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There has been a growing trend for U.S.-based companies to outsource significant aspects of their information technology functions to other countries, such as India, where the work can be performed more cheaply. While saving money in the short term is an understandable goal, companies must not be short-sighted. Without proper care and advance thinking, outsourcing can lead to a host of intellectual property, security and privacy problems down the road. CURRENT CLIMATE Application development and maintenance are not uncommonly outsourced to other countries, and there also has been an increasing tendency to outsource business processes, such as claims handling. And now, companies are starting to outsource technical support for information technology infrastructure and systems. Companies fully understand that it is cheaper to perform the above functions outside of the United States. Indeed, McKinsey estimates that by the year 2010, the information technology industry in the United States will save approximately $390 billion as a result of outsourcing of software development. Forrester Research projects that 3.3 million information technology jobs will be lost in the United States over the next 12 years as a result of those jobs being handled in other countries. But outsourcing of software-related functions could lead to an information technology vendor in a foreign country copying the source code to create its own competing and infringing software — and this could happen in a country where the laws are not terribly strong in terms of protecting the intellectual property of U.S. companies. This already has occurred to some American companies. And, of course, with the sending of information back and forth between the United States and other countries, and with the reliance on scores of people to handle outsourced functions overseas, it is not difficult to recognize a vast array of security and privacy risks. There are greater opportunities for attacks, hacks, viruses, worms — not to mention the negligent or intentional revelation of identifiable details about individuals. SUCCESSFUL OUTSOURCING Outsourcing still has value, so long as companies lay the groundwork for successful outsourcing relationships and follow sound practices. It’s important up front for both the outsourcing company and the information technology vendor to have a very clear perception of what they each want to achieve from the relationship. The contract between the parties, usually a service level agreement, needs to be plain in terms of required objectives. The contract also must be clear about the parties’ specific rights, responsibilities and performance obligations. The contract also should be straightforward as to the incentive terms under which the vendor can earn a bonus, under what circumstances a penalty will be assessed for failure to perform, when the parties can terminate the relationship, and how unforeseeable events will be accommodated. Before the negotiation of the contract even takes place, the company should think through exactly what it wants to outsource, considering such things as whether critical processes or applications should be outsourced, especially if they are unstable or volatile in any major respect. And a strong-armed negotiation that leads to “victory” on all points could be the beginning of a sour relationship, especially if that relationship is with an unknown or unproven vendor. BEST PRACTICES The Financial Services Technology Consortium, which has been leading the pack in terms of outsourcing information technology services, has started to consider creation of a set of best practices to follow. The FSTC has been studying how to protect company trade secrets and personally identifiable information pertaining to customers. These secrets and this customer information needs to be protected from being disclosed or taken by outsourcing vendors, their employees or contractors, and by competitors. Verification of a vendor’s security program and background checks on personnel may be in order. And it’s important to note that some overseas outsourcing vendors prohibit their personnel from bringing certain items to work, such as handhelds, laptops and the like, in an effort to prevent the copying or stealing of information. Another idea to protect trade secrets is to prohibit outsourcing vendors from working for competitors of an outsourcing company. Furthermore, in terms of protecting customer information, technologies can be utilized that disguise the personal data of customers. Eric Sinrod is a partner in the San Francisco office of Duane Morris ( www.duanemorris.com), where he focuses on litigation matters of various types, including information technology disputes. His Web site is www.sinrodlaw.com, and he can be reached at [email protected] . To receive a weekly e-mail link to these columns, please send him an e-mail with “Subscribe” in the subject line.

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