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Coronavirus - Response of the Indian Outsourcing Industry - Global

  • Global
  • Coronavirus - Contractual issues
  • Outsourcing and offshoring

12-05-2020

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The global response to the coronavirus pandemic has shone a spotlight on the resilience of global supply-chains. In this Q&A Craig Rogers, a partner in our International Outsourcing practice, sat down with Harsh Walia (partner at Khaitan & Co, Eversheds Sutherland’s network firm in India) to ask him some of the questions most commonly posed by our clients.

Q&A:

Craig:

Harsh. Thanks for taking the time to speak to us. As you know, there is a significant reliance by businesses in all sectors and public sector organisations (particularly in Europe and the US) on the Indian outsourcing industry. This applies across IT and Business Process Outsourcing services, and includes financial institutions who have regulatory requirements to ensure continuity of service and security of customer data.

What we would like to do in this Q&A is to:

  • discuss the immediate response of the industry to the virus (and government-imposed restrictions);
  • explore some of the lessons learned; and finally
  • look at the future of an industry which not only plays a key role in the operations of major global companies and government departments but is a significant contributor to the Indian economy

Harsh:

Sounds good, Craig. As you say, the outsourcing industry is a key contributor to the Indian economy and supports a significant number of public and private-sector organisations around the world, including the EU and the US. Let me start by highlighting the Indian government’s response to the COVID-19 outbreak, and the specific regulatory measures taken to safeguard the outsourcing sector. I will also briefly outline the outsourcing industry’s response to the present situation.

The most significant measure adopted by the Indian government to contain the spread of the COVID-19 virus was the announcement of a nationwide lockdown requiring the complete stoppage of all non-exempted economic activity and a general restriction on public movement and gatherings. Lockdown restrictions have been in place since 24 March and are gradually being relaxed as the spread of COVID-19 disease is being brought under control.

Such restrictive measures have naturally resulted in severe business disruptions across India, including in the outsourcing sector. To ensure business continuity and fulfillment of key customer contracts, major outsourcing providers have taken steps to move to a remote working model, with as much as 70% of their workforce reportedly working from home. The shift to a remote working model has however not been seamless on account of the unprecedented nature of the crisis, governmental restrictions, and infrastructural and technological limitations. The impact on financial-sector outsourcings has been particuarly acute since in a number of cases these arrangements were subject to contractual restrictions which prohibited access to customer data outside of designated supplier-locations.

The Indian government has relaxed prescriptive compliance conditions in view of the economic significance of the outsourcing sector. These include:

  • allowing IT and Outsourcing service providers to resume business operations from office premises at reduced capacity (in areas designated as red or orange zones), or without restrictions (in green zones);
  • granting concessions in relation to taxes and corporate filings;
  • relaxing work-from-home (“WFH”) requirements (including waiving the requirement for security deposits, prior governmental approvals, and provider-provisioned VPNs); and
  • granting rental and lease exemptions for IT / Outsourcing providers located in software technology parks in India (“STPI”).

We are expecting an imminent announcement of futher economic stimulus measures.

Can you summarise the immediate challenges faced by outsourcing companies in response to the Indian government lockdown?

As stated in my previous response, the Indian government is now lifting lockdown restrictions in a phased manner and taking steps to reboot the economy. Presently, apart from areas designated as “containment zones”, IT / Outsourcing activities have been permitted in all others regions (designated as red, orange or green zones) with reduced capacity or in certain cases, without restrictions. In this context, the immediate challenge facing outsourcing companies is charting a business resumption plan and revaluating their operating-models in a post-COVID economy. Several prominent outsourcing companies (such as TCS) are evaluating the possibility of shifting a significant proportion (up to 75%) of their workforce to a permanent remote-working model, in a bid to reduce operating costs and offset the impact of any future business disruptions.

Whilst increased remote-working may reduce over-crowding (and pollution) in urban areas, the availability of adequate hardware and reliable, high-speed internet connections for homeworkers (particularly in rural areas) could take some time to realise.

Further, draconian legal and regulatory requirements (such as the mandatory use of in-country VPN gateways for home-working, and government-issued permits for office workers) are driving increased investment and red-tape for outsourcing companies, thus creating further challenges.

It was reported that a large portion of workforce travelled from large cities (such as Delhi, Pune, Bangalore, Mumbai and Chennai) back to their villages in the days after the lockdown? Do you feel that IT workers had the infrastructure and equipment necessary to work from home?

Soon after the announcement of COVID related lockdown restrictions in India, a large portion of the unskilled workforce travelled from large cities back to their villages due to financial imperatives. However, the outsourcing sector appears to have been less impacted by this migration as the workforce consists largely of skilled personnel.

That being said, a significant portion of office workers lacked the necessary infrastructure and facilities to continue their tasks effectively, during the first few weeks of the lockdown. It appears that outsourcing companies have, in the interim, taken steps to address these issues and ensured the availability of necessary equipment and infrastructure to faciliate home-working. However, these issues have not been entirely resolved with infrastructure issues remaining a key challenge.

There has been a lot of discussion over the last few weeks about increased activity by hackers and state-sponsored groups. What practical steps have companies taken to ensure resilience to cyber-attacks and the security of data and systems accessible by home-workers?

Rising incidents of hacking, identity theft and malicious payload deliveries have indeed been observed in the weeks following the lockdown in India. With organisations being forced to shift overnight to off-location operations and WFH models, remote infrastructure vulnerabilities and security gaps are being exploited to secure unauthorised access to proprietary systems and data.

In terms of practical steps to ensure cyber-resilience and enhance data security, we are seeing companies increasingly implementing secure access technologies, such as VPNs, two-factor authentication and other ID and access-management controls for home workers, as well as increased monitoring and threat-detection tools.

Outsourced service providers are also revamping organisational policies (including Bring Your Own Device (“BYOD”) and work from home policies) and data breach protocols in response to the challenge. Employee education is also being prioritised by some companies to enhance awareness about emerging threats and data security best practices.

Can I ask a question about people? By some accounts there are 4 million people employed in the outsourcing industry in India (TCS, Wipro, Infosys, HCL have nearly 1 million employees between them). Are you aware of any companies reducing their workforce or implementing “furlough” schemes as we have seen in Europe? Has the Indian Government provided any financial support to the industry?

Downsizing measures are certainly being explored by Indian technology and outsourcing companies in the wake of the business slowdown caused by the COVID-19 crisis, with news reports suggesting that some business in Pune and Bangalore have already laid-off a sizeable portion of their workforce. In India layoffs and dismissals are regulated by a complex legal framework, and there is no clear legal basis for ‘furlough’ measures deployed in other parts of the world.

To further add to the confusion, the Central Government and various state governments have issued orders requiring payment of wages to workers without any deductions during the lockdown. This increases the complexity of implementing short/medium term downsizing measures in compliance with Indian law.

To limit the financial impact of the COVID-19 pandemic (and as discussed above), the Indian Government has provided relief to corporations in the form of tax relief, moratorium on loan repayments, deferments in payment of interest, corporate filings and working-from-home arrangements.

A relief package worth INR 1.7 trillion (nearly USD 23 billion) was also announced. However, this package focused largely on providing social security measures for affected workers, cash transfers to citizens and health insurance benefits for healthcare workers. Governmental relief for the outsourcing sector has so far been limited to rent deferrals for businesses operating in technology parks and WFH exemptions. An additional economic stimulus package is reportedly in the works and is likely to be announced soon.

Now a two part question: have you seen customers relaxing service delivery expectations as a result of COVID-19 (i.e. allowing personnel to work from home, extending delivery deadlines, or reducing service levels and KPIs)? If so, do you think that the parties have been disciplined in how they reflect these changes in their contracts?

In the present circumstances, customers and outsourced service providers are revaluating key contractual parameters (such as delivery timelines, service levels and discounts) for mutually beneficial outcomes.

Service providers are re-evaluating their arrangements with customers to assess the legal and commercial impact of breaching contractual obligations, including service standards and delivery schedules. We have already discussed changes required to outsourcing agreements to permit remote-working arrangements, and the resultant impact on information security standards.

Some service providers have invoked Force Majeure provisions to secure full or partial relief (e.g. for missing a 99.9% availability service level, a fixed deadline for a project milestone, or for paying service credits), whilst some are relying on Force Majeure clauses to re-negotiate service standards.

To be clear, the crisis has impacted business-as-usual not only for the outsourcing industry, but also for their customers. Whilst service providers are struggling to maintain service standards (with a reduced and remote workforce) customers are facing the prospect of shrinking demand and reduced cash flows. It is no surprise then that customers are demanding discounts, delaying payments and seeking to introduce variable or “demand-based” pricing models for outsourcing services.

Considering the impact of the crisis on both customers and outsourcing entities, it will be crucial for parties to formalise and document any changes to their outsourcing arrangements to ensure legal certainty and avoid disputes.

What lessons do you think businesses have learnt from the experience of the past few weeks?

The COVID-19 crisis has underscored the importance of pre-emptive crisis planning by organisations, which may manifest through investment in new technologies, implementing robust data security standards and establishing reliable operational continuity protocols.

The crisis also highlights the need to carry out timely reviews of organisational policies (such as BYOD, home-working and data security policies) to respond and recover from unforeseen operational disruptions. This takes on a new complexion when we consider the forthcoming Indian data protection law which is likely to contain specific obligations regarding the security of personal data.

From a legal perspective, the crisis has highlighted the importance of including appropriate contingency arrangements in commercial contracts to address unforeseen events; reviewing how and when Force Majeure clauses can be invoked; how parties respond to changes in law, regulation or Government-imposed measures; considering how parties implement changes to existing delivery models and charging arrangements; and how customers may practically step-in to provide services themselves. It also highlights the importance of governance arrangements and mutual cooperation to manage and mitigate the shared-impact of market-impacting events.

It is also clear that contractual safeguards alone are not sufficient – business continuity plans need to be tested, reviewed and updated on a regular basis to ensure their adequacy.

Some commentators have argued that one of the lessons of COVID-19 is that companies (in Europe and the US and elsewhere) should be reducing their reliance on off-shore suppliers and service providers. How do you think the Indian market will respond?

To stay relevant in a post-COVID world, the Indian outsourcing industry needs to adopt a range of measures to build on its existing strengths and deliver high levels of performance at lower costs to retain its customers. It will also need to respond to competition from technology and business process outsource providers in other parts of the world.

Despite the current pressure on cash flow, Indian service providers will need to make significant investments in automation tools and infrastructure, recognising that their customers will seek to drive increased digitisation and automation of their own services, and reduce their cost-base. It will also need to continue to invest in the training and retention of staff, and work closely with government to ensure the long-term success of the industry.

We would not be surprised if we see some rationalisation, partnerships and consolidation amongst some of the larger players in the market. This may be (a) the indirect result of responding to increased pressure from near-shore providers (in locations such as Poland, Belarus, Latvia and Ukraine); and (b) building value in the long term, as the Indian technology and outsourcing industry seeks to move up the value chain, diversify and take on more consulting and strategic advisory projects, and pursue higher profit margins.

Editorial note: this briefing reflects the position as at 11 May 2020 but relates to an evolving and fast-moving situation. This briefing is not a substitute for legal advice and the authors have no liability for reliance on any of the comments or statements made herein. Please contact one of the authors or your existing Eversheds Sutherland or Khaitan & Co. contact if you would like further guidance on any of the topics or themes raised in this briefing. This briefing is copyright material and cannot be reproduced without consent.