Talk on the empirical examination of business outsourcing transactions

Today I attended an interesting workshop on a paper by Prof. George S. Geis on business outsourcing contracts as part of the ongoing Law and Economics workshop series. At the very beginning Prof. Gies noted that there was very little empirical data or studies on outsourcing contracts due to the inherent confidentiality (due to fear of firms that the business model may be imitated by competing firms or there may be a political backlash) surrounding them. The paper which has been presented was truly novel in this respect that it contained an empirical study of 60 outsourcing contracts (involving one or more public firms) from 1994 to 2007 which were gleaned from the SEC filings of the public companies.

Though the paper is a work in progress, it throws up the following interesting and counterintuitive points:
a) For most customers the primary motivation to outsource the work to a vendor was to save costs however, only one of the contracts contained a savings provision. The author notes in the draft of the paper which was circulated, “[m]ore puzzling (atleast to me) is the infrequency of contract terms that guarantee savings to a client or expressly tie vendor compensation to actual realized savings. Only one agreement in the sample adopts this sort of guarantee clause — — explicitly conditioning its fees on the ability to achieve benchmark saving rates.”
b) The geographic location of the vendor does not lead to a great variance of managerial difference in contracts but the nature of business does.
c) Off-shoring is also seen increasingly as a regulatory arbitrage play where even though firms may not admit it but they move there operations abroad to escape local rules or regulations. The most common and widely circumvented regulatory instrument, is taxation.

Prof. Geis also made mention of the recent reports on financial irregularities at Satyam and stated that the incident may have an effect on material terms in contracts especially the clauses governing the escrow provisions.

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