Many business people accept the idea of a contract as a given. Sure; you are buying a service, so you need a contract, right? In the case of outsourcing to a foreign country, this seems to be even more of an assumption.
Here’s a question: if you do not know the company at all–except for a few references on the internet and a phone conversation or two– how do you know that signing a contract will head off any problems? And how will the contract work if you are thousands of miles away? Finally– what will you do if you actually need to consider litigation at some point?
Recently, before doing business with an IT company overseas [it was in Russia/ I thought it better not to say where], a U.S. company refused to sign a contract. Why? The IT firm required this preliminary contract just to be able to negotiate with the U.S. company and provide any details about pricing and terms and actual contracts! The U.S. company refused to sign. This idea of a preliminary contract was not a good sign: it indicated that the IT company was highly suspicious and unfriendly, had had several bad experiences communicating with or working for foreign companies, or was either burned out or inexperienced. In short, they did not want to do the work of finding out what the U.S. company needed or working with them on a trial basis for even a small paid project first– without a contract–so they could all get to know each other. If you find out at the very beginning that this is how a company operates, it is a blessing…but don’t think it will get any better because you sign a contract. Run, don’t walk, and find another company–no matter how friendly the sales people seem up front.
Another scenario: an IT company in India wants a U.S. company to sign three separate contracts before any serious conversations about work can begin. One is a “Master Services Agreement” that describes how the three contracts work, includes warranties, obligations…and an entire section that suggests what part of the client’s website might in fact be the intellectual property of the company creating or working on the site. This master contract by itself is daunting, but the combination of the three contracts (including a SOW or scope of work, plus a mutual non-disclosure agreement) makes the relationship–before it has even begun–a maze of unpleasant twists and turns, unknown obstacles, and hidden agendas.
Consider this advice from www.answers.onstartups.com:
Enforcing a contract where the parties to the contract are from different countries is very difficult. The reason is that even if you win from a legal perspective, you still need to collect damages, and in order to collect damages you probably need to file suit in the country of the other party. (enforcing international agreements, 2011, http://answers.onstartups.com/a/27846)
In other words, with any contract, you need to know ahead of time what court has jurisdiction over that contract; this must be agreed in advance. Otherwise, it is just a friendly understanding between business associates, not an enforceable legal contract. The commentary justly concludes:
Even if you get over that hurdle, and you win the lawsuit and the court says that the defendant owes you $1 million, you have to be able to collect that money from the defendant. If the defendant does not have any assets in the U.S., then the only way to collect money would be to sue the defendant in a country where the defendant has assets, and that country may not honor the judgment of the U.S. court. In summary, if you have a contract with a party in Timbuktu and that party breaches the contract, you should just write it off and move on because the likelihood of collecting any damages is minimal. (http://answers.onstartups.com/a/27846)
In other words, an international contract may end up being just for show, a club held up in the air to convince you the company has clout. It is at best a power play by the outsourcing company, and does not often benefit the client as much as it benefits the outsourcer. Unless it includes statements that benefit your company, it is a bad start to a business relationship.
In my experience, it is whatever is left out of a contract that invariably becomes the problem. Remember, the contract specifies what service you are getting, for how long, and some liability issues. But the contract does not often control who will be doing the work, and how efficiently the work will be done. It is rare that an IT company will give you a contract that protects your interests as well as it protects theirs. You also don’t know if they are really giving you as many hours as they bill you for.
If you must sign a contract, be sure you have the ability to add or change certain parts, including the level of workers they give you and the quality of the work: be sure these statements are adequate. But you have to let them cover themselves, or they will not work for you. If you refuse to sign a contract, they will most likely not do any work for you at all.
If you are outsourcing, be prepared to think hard about the details of any contract and ask hard questions like ‘Why should I guarantee the hours of work I am giving you–if you can’t guarantee the quality?’ And—if you ask this kind of question ahead of time, you will find out enough about the company so that you will get a better idea of whom you are dealing with, how they really do business.
Ultimately, that is why, if you outsource, you may want to go to the country to meet them…and then be prepared to lose everything you have already put into the relationship. If you find you do not like how they do business, there is no use pursuing a business relationship at all.
In other words, agree on scope of work, penalties and incentives… and try to make a preliminary “contract” or agreement by email, but suggest that you make the contract informal until you have had a chance to work with the company for a short while. If a company will not allow you to have any input into how the relationship will work, and will not do a paid test project for you without an extensive legal contract, chances are that signing a contract with them will not lead to results you will be happy with, and you will save yourself a lot of grief and money if you Just Say No.
You might also like:
Pre-contracts for outsourcing: before the real contract!
Using contracts to get more clients for your call centers