Outsourcing Industry is Affected by Data Localization Rules
If we roll back to the 90’s, that was a time that outsourcing and the internet took off almost simultaneously. The advent of the internet and its adoption meant that anyone could access any information from anywhere. That’s free data flow. The rapid increase in outsourcing also meant an increased transfer of data across geographies and across different parties.
The outsourcing industry is now in its mature stage and by estimates from various sources is already a 300bn US$ industry. The Indian IT service sector is 167bn US$ and projected to expand at 7-9%. The Indian IT firms and technology MNCs that have set up huge bases in India benefit from the free data flow.
In this article, I want to analyse the impact of recent data localization laws/rules that several countries are contemplating or have already put in place regarding the outsourcing industry.
What is data localization?
It’s important to understand various interpretations of data localization to ascertain its impact on the outsourcing industry:
1. Export restrictions – Such restrictions mean that data cannot be exported to another country either in original form or copies. This means that data has to reside locally only and hence requires storage capability in the country.
2. Location Restrictions – In some cases, the original data cannot leave the country but the copies/replica can be exported to other countries. Malaysia, Indonesia and a few more countries have such policies.
3. Consent-based permission – A few countries mandate that foreign companies must seek approval from authorities before cross-border data flows. Switzerland is such an example.
4. Guidelines/Standards – Most countries have, however, not defined any strict data localization policies. Instead, they have formulated certain guidelines that companies need to adhere to. These guidelines vary based on the sensitivity of the data.
The European Centre for International Political Economy (ECIPE) has claimed that data localization requirements can have a negative impact on GDP in several countries (Brazil -0.8%, India -0.8%, Republic of Korea -1.1%, Indonesia -0.7%). This would have the effect of making services more expensive for customers.
Clearly, the impact of stringent data localization rules does not seem to be very favourable to the outsourcing industry:
1. Increase in cost of services – Depending on the stringent requirements of the rules, the delivery cost of services could go up. It is going to be expensive to set up new data centers and maintain them. It is also going to be expensive to meet the requirements of additional compliance, data transfer, replicas etc.
2. Risk and Compliance – Adherence to local laws of each country means additional effort, resources and activities. Service Providers will incur more costs and will try to pass this on to the buyer.
3. Global Deals will need to be reviewed and restructured – Outsourcing contracts need to be analyzed and changed in order to incorporate new data requirements and adherence to laws. This itself opens up a Pandora’s box as both buyers and sellers of services will try to influence the restructured deal.
The future is Data
The future is data. Many future solutions will require heavy use of data. Various solutions will increasingly involve analytics and AI – all of which needs access to data. Data localization in destination countries like India is not the only factor that will impact the outsourcing industry, but localization rules from sourcing countries will also impact it.
These countries and their respective governments would do well to not impose heavy restrictions on data flow. Instead, governments should look at a strategy to incentivize the data industry. Organizations should be encouraged to invest in data with favourable laws and effective guidelines to prevent its misuse.
There is a need to reform data law for enforcement and multi-level agreements, and define new data-sharing bi-lateral agreements between countries.
- Let’s not act in fear, but rather make effective policies that encourage data sharing and prevent its misuse.