder" and organisations undertaking outsourcing, and those providing outsourcing services, need to have a deeper knowledge of legal landscape for their sector,” he said.

The key then is preparation, preparation, preparation. Outsourcers need to become increasingly legal-savvy and understand exactly which parts of the law, in any country, they are operating in affect their outsourcing deals. An eye on the horizon as new legislation is laid out, is also increasingly important.

“Be as prepared as possible and as early as possible and make sure that the contract is robust enough to protect from a change in law but flexible enough to adapt to changes. Plus the contract should anticipate changes in law and deal with how those changes will be catered for, and paid for. Without express wording, customers and suppliers may find themselves locked into protracted negotiations as to whether compliance with the new law should sit at the doorstep of the customer or supplier,” added Duncan.