Amid an unsteady economic recovery and an election year, outsourcing has become both a corporate buzzword and a politically charged issue. Major publications examine the topic from multiple angles, and CNN's Lou Dobbs even maintains a running list of American companies "exporting" jobs overseas. No fewer than a dozen federal bills and resolutions aimed at curbing offshore outsourcing have been proposed, and a majority of states have introduced some type of anti-outsourcing legislation.

At the same time, companies in a wide array of industries increasingly view outsourcing as a means to achieve cost or operational goals and as a tool for strategic and cultural transformation. Corporate strategies have grown steadily more fluid and adaptive, and in most organizations the line marking what is too critical to a company's operations to be handled by an outside party has moved closer to the corporate office. Functions such as human resources, finance, marketing, project management, customer care and customer acquisition are being outsourced with growing frequency.

The result of the heightened scrutiny, combined with the diversity and scope of the functions being outsourced, is a need for more sophisticated transaction structures. That need has inevitably brought outsourcing within the purview of corporate development teams, who are responding to the new environment in a variety of ways.

Most companies are expecting tighter regulation of outsourcing, even though the future of any of the pending proposals remains far from certain. And many companies have begun structuring (and restructuring) their outsourcing relationships in anticipation of stricter rules. But the responses fall into two very different categories. One strategy calls for tightening the reins on the governance of the outsourced function, thereby ensuring that down the road the company can control its own compliance in a changing regulatory environment. The other strategy takes a hands-off approach, easing the reins on the day-to-day mechanics of governance and making the vendor responsible for compliance with changing laws.

Both approaches can be appropriate, depending on the circumstances of the company and the capabilities of the vendor. With either approach, the key to success is open dialogue between the company and service providers.

Current and pending data security and consumer protection laws have prompted some companies to seek firm assurances from their outsourcing vendors that the vendors' facilities, systems and human resources policies have adequate security measures in place. In the wake of Sarbanes-Oxley, and with new accounting rules being developed by the Securities and Exchange Commission and Public Company Accounting Oversight Board, companies are seeking to bolster their rights to audit their outsourcing vendors' records, facilities, software, hardware and security measures.

With increased regulatory scrutiny of offshore service locations (not to mention the rise of global terrorism), the legal doctrine traditionally known as "Force Majeure" has taken on added meaning. Companies are imposing more stringent business continuity and disaster recovery obligations on their vendors. They are also paying more attention to the corporate entities that are signatories to their outsourcing contracts, so as to ensure that they are not simply contracting with local holding companies but, rather, with companies that have assets to stand behind the promises made in the contracts.

Some things, to be sure, don't change. Managing a relationship with an outsourcing partner will continue to involve putting the right contract governance and management procedures in place, communicating effectively and dedicating the necessary time, resources and energy.

But as the world of outsourcing continues to grow and evolve, social and political forces will inevitably help shape it, for reasons both good and bad. Meanwhile, companies seeking to compete in an ever more dynamic economy will continue to refine the focus on their core competencies and offload work best done elsewhere. As this decade unfolds, the competitive differentiation for many global organizations may well turn out to be the ability to effectively manage multiple outsourcing relationships - and the myriad business and legal issues those relationships entail. - John Halvey

John K. Halvey is the head of the technology and outsourcing group of international law firm Milbank, Tweed, Hadley & McCloy LLP.

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