However, COVID-19 crisis has revealed some challenges in outsourcing arrangements, particularly including those involving offshore outsourcing service providers (OSPs). Most of these weaknesses arose due to the movement control orders that were implemented to curb the spread of the pandemic. Take, for example, in India, which was ranked as the most attractive country to offshore business services to in 2019, the Indian Government on 24 March 2020 imposed a compulsory lockdown to restrict commerce and travel across the nation, and such lockdown has been extended to 30 June 2020. Despite announcement of certain relaxations outside of the COVID-19 containment zones, during the original lockdown period, only businesses providing “essential services” were permitted to operate. Some states specifically expanded their list of exempted industries to include data centers.  On 15 April 2020, the Indian Government allowed IT establishments (whether providing “essential services” or not) to operate, subject to the limitation of only 50% capacity. Some OSPs also had problems implementing remote working arrangements that became necessary, including in getting laptops to service provider personnel, setting up virtual private network access, ensuring WiFi availability, and providing the requisite security software applications.
These difficulties have resulted in many OSPs struggling to operate fully, if at all. Concerns have also arisen as to whether the remote working systems used by the OSPs (most of which have neither been tested nor specifically designed for the disruption arising from the pandemic) can securely handle confidential data and maintain the integrity and availability of their services. As a result, some organizations have started to bring their outsourced operations back in-house and/or find alternative service providers which are less affected by the pandemic at short notice.
Some conflicts have also arisen because of this, with:
- OSPs which were unable to perform their services seeking to delay the performance of their contractual obligations and/or avoid liability for non-performance.
- Organizations seeking to replace their existing OSPs with alternative service providers which are less affected by the pandemic and whose services are more reliable.
- Organizations affected by the economic downturn seeking to cut costs and terminate their outsourcing contracts prematurely to cut costs.
Nonetheless, it is anticipated that the outsourcing trend will continue, with more and more organizations turning to outsourcing, including of core or supporting functions such as accounting, finance, human resources administration, legal, marketing, payroll and tax. For finance and tax, 73% of the respondents to the EY 2020 Tax and Finance Operate survey said they are more likely than not to co-source some critical activities in the next 24 months in order to add value, reduce risk and decrease cost.
In considering outsourcing and/or changing outsourcing arrangements, it is important for organisations to bear in mind two key issues:
- Whether there are laws and/or regulations governing outsourcing; and
- Whether the third-party service provider has the requisite expertise and experience and business continuity capability to support the outsourcing.
As a guide to issues and risks to watch out for, we summarize below Hong Kong’s regulatory regime for outsourcing and conclude with some recommendations for proactively managing these issues and risks.