Fiscal risks
Offshore outsourcing can present unique financial risks. Contracts that include future payments in a foreign currency can be subject to exchange rate fluctuations. Financial hedging or limiting contracts to New Zealand dollar terms can help mitigate this risk. Offshoring contracts might also incur unexpected liabilities in the foreign jurisdiction (e.g. taxes).
Unclear, ambiguous or overly flexible contractual terms may result in uncontrollable cost increases. These can occur because of assumptions made about business practice norms or simply because the parties sought a flexible and adaptable relationship. Clear contractual terms and variation processes may be the best way to avoid misunderstandings and unexpected costs.
Fiscal risks
- Currency fluctuations - cost movements exaggerated and fixed price contracts
- Lock-in risks - price changes by suppliers, high set up costs, high compliance costs, fixed prices achieved by varying quality in response to changing demands and conditions, costs of repatriation or transfer to another supplier
- Unplanned liabilities and costs (e.g. taxes).
Example mitigations
- Consider money market hedging, forward contracts and option hedging for significant future payments
- Implement contractual controls on price changes by suppliers
- Contract for flexibility to reflect changing financial market conditions
- Engage expert advice on the legal/financial concerns in the foreign jurisdiction.
