Hidden Costs of Outsourcing and Offshoring for Financial Services Firms: Third-party Financial Data Licensing

Kristin Gallagher, Director, Global Sourcing and Procurement in the Financial Services industry, Russell Investments

Before you finalize that outsourcing or offshoring deal, read your third-party data licensing contracts carefully—it could cost you if you don’t.

Third-party data providers—think firms like Bloomberg or NYSE that create and sell stock exchange or financial instrument pricing data—are getting more proactive in pursuing alleged unlicensed use of their data by licensees; key areas of focus often include reviewing licensees’ use of outsourced/offshored providers to determine if the licensee has sent data to other parties without having proper licensing in place. This can result in penalties as well as costly new or expanded licenses to cover the outsourced/offshored use.

What do data providers consider when determining your licensing needs? Data providers will typically focus on several key criteria:

• Where the data is used—Physical locations, which may include software storing the data
• Who is using the data—Business units using the data, including number of users
• How you are using the data— Are you using the data for research or benchmarking your products against the data? Will your firm be using the data to create and sell products?
• What data you’re using—are you leveraging high-level summary numbers on a periodic basis or do you require the detail or data snapshots throughout the day?
• To whom can you send the data— can you re-distribute the data outside your firm? If so, are there any restrictions?

Outsourcing/offshore, affiliate, and re-distribution rights are critical to understand when it comes to outsourcing and offshoring deals. This is where firms often overlook data licenses and what they are actually covered to do in an outsourced/offshored arrangement. As part of your outsourcing/offshoring deal, you need to look at several aspects of data usage to determine if your license offers appropriate coverage, including:

• Will the outsourced/offshored firm or location need access to the third-party data as part of their scope of services?
• What data is required?
• Will the data be provided by your firm or is the outsourced provider expected to source the data themselves?

If you will provide the data, do you have the rights in place to send the data to an outsourced/offshored provider or location? Does your license recognize an outsourced/offshored firm as an extension of your firm?

If you expect outsourced or offshored firms to source the data, and don’t have adequate re-distribution coverage or recognition of outsourcer use, be prepared for additional costs as part of your model. Most outsourced providers won’t absorb data licensing fees as part of relationship and will either pass through the licensing fees or have you execute a contract with the data provider for their coverage, which may include tri-party agreements, which may include your firm assuming liability for the outsourcer/ offshore firm’s usage of the third-party data.

Third-party data providers have the right to protect their intellectual property; ensuring you have a clear and comprehensive understanding of your usage of third party data and working with data providers to determine the licensing required ahead of making any decisions on outsourcing or offshoring will mitigate financial and reputational risk to your firm.

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