Industry Developments
Fears of a global economic downturn appear to be driving businesses to focus on cost rather than long-term strategic partnering in outsourcing relationships. According to Compass Management Consulting’s 12-month study of 120 outsourcing deals involving global companies, businesses are requesting discounts of up to 23% from outsourcers in return for longer contracts. A number of high-profile outsourcing deals have also been taken back in-house as some employers have begun to question the long-term savings; while others have become concerned at growing consumer opposition to support services and call centres being sourced from overseas.
Despite these economic conditions, trade body Nasscom's Strategic Review 2008 states that growth in the Indian IT sector is on track: Indian software and services exports are expected to touch the $40 billion mark in the financial year 2008. KPMG has issued a report stating that India’s knowledge process outsourcing industry is expected to grow to $5 billion by the year 2010; while Capita has indicated that UK companies are contracting out work at "unprecedented" rates ahead of a potential economic downturn.
Financial Services
The FSA has issued a policy statement (PS08/1) on the recording of telephone conversations and electronic communications such as email, video conferencing, SMS, business to business devices, chat and instant messaging. Firms are being required to record and keep telephone and electronic communications in the hope that it will raise the standard of behaviour by participants and enable the FSA to investigate and prosecute market abuse offences more easily. The statement is important for all firms that receive client orders and negotiate, agree and arrange transactions across the equity, bond and financial commodity and derivatives markets.
The FSA has indicated that it may be appropriate for firms to outsource the recording to third parties. It has also amended SYSC 8.1.5R to clarify that outsourcing of taping to third-party service providers will not be considered a critical or important function for the purposes of SYSC Chapter 8, and the conditions relating to outsourcing in SYSC 8.1.8R will therefore not apply to such outsourcing.. The rules will not come into force until March 2009.
Public Sector
The public inquiry into the scale, scope and potential growth in the supply of public services by private firms is currently reviewing evidence on improvements which may be made to the UK market in outsourced government services. The inquiry was commissioned by John Hutton, Secretary of State for Business, Enterprise and Regulatory Reform and is expected to report in June. It is looking at ways to improve the effectiveness of the market, the procurement models that work best, the existence of barriers to the private and third sector entering the market, and at the export potential for companies which operate in this ‘public service industry’. Compass, a marketing consultancy firm, has submitted a paper to the inquiry warning that public sector outsourcing is costing up to 75% more than the market rate. It argues that there is excessive use of procurement advisers rather than managers who will work with suppliers once the contract is in place.
Data Protection
The ICO has issued new guidance for organisations on managing a data security breach and suggests the adoption of a policy dealing with this eventuality. The guidance covers issues relating to containment and recovery, risk assessment, notification, evaluation and response.
The ICO has also published separate guidance on the information it expects to receive as part of a breach notification and on what organisations can expect from the ICO in response. This highlights the importance of organisations reporting breaches to the ICO, especially breaches involving large volumes of information or sensitive data which could cause harm to the individuals affected.
The ICO has also found that Skipton Financial Services failed to take appropriate measures to prevent unauthorised or unlawful processing of personal data and its accidental loss, damage or destruction. The breach involved the theft (from one of its suppliers of software consultancy services) of an unencrypted laptop containing names, dates of birth, national insurance numbers and investment amounts of around 14,000 Skipton customers. Skipton gave the ICO an undertaking to encrypt all personal data held on its laptops and those of its contractors and to carry out a risk assessment before engaging third parties to process data on its behalf.
Exclusion of Liability for Indirect and Consequential Losses
Exclusion and limitation of liability provisions are often the most contentious and heavily negotiated provisions of outsourcing agreements. Recent case-law provides a timely reminder of general principles which should be borne in mind in drafting and negotiating such provisions, specifically clauses which attempt to limit or exclude liability for indirect or consequential loss or damage. In short, the exclusion of indirect and consequential loss will not exclude direct loss of profits and loss or revenue and any other losses that are naturally arising and fall within the first limb of Hadley v Baxendale, such as liability to a third party.
In Ferryways NV v Associated British Ports [2008] All ER (D) 201 (Feb), the High Court held that an exclusion clause which attempted to exclude liability for losses to third parties was not sufficiently clear and unambiguous to do so. The proceedings involved a claim by a ship owner which entered a stevedoring contract with port authority. The ship owner’s employee and chief officer was killed whilst supervising loading and unloading operations by a vehicle driven by an employee of the port authority’s subcontractors. The ship owner sought to recover the compensation it paid from the negligent port authority. The stevedoring contract contained a clause excluding the port authority’s liability for any loss of the ship owner which was “of an indirect or consequential nature including without limitation the following: loss or deferment of profit; loss or deferment of revenue; loss of goodwill; loss of business; loss or deferment of production or increased costs of production; the liabilities of [the ship owner] to any other party.” The port authority sought to rely on this clause but the High Court held that, although the liability of the ship owner was a liability to a third party, it was nevertheless a direct liability which was not caught by the exclusion clause. In addition, the listing of heads of loss such as a loss of profits after the words “indirect and consequential loss including” will only exclude loss of profits which are indirect (within the second limb of Hadley v Baxendale) and not direct loss of profits.
