IT service providers in offshore and nearshore locations have had to change their day-to-day operations due to the recent developments in the COVID-19 pandemic. Their customers – the companies outsourcing – should monitor the situation closely and follow-up with their providers in order to minimise any negative impact on their businesses.
In recent years, many Western European companies have outsourced IT services to service providers which are either based, or have substantial parts of their operations based, in offshore locations – predominantly in India, Vietnam and other parts of Asia but recently also to some extent in South America – as well as nearshore locations in Eastern Europe, such as Poland, Lithuania and Ukraine. Access to large, highly qualified resource pools in these offshore and nearshore locations has generally led to significant cost reductions and high-quality services for customers. At large, the move to offshore and nearshore locations has been a success.
Service Providers face various difficulties during COVID-19
Recent developments in the COVID-19 pandemic have included restrictions imposed by the governments of most countries such as complete lockdowns or at the least some restriction on the ability to carry on business in the ordinary course (for example, restrictions on which businesses can be open and on the maximum number of people permitted to gather in places such as normal business premises). This has caused various difficulties for the IT service providers which can negatively affect their customers in the form of late delivery, non-compliance with SLAs and an increased risk of data breaches. The issues are mainly related to:
- lack of sufficient infrastructure to work efficiently from remote locations
- increased risk of cyber security attacks and
- unavailability of resources
In India, where the nationwide lockdown took effect at very short notice, not all service providers could properly adjust to the new circumstances, especially if their contingency plans were not sufficiently robust. This has resulted in difficulties for employees working from home, simply because of the lack of sufficient IT-infrastructure in the residential areas – for some, working from home has been almost impossible. Even where the infrastructure is in place, consultants may have difficulty maintaining proper traction. In Argentina for example, the general complications of COVID-19 and the subsequent government restrictions are expected to cause difficulties in performance, as the restrictions may require changes to the possibilities to perform the services, and consequently sticking to timelines are almost inevitable and will necessitate contract re-negotiations.
In Eastern Europe, the requirement to work from home has also posed concerns. Unlike parts of India, the bandwidth of the infrastructure has generally been able to cope with the large number of people working remotely with only minor hick-ups. In Ukraine, the issues mainly pertain to the risk of cyber security threats, especially if the remote workstations cannot maintain the same data security standards (e.g. if they are not using secure communication lines). This introduces greater risks for those companies which have granted their service provider access to sensitive or personal data. Poland has faced similar issues however to a lesser extent, as companies are only encouraged, but not required, to have their employees working from home. However, the closure of schools/day-care centres has meant that some service providers are facing issues in maintaining enough resources on-call, as many employees take leave in order to care for their children.
The physical and practical restraints are not the only issues faced by the IT service providers. The general uncertainty in the global economy also impacts on the market and the risk of companies becoming financially distressed or even going bankrupt is no different in this market. Argentinian companies may not lay-off staff due to the COVID-19 lockdown, but will have to pay salaries at least until 1 June, which may result in cashflow issues if the amount of work declines. Additionally, some Indian service providers are hesitant when it comes to entering into new projects simply because of the uncertainty of being able to deliver in a timely manner. The pricing of Ukrainian companies is expected to go down and may become more competitive in the global marketplace. Despite many governments implementing support schemes to keep businesses alive, access to such schemes may not be available to the service providers, in Poland for example such support schemes are only available to companies paying taxes in Poland or whose beneficiary owners are Polish tax residents – outsourcing businesses that have beneficiary owners outside Poland or do not settle taxes in Poland would miss out on the government aid.
How to mitigate the risks of a non-performing service provider
The issues faced by the service providers will likely – at least to some extent – have an impact on their customers' businesses. Even though such impact may vastly differ between customers depending on the specific services, the provider and location in question, all companies outsourcing IT should prepare themselves and take steps in order to mitigate any potential negative impact on their nearshore and offshore arrangements as a result of COVID-19. All companies outsourcing IT should consider taking the following steps:
- reach out to the service provider and have an open dialogue to understand the issues the service provider is facing – some may be temporary and can be managed e.g. by short deadline extensions, amended milestones or waiver of remedies, while others can be long term and may require a change of provider or a re-negotiation of the current agreement
- assess the impact of the provider's potential difficulties on the business – are the services business critical or will the provider be able to continue day-to-day operations (almost) unaffected?
- review your contingency plans and exit strategies and make sure the internal setup and retained organisation is ready to execute on the plans – if needed
- check your contract and know your rights. Even though resorting to contractual remedies may not be the right first course of action, it is important to know the contract's provisions on force majeure or hardship, and what levers are available if the service provider faces continuous problems (step-in rights, SLA credits, termination rights, etc.)
- consider and prepare alternatives including to have additional suppliers on standby in the event of a non-performing service provider
- monitor the situation closely and check-in with the service provider on an on-going basis and act as soon as issues are identified in order to mitigate these early. Ask the service provider for a written evaluation, e.g. of the actual and potential impact on services as well as the risks now and in the short and medium term.
Originally published 29 April, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.