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We have stated that the BPO contract negotiations should be conducted in a positive-sum spirit, with an eye toward building a trusting, synergistic relationship. At the same time, it would be naive to assume that trust is a sufficient governing mechanism.

In fact, drafting precise contract terms, including avenues for remedy in case performance falls short of expectations, can help preserve a relationship during difficult stretches.

The following sections outline terms that should be considered and included in the formal BPO contact. Although not an exhaustive set, the terms discussed are part of nearly every BPO contract and constitute the core of the working relationship. The terms discussed include the following:

? Scope of work
? Service level agreements
? Pricing
? Term of the contract
? Governance
? Intellectual property
? Industry-specific concerns
? Termination of the contract
? Transition
? Force majeure
? Dispute resolution

We discuss each of these contractual elements and, in many cases, high-light alternative strategies. Because the BPO contract is such a critical part of the success of the working relationship between buyer and vendor, it is recommended that third-party (legal) support be used in drafting, negotiating, and modifying the contract.

Scope of Work
The linchpin of the outsourcing contract is a description of the nature of the work being outsourced, often refereed to as the “scope of work” or “statement of work.”

The BPO buyer’s attorneys must work closely with the buying organization’s personnel to become intimately familiar with the details of the outsourced processes in order to prepare a statement of work that is clear and complete.

Provisions of a well-drafted outsourcing contract must also outline the change process as it pertains to the scope of work, whether such change is incremental because of technological developments or organic because of acquisitions or divestitures by the client.

The outsourcing contract should also specifically delineate the processes by which the work will be transitioned from client to vendor. In this respect, the transaction mirrors the purchase or sale of a business unit.

Personnel, hard assets, and soft assets, such as intellectual property, vendor contracts, and license agreements, all may be transferred to the vendor.

Particular care must be taken in the personnel area. Employees with key institutional knowledge or other unique capabilities should be considered for retention. Well-qualified project managers must be retained to staff the buyer’s governance team.

Attention must also be paid to the employment laws that regulate the BPO provider. For instance, in the European Union (EU) in certain cases when a business unit is transferred, the new employer must offer the transferred employees the same wages and benefits that the employees have with their current employer.

Staffing needs should be carefully considered because layoffs and reductions in force are often more complicated in foreign jurisdictions. Buyers and vendors should discuss and agree on the vendor’s intentions regarding the use of subcontractors. Attention must also be paid to US. labor laws such as the Worker Adjustment and Retraining Notification Act WARN).

In nearly every BPO relationship that involves international transactions, the parties to the contract must consider employment laws and regulations. Buyers and vendors alike can be held liable for violating or flouting employment laws, which vary widely from country to country.

For instance, the EU has enacted stiff worker protection laws that protect workers from loss of income if their employer should decide to outsource their jobs.

The Applied Rights Directive was enacted nearly two decades ago and is designed to protect employees’ jobs, pay, and conditions when organizations sold or outsourced parts of their business operations to other companies or contacting firms.

The United Kingdom (UK) has enacted similar legislation known as Transfer of Undertakings Protection of Employment (TUPE).

Together, these regulations are potent protectors of employment rights and make it difficult for European firms to realize dramatic cost benefits from outsourcing.

The Case Study highlights difficulties experienced by Compaq as it wrestled with TUPE regulations with an outsourcing client.

Service Level Agreements
In a service level agreement (SLA), a vendor agrees to achieve defined levels of performance.

If the vendor fails to meet these defined objectives, the SLA provides the buyer with various rights and remedies. A carefully crafted set of SLAs aligns the interests of the vendor and buyer. Poorly dratted SLAs almost ensure a failed outsourcing relationship.

Unfortunately, SLAs are among the most difficult of outsourcing contract provisions. A well-drafted SLA requires an intimate understanding of business processes by the attorneys drafting the SLAs (SLAs should not be drafted by nonlawyers).

The parties need to be able to document in great detail the requirements of each outsourced process and agree on the manner of measuring the service levels and the consequences for the failure to meet them.

The foundation of the SLA is defining which service levels and key performance indicators (KPI) to measure.

An SLA may be tied to anything that can be objectively quantified, but is usually a measure of such KPI as quality, speed, availability, reliability, capacity, timeliness, or customer satisfaction.

For instance, for a call center, service levels might include the average time to answer a call, the duration of the call, the percentage of issues satisfactorily resolved in the first call, and customer satisfaction.

Service levels must be intimately tied to pricing in order to properly align the financial interests of the vendor and the business goals of the client.

For instance, pricing tied to the number of problems fixed may create a disincentive to stop the problems from happening in the first place. Quality is generally a better service level measure than quantity, especially in fixed-price scenarios.

Once appropriate service levels are agreed upon, terms must be used with ‘precision. For instance, what does it mean for computer system to be “available”?

If the buyer can access the system, but it performs sluggishly, is that system available? What if the system is unavailable to the buyer as a result of something beyond the vendor’s control?

Who bears the risk of a failed service level in that instance? Drilling down to issues such as these in the negotiation process will avoid needless disputes during the performance stage of the outsourcing life cycle.

Service levels may vary depending on hours of operation or other variables. Response times should take these factors into account, including differences in time zones. Agreement must be reached between the parties regarding how to measure service levels.

Technologic capabilities may be a constraining factor, particularly with smaller clients and vendors. Softer measurements, such as customer satisfaction, may meet with resistance, both from the vendor and from the client’s personnel who are now required to fill out satisfaction surveys as a result of the outsourcing process.

If possible, the client should implement the service level measurements before outsourcing, both to obtain a baseline and to determine the adequacy of the measurement process.

The SLA should address who is responsible for measuring service levels and how often. Depending on the type of activity being measured, service levels can be measured by the vendor, the buyer, third parties, or some combination.

The time period for which the service level is measured should be long enough to be meaningful, but not so long as to be cost prohibitive or unfair to the vendor. Of significance is the fact that pricing, in the form of credits or bonuses, may be tied to achieving or failing to achieve service levels, as well as events of default.

Credits can be handled either through cash rebates to the buyer or credits against future amounts owed to the service provider. Reporting and availability of compliance data should be agreed upon.

One common mistake in setting service levels is to set a standard or average, but to neglect to define appropriate service levels for the out-of-compliance performance.

For example, it the service level for a call center requires that 95 percent of all calls must be answered within a certain time period, the SLA should also address the minimum acceptable standard to the remaining 5 percent of the calls. SLAs should set target service levels and minimum service levels.

Deviations from target service levels result in credits to the buyer or bonuses to the vendor, as appropriate. Failure to minimum service levels may result in termination of the outsourcing contract for cause.

Careful consideration should be given to the buyer’s remedies resulting from failure to meet service levels. Beyond credits, termination of the outsourcing contract may be appropriate in the case of failure to meet minimum service levels, material deviations from target service levels, or failure to meet, target service levels on a repeated basis.

As with scope of work and pricing, the BPO buyer and vendor alike need to anticipate that service levels will change over time, whether because of changes in customer requirements, technologic advances, regulatory requirements, or improvements in the service provider’s processes.

Because of the specificity required in SLAs, vendors and clients should fully discuss change processes that will be agreed on.

Both parties need to keep in mind that the touchstone for SLAs and change processes should be to align the interests of the service provider and the buyer as much as possible.
Pricing
Pricing of outsourced services may be set in any number of ways, and combinations of the various pricing alternatives are common.

Fixed fee, volume of transactions, and cost plus are some common examples of pricing alternatives used in BPO relationships.

The choice of fee structure for a BPO contract should be motivated primarily by the outcomes that are to be attained. Buyers and vendors alike must think carefully about the fee structure of the contract because unexpected future events could lead to financially burdensome obligations.

For instance, a BPO contract may specify that the vendor receive compensation for every successful handling of a returned retail item. This may be a workable fee structure if the retailer controls its returns and has trained its customers to return goods only if they have the receipt.

Nevertheless, the fee structure would become unworkable if the retailer unilaterally decided to waive the receipt requirement. Under the changed policy, the BPO vendor may be overwhelmed with returned goods that it has no way of verifying.

Outsourcing arrangements can run from thousands to millions of dollars over the course of a multiyear agreement, depending on the size and complexity of the work.

In general, contracts can be written on a fixed-price or variable-price basis. With fixed-price engagements, the vendor assumes the risk of absorbing cost variability.

When set too low, fixed-price arrangements diminish the vendor’s flexibility and motivation to respond to changing business objectives or emerging technologies.

Although variable pricing allows for increased risk sharing, it may also create misunderstandings if and when costs exceed expectations, especially if scope and accountability are poorly defined.

Many BPO buyers opt for a “pay as you go” utility model for BPO services. This sounds good, in that companies pay only for as much capacity as they use, but how do you measure capacity?

Not long ago, the utility fee model was based primarily on technology metrics, such as CPU cycles or storage consumption. More recently, firms have been using business metrics to determine fees.

Canada Life, for instance, pays IBM a small fee for each policy it sells in return for hosting its claims processing application.

Digital River’s fees are based on the amount or paraphernalia sold through the Major League Baseball Web site it built and hosts.

Term of the Contract
The term of the outsourcing contract is an important consideration, especially in view of the statistics suggesting that many companies terminate outsourcing arrangements before the end of the contract period.

The negotiated term of the BPO contract should at minimum match the life cycle of the processes involved and changes in the business cycle.

Setting the term should take into account the volatility of the outsourced service, including anticipated changes in scope, SLAs, and pricing.

Setting the term should also be considered in the context of the client’s night to terminate the contract for convenience and the direct and indirect costs associated with such termination, as discussed later.

Governance
As already discussed, an outsourcing relationship is a collaborative effort, and the outsourcing contract should be regarded as a living document in which it is anticipated that significant terms dealing with scope, SLAs, and pricing may mange over the life of the contract.

In light of these factors, governance of the relationship is critical. In essence, governance is the process of administering and monitoring the performance phase of the BPO Life Cycle to ensure that the interests of the service provider and the client remain in alignment and that the overall goals of the parties are met through the most efficient processes available. Stated more simply, governance involves assessing performance and managing change.

Depending on the size and complexity of the outsourcing relationship, governance may be implemented through single points of contact between the parties or through committees with multiple representatives of both parties.

The structure of the governance process is infinitely variable, but certain basic factors are fundamental to successful governance. Communication and reporting are essential elements of the governance process.

The governance structure should address schedules of meetings and scope of authority, especially with respect to change processes involving scope of work, compliance with SLA standards and the use of benchmarking to establish new SLA standards or pricing.

Depending on the seniority of the personnel involved in the governance process, escalation of disputes arising from the governance process may be appropriate. Support of the governance process and personnel by vendor and client management is essential and should be established at the outset of the outsourcing relationship.

Intellectual Property
The transfer, use, disclosure, protection, and development of intellectual property are some of the most significant legal considerations of the outsourcing process. In the initial stages of considering an outsourcing initiative, companies should carefully consider the intellectual property ramifications of outsourcing.

Intellectual property laws and enforcement vary considerably around the world. Many countries have laws protecting intellectual property and are signatories to the World Trade Organization’s intellectual property rights provisions collectively known as the Trade-Related Aspects of Intellectual Property Rights (TRIPs).

Nevertheless, there is a mixed track record of local enforcement of intellectual property rights belonging to US. firms outsourcing offshore.

Until the countries in which service providers are located establish a track record of protecting these intellectual property rights, BPO buyers who rely on these laws do so at their peril.

Obviously, the most prudent course is to keep vital intellectual property within the United States.

If an organization does transfer intellectual property offshore, however, it should rely heavily on self-help to protect its assets.

This begins with conducting through due diligence regarding potential vendors and their security and confidentiality procedures, as well as understanding the culture of the vendor’s country toward the intellectual property of foreigners.

It is no secret that certain countries have viewed the intellectual property of foreigners as communal property.

There are indications that India would like to differentiate itself from these other countries as an outsource provider by providing strong legal protections for the intellectual property of foreigners.

The Ethics and Governance insert cites evidence that Indian firms are superior in some respects to U.S. firms in their measures used to protect intellectual property.

Beyond due diligence, however, the outsourcing contract should specify measures to be taken by the service provider to protect the intellectual property of the client.

These measures are not materially different than the measures that domestic companies should, but often do not, take with respect to their domestic operations: background checks on employees, restricting access to data on a need-to-know basis, monitoring retention rates of employees with access to key intellectual property, and use of confidentially, nondisclosure, and noncompete provisions with these employees.

Putting these procedures in place is meaningless, however, unless the procedures are properly and consistently implemented and monitored through the governance process.

One way to increase the chances that these procedures will be properly and consistently implemented is to make sure that someone or some entity guarantees protection of intellectual property through the use of indemnification procedures.

These indemnification procedures are more meaningful it the party providing the indemnity has assets within the United States that can be attached to fund any indemnification obligations.

In addition to or perhaps in substitution for such indemnities, BPO buyers should investigate the availability and cost of insuring against the loss or theft of intellectual property.

Bankruptcy of service providers can create severe complications for buyers, even within the United States.

BPO buyers should consider escrowing critical intellectual property to ensure access in case of bankruptcy or other financial or operational failures.

Buyers should consider escrowing not just source code but also any and all intellectual property and other critical information related to the outsourced process, including the information necessary to contact and access personnel whose cooperation is necessary to exploit the full value of the intellectual property.

Another key issue concerns ownership rights to intellectual property created through the outsourcing relationship. Joint ownership of intellectual property such as patents, trademarks, and copyrights is a particularly complex issue.

The outsourcing contract should specifically address who controls this intellectual property, including the prosecution of ownership claims to these types of property.

Panties should also address the potential for licensing of this jointly developed intellectual property. Who has the right to license this property and to whom? Can it be licensed to competitors of the client?

Industry-Specific Concerns
Depending on the nature of the outsourced process, additional regulatory hurdles may need to be addressed.

If the outsourced process involves health care information such as insurance claims processing, the outsourcing contract should address compliance with the Health Insurance Portability and Accountability Act (HIPAA).

HIPAA requires that health care organizations establish procedures and systems to protect against unauthorized access to certain protected health information.

These procedures and systems include internal audit procedures, incident reporting procedures, data protection procedures, and termination procedures.

Pursuant to HIPAA, the client must have the might to terminate the outsourcing contract if the service provider breaches any provision of HIPAA and fails to cure such breach.

If the client is a financial institution subject to the Gramm-Leach-Bliley Act (GLB), and the outsourced process involves financial information of customers, then the outsourcing contract should address compliance with GLB. Under GLB, financial institutions must secure private customer data.

They must implement a comprehensive, written information security program with administrative, technical, and physical safeguards for customer information. Once again, contractual provisions are just the beginning-implementation and governance must be addressed to ensure compliance.

Termination of the Contract
In light of the statistics concerning the number of firms that terminate outsourcing contracts prematurely, termination provisions are among the most valuable contractual provisions.

The initial focus should be to anticipate the various circumstances under which BPO buyers might desire to terminate the outsourcing relationship.

The contractual right to terminate a BPO relationship can be granted for two reasons: convenience and cause.

Because of the requirement for flexibility and change management in the outsourcing process, it is imperative that the buyer has the right to terminate for convenience (i.e., without cause).

In most instances, service providers will be justified in requiring a termination fee in conjunction with termination for convenience.

This is especially true in the early years of the outsourcing relationship, when the service provider may not have yet fully recouped any capital investments it made in conjunction with establishment of the outsourcing relationship.

The amount of the termination fee should vary in relation to the anticipated financial position of the parties at the time of the termination.

Typically, service providers are not permitted to terminate for convenience because of the extreme cost, risk, and disruption resulting to the client.

If the service provider insists on allowing termination for convenience, the termination fee should reflect these factors. Typically, service providers are only permitted to terminate for cause, usually meaning the failure of the buyer to pay amounts owed to the vendor.

The outsourcing contract should specifically define what permits termination for cause by the client.

Termination for cause should include material breaches of the outsourcing contract, as well as continuing or repetitive nonmaterial breaches of the outsourcing contract. The parties should develop specific parameters with respect to the SLAs in this regard.

Termination for cause should also address financial insolvency or insecurity of the service provider.

In cases of financial insolvency or insecurity, an ounce of prevention is worth a pound of cure.

In order to adequately protect the interests of the client, the outsourcing contract should include various financial covenants and ratios, akin to those found in loan agreements, to provide objective standards for financial insecurity.

These provisions should be supplemented with reporting requirements and auditing rights so that the client can monitor the financial health of the service provider. Financial insecurity may also be tied to precipitous declines in the stock price of a publicly owned vendor.

Termination for cause may also be tied to retention of key employees or overall turnover rates of the vendor’s workforce. These are critical because they reflect on the organizational fitness of the vendor firm.

High turnover levels or the inability to retain key managers and executives are proxy indicators that the firm has internal governance issues that may place the BPO buyer at unwanted risk.

Termination for cause should also include so-called cross-default provisions with respect to the vendor’s contracts with other service providers (subcontractors) that may or may not be working on the buyer’s outsourced process.

If the service provider is in default under these contracts, it can constitute a default under the outsourcing contract. Depending on the degree of reliance by the vendor on subcontractors, termination for cause may also include default by either party under these subcontract arrangements or the financial insolvency or insecurity of the subcontractor.

Finally, termination for cause should also contemplate changes in control, both with respect to the vendor and the buyer.

Changes of control of the vendor may result in the replacement of the management team in which the buyer placed its trust at the outset of the outsourcing relationship or may result in the vendor providing services to or even becoming a competitor of the buyer with attendant risks to the client’s intellectual property.

Changes of control with respect to the buyer may result in the divestiture of the processes being outsourced or otherwise obviate the need for outsourcing in the first instance. New management of the buyer may not be comfortable with outsourcing for any number of reasons.

For these reasons, the vendor should also have the right to terminate the outsourcing contract as a result of changes in control at the top of the buyer organization.

Transition
If a BPO relationship falls apart and one or both parties decide to terminate the agreement, it may be necessary for the buyer to reabsorb the outsourced process or find another vendor.

In either case, the transition of the outsourced process under these circumstances should be considered in the original contact.

The reasons that the original contract should include provisions for the transition of the outsourced process in the case of termination should be clear.

Consider all of the planning and implementation entailed in outsourcing a process from a buyer to a service provider.

Now imagine how much more difficult that process might be when the original buyer is no longer in control of the process and its attendant assets and personnel.

To add to the challenge, consider the fact that the transition may well be from an unhappy or incompetent vendor (and frequently, both).

Thus the transition from a service provider to a second service provider, or the reintegration of the outsourced process back to the client, is exponentially more difficult than the original outsourcing process.

Hence careful consideration should be given to how the transition may be effected, and detailed transition provisions included in the outsourcing contract.

On the positive side, the elements of an effective transition plan are similar to those included in the original outsourcing process, just more complex.

A transition plan should include a commitment by the vendor to provide transition-planning assistance.

This assistance should include inventories of hard and soft assets, copies of relevant data, detailed descriptions of procedures, and other information relevant to the outsourced process.

The buyer should have the right to use this data and to disclose it to other potential service providers. The client should also have the right to purchase the assets and hire key personnel related to the outsourced process, as well as the right to assume key contracts.

The transition plan should address the need for parallel processing for some period of time while the process is migrating from the service provider to a new service provider or back to the client. There may be a need for continued use of shared assets, such as computer networks.

Just as aligning the interests of the service provider and the client is a key element of a successful outsourcing contract, aligning the interests of the service provider and the client during the transition period is significant.

Usually, this takes the form of monetary incentives for a successfully implemented transition plan.

Force Majeure
Outsourcing contracts, like other commercial contracts, typically include force majeure clauses, which excuse the service provider from performance in the case of natural disasters such as fire- and weather-related catastrophes.

In light of the geopolitical postures of many of the countries where BPO service providers are located, war and terrorism are also likely triggers of force majeure clauses.

Nevertheless, because of the significant function that outsourced processes often play in the client’s business, a well-crafted outsourcing contract should contemplate more than just excusing the vendor from performance for the duration of the force majeure event.

The outsourcing contract should link the triggering of a force majeure event with disaster recovery plans and business continuation plans. To the extent that a client cannot significantly minimize its risk in that regard, insurance should be addressed.

Dispute Resolution
As has been stressed throughout this discussion of outsourcing contracts, the outsourcing contract is a living document, which must have change management processes integrated within it.

Change, however, inevitably invites disagreement, and the outsourcing contract should anticipate this eventuality.

The dispute resolution process begins where corporate governance ends. When all of the elements of the corporate governance process have been engaged and the parties have failed to reach resolution of the dispute, the parties must seek resolution through legal processes.

These processes can have escalation procedures built in, just like the governance process. Dispute resolution may be initiated through informal nonbinding procedures such as mediation, although this is not a necessary step.

Beyond these informal nonbinding procedures, however, the dispute resolution process will progress to either binding arbitration or litigation. If the parties decide to utilize the arbitration process, they must agree on the rules of arbitration.

In international transactions, parties often use the rules and procedures promulgated by the International Chamber of Commerce’s International Court of Arbitration.

In domestic transactions, parties often specify that arbitration will be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association. In either case, questions of venue and choice of law must be addressed.

Venue is the place where the dispute is to be resolved. The parties should consider both questions of efficiency in terms of proximity to the persons and facilities proximate to the dispute and questions of neutrality.

Choice-of-law provisions determine what laws will govern the interpretation of the outsourcing contract and rules of the dispute. Choice-of-law provisions are usually determined by the golden rule-he who has the gold rules.
 

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Developing an effective BPO contract has several basic rules of thumb. First, everyone involved in the contracting process should keep in mind the nature of the BPO relationship.

The alignment of the long-term strategic interests of both the BPO buyer and vendor should be reflected in the terms of the contract.

Second, it is important to be able to describe services and performance levels in precise language.

The contract should include details about measuring service performance and steps to take to remedy performance shortfalls. Finally, it is important for the parties to plan for exit.

This element of BPO contracts is often overlooked because it suggests that, at some point in the future, the relationship will end. Nevertheless, handling exit provisions in the contract is a good way to make sure that when the relationship does end it ends amicably.

When it comes to common mistakes that companies make in developing an outsourcing contract, one is the failure to test performance metrics and measurement strategies.

One firm that I recall outsourced its help desk process. Part of the agreement was that the quality of service would be measured using a help desk customer survey.

The help desk vendor applied the quality survey to every single help desk inquiry, which greatly annoyed the BPO buyer’s employees. To make matters worse, completion of the survey was required to close out the trouble ticket.

As a result, help desk staff frequently called employees to implore them to answer the survey questions so they could close out the ticket. Overlooking the impact of the survey on the attitudes at employees led to a lot of criticism and needless griping in this case.

To help keep legal costs to a minimum in BPO contract development-and this may sound paradoxical-get the legal team involved early.

Early involvement ensures that the team is well versed in the business process and understands appropriate service levels metrics.

Firms should also get the legal team involved with the operational staff so they do not end up writing the contract in the abstract. The more familiar the team is with the actual business process, the better it will be able to draft effective service level standards.
The significance of the collaborative effort is not limited to the buyer- vendor relationship, however. This cooperation is also required among the members of the buyer team.

The contracting process requires that the buyer’s lawyers and the personnel involved in the outsourced process work closely together.

BPO buyers should be sensitive to personnel issues in this process. Employees whose jobs are being outsourced may not be cooperative or completely candid with attorneys working to bring the outsourcing initiative to fruition. In some cases, the use of outside consultants will be appropriate.

The distinction between negotiating outcomes is commonly referred to in general terms as win-lose, win-win, and lose-lose. In a zero-sum negotiation, the outcome is win-lose in that one party or the other gets its way, usually to the detriment of the other.

In a standard buyer-vendor relationship, it is not uncommon for the winning negotiating team to be overheard bragging about “beating them down” on price. It is a mark of distinction to be the party that prevails in such a negotiation.

The result of such a strategy may be lower prices, but the relationship may become adversarial rather than collaborative.

Working with a BPO provider requires long-term collaboration to ensure that organizational learning and strategic advancement is occurring throughout the life of the project. An adversarial, win-lose negotiating strategy is unlikely to promote this type of relationship.

Instead, the ideal BPO negotiating strategy is one that is collaborative, based on a vision of a win-win outcome, and that seeks long-term, flexible contract terms. This will require compromise by both parties.

At the same: time, risks associated with compromise can be mitigated through creative incentive clauses and remedies in the event of nonperformance. Such contract innovations are part of the terms of a BPO contract.

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The formal contract between BPO buyer and vendor has been signed and sealed. The BPO contract is a detailed document that includes service level agreements that specify the level of expected performance on defined organizational processes.

These form the basis for developing metrics and for the system of rewards, penalties, and remedies that govern the buyer-vendor relationship.

At the same time, the BPO contract does not provide the flexibility and responsiveness required to manage an ongoing project.

For that, we recommend development of a separate document that we call the project management plan.

The project management plan should be alluded to in the BPO legal contract, but it is too fluid to be spelled out in detail in that governing document.

The project management plan will need to adapt and change over time as the needs and competitive conditions of each firm change.

The project management plan will include change provisions to enable adjustments over time. It will also include standard project management details such as goals and objectives, timelines, milestones, and key term working definitions.

In essence, the project management plan provides a disciplined framework of execution to ensure that the BPO transition phase gives way to the operating phase.

One of the main objectives of the project management plan is to establish and identify roles and role players from each organization-buyer and vendor. These roles and role players will be responsible for project outcomes and accountable to the BPO steering team.

Many firms vest the responsibility for the BPO project in a single individual, whom we have designated as the BPO champion.

Others prefer to vest that responsibility in a project management team. The choice is nor merely one of preference; there are several factors to consider in deciding between an individual or team approach to managing the BPO project.

Individual or Team?
Developing a formal project management plan requires that the buyer and vendor each assign a dedicated team or, at minimum, a dedicated internal BPO champion to design the plan, manage the project on an ongoing basis, and implement changes as needed.

Although this function adds short-term costs to the outsourcing project, it will usually prove to be less costly in the long run because issues can be anticipated, managed, and controlled before they become major problems. In general, project management costs should not exceed 7 percent of total project costs.

Whether to use an individual or team approach to project management depends on several factors.

For instance, a far more intensive, team-based approach may be necessary to manage an offshore outsourcing relationship than an onshore one.

Offshoring often brings a range of issues not generally encountered with an onshore relationship.

Cultural differences, language differences, and time zone differences are just three of the variables that distinguish an offshore BPO project.

These are not minor distinctions, and they generally require additional resources to manage compared to an onshore project.

Another major distinction in outsourcing projects is whether the buyer is managing a single or multiple vendors.

Complications arise in managing multiple vendors. For instance, it may be necessary to establish more than one BPO champion or project management team to deal with each vendor.

This creates a further need to integrate the various project managers to make sure they are communicating and sharing best practices and lessons learned.

Nevertheless, a team-based approach can lead to problems of accountability if there are no one-to-one links between individuals and discrete project management responsibilities.

That is, even when a team approach is used, individual team members should be assigned clear responsibilities for particular aspects of the project, and they should have clear reporting channels.

A hybrid approach that may be used to alleviate the potential for the diffusion of accountability is to assign a BPO champion who has the responsibility of developing a project management team.

With this approach, the BPO project management responsibility remains clearly with the BPO champion, who is held accountable for performance of the project.

We recommend this approach, and we call the resulting team the project management team (PMT). This is the last of the various teams we have identified throughout the BPO Life Cycle.

The BPO steering team remains in ultimate control of the project. This team was constituted at the beginning of the BPO Life Cycle and retains its oversight role over the organization’s BPO project.

The PMT should consist of individuals representing a range of organizational functions, including individuals from each firm. Just as with the BPO analysis team (BAT) and vendor selection team (VST), cross-functional representation on the PMT ensures a diverse skill set.

This diverse skill set should range over financial, technical, and human resource skills. Issues that draw from each skill area are likely to arise during the transition and maintenance phases of the BPO Life Cycle.

The BPO champion is likely to be an individual who participated on the BAT, the VST, or both.

This person will generally have high visibility within the organization and possess skills in communications, negotiations, and business reasoning.

This person should have the additional capability to organize and manage a team. He or she should also be exceedingly familiar with the business case for BPO and be willing and able to articulate, discuss, or defend it within the organization whenever necessary.

Other roles that might be assigned to individuals on the PMT include facilitator, recorder, and liaison.

The facilitator is primarily responsible for setting meetings and arranging meeting locations.

The recorder is responsible for taking notes during the meeting and distributing minutes to each team member after each meeting.

The liaison role is delegated to individuals who are responsible for maintaining contacts between the team and other organizational units, to ensure appropriate communications are occurring, and to detect and address issues before they turn into problems.

The PMT is responsible for implementing the change management strategy for the organization.

Up to this point in the BPO Life Cycle, most of the skills required to manage the BPO project have focused on negotiations and analysis.

The required skill set widens during the transition phase to include leadership, communication, and cross-cultural management. Let us turn next to the principles of effective BPO-related organizational change management.

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Because of the complex and evolving nature of the outsourcing process, negotiation of BPO agreements requires a different mindset than that required in traditional commercial contract negotiation.

Outsourcing is by definition a collaborative effort, rather than a zero-sum game. Zero-sum negotiating means that each party is motivated to extract as much value as possible from the limited available resources, even to the detriment of the other party.

By contrast, in positive-sum negotiating, the parties are interested in creating more resources and value than currently exists and then dividing up the gains.

The $64 word often associated with this type of negotiating is synergy. A BPO negotiation should be conceived as closer in nature to negotiations with a joint venture partner than to negotiations with a vendor.

From the BPO buyer’s perspective, the process of selecting an outsourcing provider and negotiating the outsourcing contract is the first opportunity to evaluate the corporate culture and mindset of the vendor.

Organizations that have decided to undertake a BPO initiative should use this opportunity to assess cultural fit with the BPO provider. There are many potential signals at this stage of the BPO relationship that could portend future problems.

For instance, if the vendor fails to recognize and take seriously this critical stage of the outsourcing relationship, that could be a red flag that the relationship may not develop as planned.

BPO buyers can use several strategies to determine the character of the firm they have selected as their vendor. For instance, different negotiating strategies may be employed to distinguish a cooperative vendor from an adversarial one.

At the outset of the selection process, clients may attach a proposed form of the master outsourcing contract (without detailed exhibits, such as scope of work, service level agreements, and pricing) to the RFP in order to evaluate which prospective vendors will accept the buyer’s general terms and conditions.

Vendors who are unwilling or reluctant to accept the buyer’s general terms and conditions without significant negotiation can be readily identified and disqualified.

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Finding the right BPO vendor is a critical step in an organization’s outsourcing initiative and one at the most difficult to manage.

The promise of BPO is always tempered by the perceived risks associated with handing responsibility for an internal business process-no matter how noncore or mundane it may be-to another firm.

More than one manager has balked at launching a BPO project because of the occasional stones of vendor failure that appear in the media. Many would prefer to play it safe and stay with the status quo than to advance toward what will (or might) be.

With its implications for the long-term strategic direction of the organization, the vendor identification and selection phase of the BPO Life Cycle certainly must be taken seriously.

When an organization enters into a BPO relationship, it is assigning a third party the responsibility of managing part of its business. When such a decision is made, the organization obviously is assuming additional risk.

The vendor identification and selection process has a life cycle of its own, beginning with sourcing the Internet and other sources to identify potential vendors/partners, through the agonizing getting-acquainted stage, the evaluation stage, and, finally, selection.

If all goes well, service delivery works as planned and may even continue beyond the original contract period.

Both parties are satisfied. If things do not go well, the parties disassociate themselves, and the BPO buyer is forced either to find another vendor or to reestablish an internal version of the business process.

In some ways, the BPO vendor selection process is a highly subjective affair. For example, the decision about which vendor to select will ultimately be based in part on how well the buyer and vendor firms relate to one another.

It would be unwise, and probably considered a bit absurd, to select a BPO vendor that was offensive or whose organizational culture was a clear mismatch with the BPO buyer’s culture.

There undoubtedly are qualitative factors in vendor selection (as there are in romance), but the process can also be conducted systematically and with rigor. Large firms, such as Xerox, that pioneered BPO have well-developed systematic approaches for identifying and selecting outsourcing vendors.

Fortunately, the systematic approach that has been pioneered by the large early adopters at BPO has been refined and standardized over time.

The basic steps at identifying and selecting a BPO vendor are now well known. This quasi-standardization means that vendors have developed expectations of how they will be approached and how they will be required to bid on projects.

Becoming familiar with the standard procedures of vendor selection, then, can speed the vendor review and selection process for buyers and vendors alike.
 

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Step 1. Appoint a vendor selection team (VST)
There is far more to choosing an outsourcing vendor than there is to choosing a new supplier. Unlike the buyer-supplier relationship, the business process outsourcing (BPO) buyer-vendor relationship involves a customized service, detailed agreement on service levels, and a strategically oriented long-term contract.

Given our contention that a robust BPO relationship is strategic in nature, the BPO buyer and provider must have shared interests in key objectives and values.

The relationship between BPO buyer and vendor will be more intimate than a standard buyer-supplier relationship. In general, BPO buyer-vendor relationships are characterized by regular senior management meetings and sharing of otherwise confidential information.

Therefore, harmony among each firm’s predominant management styles is a key prerequisite to success.

A new team, or at least a new team charter, should be developed for the vendor selection process.

We call this new team the vendor selection team (VST). Shows the VST’s relationship to the other BPO project teams.

Organizations may elect to keep the BAT intact for the vendor selection process or they may elect to develop a new team.

Many firms decide no empower and charter a new team to manage vendor identification, selection, and development to introduce fresh ideas and to provide a clear endpoint to the BPO analysis team (BAT’s) efforts.

It is recommended that, whether a wholly new team is established to manage this phase of the BPO Life Cycle or not, the organization should consciously select and develop one or, at most, a few individuals who will serve as the organization’s BPO champions.

One or more of these identified champions should be derived from members of the BAT. The BPO champions will be in change of developing and deepening the outsourcing relationship over the long term.

Experience has shown that it is better to have the BPO champion emerge from the vendor identification and selection team than to bring one in later to manage the ongoing relationship.

The VST should draw from the business areas that will be affected by the BPO project. Key staff members for the VST should include the following:

? Senior management
? Legal staff with contract expertise
? Technical staff and information systems analysts
? End users
? Financial staff

Consulting firms are available to help the VST with defining statements at work, evaluating internal needs, negotiating, evaluating vendor performance, and providing quality assurance.

Although these services represent additional outsourcing costs, they can enable the organization to reduce outsourcing risks, accomplish goals, and select the right BPO partner.

As with any formally chartered team within the organization, the VST should establish a regular meeting schedule and set clear goals and objectives.

As shown in below, one task for the VST is to establish minimum standards or qualifications for potential vendors. Establishing qualifications is the next step in the vendor selection process.

Sample VST Charter
Purpose: To undertake a process of identifying and selecting a vendor to provide outsourcing services in the area identified by the BPO Analysis Team.

Goals:
1. To develop a list of qualifications that the BPO vendor will minimally require.
2. To identify a long list of potential vendors.
3. To gather information and evaluate the long list of vendors.
4. To develop an request for proposal (RFP) and evaluate proposals from the long list of vendors.
5. To select a short list of vendors.
6. To select a final vendor candidate and evaluate its ability to meet the performance goals indicated in the RFP.

Objectives:
1. To complete the long list in 30 days.
2. To gather information and evaluate long-list vendors in 30 days.
3. To develop the RFP in 15 days.
4. To solicit and review vendor proposals in 60 days.
5. To review short-list candidates in 30 days.
6. To select a vendor within 6 months.

Step 2. Establish qualifications
Similar to searching for a new manager or key executive, it is imperative for the business process outsourcing (BPO) buyer to establish minimum qualifications for a BPO vendor. These qualifications may include standard items such as experience, price, and location.

The qualification list may also include more strategic items such as the vendor’s organizational culture, decision-making style, and reputation. According to extensive research into the needs of outsourcing buyers, the qualifications most often sought in a vendor are as follows:

? Quality
? Performance history
? Warranties and claims policies
? Facilities and capacity
? Geographic
? Technical capability

Customer service is another factor organizations may want to consider. This factor becomes more important the deeper and more strategic the relationship is intended to become.

Deeper relationships will require more interorganizational communications and transactions and will be easier to manage it the vendor has a reputation for and knowledge of how to provide good customer service.

BPO buyers must maintain a customer mindset during this phase of the BPO Life Cycle. A partner mindset in the BPO buyer should emerge only after the vendor has been selected and the contracting process has begun.

By maintaining a customer mindset during the vendor selection phase, the BPO buyer avoids giving away too much too soon. In the partnership development stage of a BPO relationship, mutual compromise and cooperation is expected.

During the vendor selection phase, the buyer is interested in deriving as much value as possible from the vendor and should not be making concessions on any of the provisions it has established as necessary for the project.

It is important to maintain a customer mindset to motivate the vendors to work hard to demonstrate their capabilities to meet the project needs as they are. Compromise and cooperation will come later.

Process expertise is another relevant consideration for any outsourcing project. The consideration is lessened the further from the core the outsourced process is. Processes that are close to the outsourcing organization’s core competence should never be outsourced to an inexperienced vendor.

Data sharing is a part of nearly every outsourcing relationship. Given that data sharing between the various commercial databases can be difficult, the technology platform of the vendor should be a qualification.

If vendors do not have a system that is easily compatible with the buyer’s existing system, they will be responsible for demonstrating how that handle can be overcome.

Understanding the emphasis of a vendor’s business, or what drives their revenue, is essential in choosing an appropriate vendor.

For example, large vendor companies are usually looking for extremely large contracts. Smaller contracts negotiated with large vendor firms are not likely to receive the same quality of treatment as larger contracts.

One of the main areas BPO buyers should look for with a vendor is industry specialization.

Any vendor, other than the major consultancies, that claims to specialize in several outsourcing service areas should be treated with caution.

Having a large base of multifunctional outsourcing expertise is rare, not to mention expensive to maintain.

Many vendor companies will make the claim that the skills from outsourcing a function in one industry transfer to another.

This may be the case; however, in general, if the vendor is not an expert in the field, it will not know about the hidden challenges associated with providing services in that industry.

In general, if a vendor has limited experience providing outsourcing services in the BPO buyer’s area of need, selecting that vendor usually leads to unnecessary costs.

Basically, the buyer will be paying for a BPO on-the-job training program. Selecting the BPO vendor that has proven experience in the buyer’s particular industry will save headaches and a considerable amount of rework.

Whatever qualifications are established by the VST, those critical to the buyer organization should be decided at this early stage in the vendor selection process.

At minimum, the requisite qualifications should consider both expected performance levels and strategic fit with the buyer organization.

Many firms also distinguish qualifications between soft and hard issues. Soft issues include cultural and organizational values, mission and vision statements, and organizational history.

Hand issues are more quantitative and are usually associated with performance and productivity.

In addition to this distinction, some firms also use a weight system to distribute the relative importance of each issue over the decision process. An example of a weighting system is provided below.

Step 3. Develop a long list
Launching the business process outsourcing (BPO) vendor search can be intimidating. There are no Yellow Pages or magic oracles to consult when trying to identify qualified vendors.

This is one of the reasons it is important to establish well-defined qualifications. Seeking vendors with specific qualifications versus considering all vendor generalists will make the search process for more efficient.

The vendor selection team’s (VST’s) objective in this step is to build a qualified list of 15 to 20 potential BPO vendors. There are several good places to start the BPO vendor search.

Believe it or not, the Internet is one of the richest sources for identifying BPO candidates. The VST can make headway in vendor identification by using the standard Internet search engines and keyword combinations. For example, if a firm is seeking to outsource its help desk function, its search may include keywords such as:

? Help desk outsourcing
? Help desk vendors
? Outsourcing IT functions

Another technique many organizations use to develop a long list is to search among their current suppliers to see if any are qualified and willing to bid on the BPO project.

This type of relationship is referred to as sole sourcing single sourcing and can be effective based on the experience gained in working together in other business areas.

Nevertheless, sole sourcing may lead to retaining a vendor that is not completely qualified to manage the business process under consideration. It also increases business risk.

If the vendor experiences problems, more of the BPO buyer’s processes will be affected. By searching for and evaluating multiple vendors, BPO buyers will better understand what the marketplace has to offer, are more likely to find the vest vendor for their needs, and will distribute risk over multiple partners.

Many outsourcing magazines and online portals offer unbiased directories specific to outsourcing, such as OutsourcingCentral.com, Outsourcing Center, the Outsourcing Institute, and FirmBuilder.

These organizations can assist in locating potential vendors. Some BPO buyers may want to consider third-party consultants to help them find vendors that match their requirements.

These companies sometimes offer searches at no cost and often have built a list of vendors from which to choose.

A good way to begin fact finding on the long list of vendor candidates is by visiting their respective Web sites.

Many BPO vendors have extensive detail on their Web sites. In many cases the vendor will include case studies for review and lists of partners, customers, and services offered.

Although this information will undoubtedly reflect positively on the vendor, it can be scanned for indications of the vendor’s fit with the qualifications established by the VST and for strategic fit with the BPO buyer organization.

The long list development process is generally conducted in a semi-clandestine (at least to the outside world) manner.

If the BPO buyer reveals that it is in the market for a BPO vendor, it is not unusual to be overwhelmed with unsolicited proposals. In many cases a new BPO vendor search can generate three or more times the proposals desired.

Step 4. Request for information
After gathering the necessary data to build a long list of 15 to 20 potential business process outsourcing (BPO) vendors, it is time to directly gather information from the candidates.

A common technique to accomplish this is to send a scope of work (SOW) outline and request for information (RFI) to each vendor on the long list. The SOW should contain the broad intention of the outsourcing proposal and the time frame for responding.

The RFI is a questionnaire-type survey intended to establish the level of vendor competence and interest. Organizations should send the RFI to the long list and track each vendor’s interest in the project.

A common method used to make initial contact with long-list vendors is via a phone call to each vendor’s sales department. This call will involve only a high-level discussion about the BPO project.

It is designed to gauge the vendor’s interest level before moving forward with the RFI. If there is interest, specific information should be gathered about where and to whom the RFI should be sent.

The vendor should be informed whether the buying organization would allow an ongoing dialog before the RFI process.

The VST should set a firm deadline for responding to the RFI. After the deadline has passed, the VST will schedule and conduct capabilities interviews with acceptable respondents to determine their respective ability to meet project goals.

Capabilities interviews are usually conducted initially via a telephone conference. Issues that need to be probed during the capabilities interview include:

? What are the vendor’s core capabilities?
? What metrics does the vendor use to evaluate its effectiveness?
? How many clients is the vendor currently serving?
? Does the vendor have unused capacity or will it have to grow to serve new clients?
? Where is the vendor investing its resources?
? How well does the vendor rate with its current customers?
? Does the vendor fit with the buying company’s culture?

During the capabilities assessment, the BPO buyer should determine if each vendor has the skills, technology, and personnel necessary to fulfill the project. A vendor site visit will assist with this determination.

If a site visit is warranted, the VST should meet with vendor management teams and personnel, evaluate their workplace, and observe how they respond to requests and questions.

The long list of 15 to 20 vendors should be reduced by half as a result of the capabilities interviews, leaving 7 to 10 vendors who will advance to the next step. The contending vendors should be informed that they have been selected to receive the formal RFP.

Step 5. Request for proposals
The objective of developing a request for proposal (RFP) is to create a document that details the services, activities, and performance targets required for the BPO project. Beyond that, the RFP is also a sales document designed to interest vendors who can add value to the BPO buyer organization.

RFPs vary in format from organization to organization. At a minimum, the requirements for the BPO project should be clearly communicated to the vendors.

Being detailed in communication of requirements at this stage ensures that initial responses will provide a full and clear picture of the vendor’s ability to meet the needs of the organization. The requirements section of the RFP must reflect the sophistication and experience the vendor will need to complete the proposal successfully.

There are several general guidelines for developing an effective RFP. One of the most important is to be clear about the business process that is slated for outsourcing and the scope of work that will be required from the vendor.

At the same time, RFPs should not be so long and burdensome that same qualified vendors will elect not to respond. Several items that should be included in any RFP are as follows:

? Administrative. This section includes information about the BPO buyer’s company, business priorities, purpose of the RFP, deadlines for response, required format, assessment criteria, and contact information.

? General requirements. This section details expectations regarding the services to be provided, reporting and information sharing, customer service, claims resolution, contract implementation, training, and benchmarks ton fees. For example, a firm that is seeking to outsource its help desk function might have a section including details about the function, as shown below.

? Pricing requirements. This section outlines the expected pricing approach, including goals for net rates and volume discounts.

? Contractual/legal. This section provides details about expected contract terms and conditions, warranties, remedies, and any disclaimers.

RFP Section an Outsourcing Help Desk Processes
• We currently have a 20 FTE help desk operating on a 24/7 schedule.
• Their primary responsibilities are to support 3,000 employees who are located around the world.
• The help desk operation center is located in our Ohio headquarters and provides all help desk support via our toll-free number.
• The applications supported are Microsoft 2000, Novel 6.x, Microsoft Office, and CAD 2.7.
• The help desk employees are also responsible for level-one troubleshooting via the toll-free number.
• The help desk tickets are managed in Helpdesk Pro software, and the average open ticket time is 12 hours.
• The help desk employees have, on average, two years of college and four years of IT experience.
• We do not currently have standard operating procedures.

Generally speaking, the VST should be able to eliminate two or three of the companies after reviewing their bids, because their skills will not be a match with the BPO project needs.

A letter should be sent out immediately to the eliminated vendors. This will leave five to eight vendors in the running that will be evaluated for their potential to become the buyer’s BPO partner.

Step 6. Evaluate the proposals
The proposals that the BPO buyer receives from contending vendors will be extremely comprehensive.

Initial screening of proposals may reveal interesting facts about the vendor. For example, the VST should scan each proposal to determine whether it addresses their organization’s unique needs.

Often, a BPO vendor will cut and paste material from another proposal and simply insert it in the current one. Although this practice is understandable and acceptable to an extent, an excessively cut-and-pasted proposal probably indicates that the vendor has not spent a lot of time thinking about the buyer’s unique needs.

The VST should read the proposal carefully and look for the signs of generic template use. A good BPO vendor must be customer oriented.

The proposal should be directly written for the buyer’s BPO project. Buyers should be wary of vendors that fill their proposals with boilerplate and puffery.

Those vendors that have submitted acceptable proposals should be scheduled for telephone interviews which, at this stage, are generally one-hour in length.

The VST can expect that each of the vendors will suggest a lace-to-face meeting. However, the opportunity to meet with the VST in a formal presentation should be reserved for the short-list candidates only.

Within the teleconference, the BPO vendor should explain in detail its submitted proposal, including addressing the following issues:
? Approach
? Company background
? Experience in the process area
? Strengths
? Availability
? Certifications
? Suggested solution

After the vendor has explained its proposal, the VST should request a submission of tender. The tender is a precise document that spells out exactly what the vendor intends to do and how it intends to establish fees and the invoice schedule. The vendor should also be requested to furnish the following:

? Case studies. Vendors should be able to provide case studies of BPO projects similar to the BPO buyer’s project.

? Copies of résumés. Each vendor will probably send résumés of its best and most highly credentialed personnel. The buyer should ensure that these individuals are the ones who will actually be working on the project should any particular vendor be selected.

? Copies of certifications. BPO vendors often cite industry certifications, such as ISO or Six Sigma. BPO buyers should request copies of these certificates to verify their authenticity.

? List of references. BPO buyers should request at least three positive references and, when possible, one negative reference. It is important that the BPO buyer talk with at least one of the vendor’s customers that experienced a negative result. The objective is to determine how the vendor handled the project when it was failing and why contingently plans did not correct the problems.

? Proof of financial stability. It is not unusual to request that vendors provide documentation showing their financial stability, how many employees they have, how long they have been in business, and the maturity of their facilities.

As with everything else in this process, the VST should establish firm deadlines for the submission of tender. With the vendor proposals and submission of tender information in hand, it is time to narrow the long list down to a short list at candidates.

Step 7. Select a short list
Once the first round of proposal evaluations is complete, the VST should now possess the necessary information to select three to five of the most qualified vendors.

The selected vendors should be contacted directly and invited in for face-to-face formal presentations.

The VST should arrange meetings such that it will meet only one vendor per day. The vendor visits should be scheduled as close together as possible so the VST can compare notes on each vendor while they are still fresh.

In general each presentation should be limited to four hours, and the VST should set the agenda for the meeting and share it with each vendor in advance. At the beginning of the formal presentation, the VST chairperson should communicate the following:

? Inform the vendor that it has made the short list.
? Explain that the vendor has four hours for its presentation.
? Express interest regarding the vendor’s pricing model.
? • Reiterate what the organization is looking for in a BPO vendor.
? Let the vendor know that there will be a final telephone conference to clarify the bid submitted.
? Ask the vendor to submit its best bid no later than the deadline you have established.
? Let the vendor know when the decision will be made.

During the presentation, VST members should book for the following:
? Who has the vendor sent to the meeting?
? Was the presentation developed uniquely or is it canned?
? Does the vendor include contingency plans?
? What performance data does the vendor provide?
? Who are the vendor’s leading clients?
? How well does the vendor team listen to the buyer team?
? Does the vendor’s presentation address issues in the RFP?

Special attention should be paid to the logical architecture outlined in the presentation. Many vendor presentations demonstrate their expertise with technology, but they lack deep understanding of workflows and process improvement opportunities (the logical architecture).

Failure to address the logical architecture of the business process to be outsourced is one of the most obvious signs of a BPO vendor’s lack of maturity in that business process.

After the vendor presentations have been completed, the final review of vendors begins. The VST should review all presentation material in great detail, along with the notes recorded by those who attended the presentations.

Someone within the VST should be recording all questions the team may have because these questions can be answered during scheduled final phone conferences with each vendor.

The final phone conference is the time to clarify all outstanding issues about the vendor’s proposal, service offering, and to discuss the formal presentation. During the phone conference, the BPO buyer should communicate the following:

? Explain to the vendor that it is among the finalists.
? Explain that this will be the final presentation.
? State that final pricing schedules must be articulated.

The vendor should be allowed to ask any questions it may have. The buyer should state that a decision will be made and a BPO vendor will be selected within a defined period (usually two weeks) after the telephone conferences. This helps motivate the vendor into making the best deal possible to win the buyer’s business.

After the telephone conference, the BPO buyer should select two or three vendors for a second face-to-face presentation.

Once this selection has been completed and the vendors have been informed, the meetings should be scheduled as soon as possible. Each vendor should be informed that it has four hours for the final presentation.

Step 8. Select the vendor
Final vendor selection should be completed shortly after the second round of face-to-face presentations.

By now, it is usually clear which vendor has developed a proposal that best meets the needs of the buyer, both short term and long term. If the VST has established its vendor qualifications early on, weighted them appropriately, and observed both the quantitative and qualitative aspects of each vendor, it should be able to reach consensus on the final selection.

It must be stated that the VST may decide in the end that none of the vendors is able to meet the organization’s needs as they have been specified. If that occurs, it is in the interests of the organization to abandon the BPO project.

As stated, one danger associated with initiating a BPO project is the escalation of commitment phenomenon. For many executives and managers, the decision to abandon a project after such a large investment of personal time and other resources is exceedingly difficult.

Nevertheless, sound business decision making sometimes requires firms to cut their losses and move on. In this case, if none of the vendors can meet the organization’s specifications after this systematic selection process has been followed, it would be unwise to attempt to either gerrymander the specifications or allow the vendor to alter its bid to try to force a fit.

If one of the vendors has emerged as the winner of the BPO project bid, there are still several steps to consider before moving on to the contract stage.

For instance, members of the BPO buyer’s staff who are scheduled for transfer to the vendor should meet the new management team before any contracts are signed.

Allowing employees to air their concerns and ask questions may help reduce the feeling among employees that they are being cast aside. Conflicts in style and personalities may emerge in these meetings that could affect the vendor’s performance.

During this precontract stage, the firms should also address issues of terms and conditions of employment, including appropriate compensation if vendor employment is not available or not required.

If any additional training will be required as a result of joining the new organization, it should now be brought to light.

Leaders of the BPO implementation from both parties should discuss the objectives of the new work processes and what the organizations want to achieve.

All members of the new interorganizational work team should understand their personal contribution to the team’s success.

Many problems can be avoided by communicating regularly and vigorously with employees at this early stage of the BPO implementation. Up to this point the rumor mill may have been going full speed and people had no idea who or what to believe.

Another useful exercise in the precontract stage is to make certain that the contract will stand up to the rigors and complexities of the actual operation. A trial period is ideal for making adjustments before the contract becomes final and for judging the likelihood of the partnership breaking down.

In general, this precontract testing period should not be less than 90 days-long enough to allow anything unexpected to arise.

For instance, when Lehman Brothers decided to outsource its IT function to an offshore firm, it spent more than $8 million on 80 separate pilot projects with the various finalists. Remember, the BPO buyer and vendor are attempting to develop a partnership, and there are going to be problems that must be worked through.

The main issue that needs to be addressed after the test period is the unexpected work that has surfaced and haw it will affect the cost model in the vendor’s proposal.

At the same time, the buyer should be cautious about judging the service levels, because new people and processes will improve performance levels over time.

As a result of the new BPO relationship, it is likely that a lot of responsibilities and processes will change in the buyer’s organization. Despite these changes, the BPO buyer should be careful not to allow its corporate identity to change.

Winding up
This part has been designed to help organizations approach the BPO vendor identification and selection process in a systematic way.

Using the systematic approach outlined here does not guarantee a successful outcome, but it should help reduce the risk associated with making a bad vendor selection.

As stated in other contexts in this book, to BPO or not to BPO is a strategic choice, and the risks associated with BPO should not lead to inaction. BPO buyers will not find the perfect BPO vendor no matter how systematic their selection process is.

Nevertheless, if buyers use this systematic approach to vendor selection, they will find a sound alternative that can help the organization achieve its aims.

Outsourcing is not a new phenomenon, although its recent popularity suggests that it is. In reality, companies have been outsourcing business processes for many years, and some generic lessons can be derived from this experience.

The systematic vendor identification and selection process described in this part is a derivation of those lessons and is designed to help BPO buyers accelerate the BPO Life Cycle without compromising rigor.

In the end, following a rigorous process of vendor selection will tell the buyer things about itself that it did not know and will more likely result in selection of a vendor that can become a true strategic partner.

Summary
? A systematic vendor selection process can help accelerate the realization of strategic benefits associated with an effective BPO relationship.

? The eight steps of the vendor identification and selection process are (1) appoint a vendor selection team; (2) establish qualifications; (3) develop a long list; (4) distribute the request for information; (5) distribute the request for proposals; (6) evaluate proposals; (7) select a short list; and (8) select a vendor.

? The VST may be made up of BAT members, but it should have a separate and new charter.

? The VST should have one or a few individuals being groomed as BPO champions for the organization.

? Vendor qualifications should include both soft and hard criteria.

? The most often cited qualifications in vendor selection include quality, delivery, performance history, warranties and claims policies, facilities and capacity, geographic location, and technical capability.

? Customer service, process expertise, and data sharing are other key qualifications buyers should look for in the outsourcing vendor.

? Using keywords to search the Internet can launch the BPO vendor search.
? The long list of vendors generally comprises 15 to 20 firms that seem to have the requisite qualifications.
? The request for information (RFI) will help the VST narrow the long list to seven to ten potential vendors.
? The request for proposal (RFP) should provide abundant details about the nature and scope of the project, including information about the buyer firm’s administration, general requirements expected of the vendor, pricing requirements, and details about legal matters.

? Proposal evacuation should include inviting several vendor firms to provide formal presentations to the buyer firm.

? A submission of tender will provide additional details about the vendor, including case studies, résumés of key personnel, copies of certifications, and a list of references.

? The short list will consist of three to five vendors who will be contacted for a telephone conference.

? Based on the telephone conference, two to three vendors will be invited back for a second formal presentation

? Vendor selection should be followed by a precontract period during which the firms become acquainted, and a pilot project may be implemented to test the relationship.

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The strategic costs associated with BPO are centered on the potential loss of organizational learning that results from moving a process under the control of an external service provider.

Competitive advantage in most industries today is a moving target, and firms must seek it whenever they can.

In some cases, competitive advantage arises in unexpected quarters, as a serendipitous result of decisions taken long ago and improved on over time.

For instance, the Sabre ticketing system developed by American Airlines was a source of competitive advantage for the air carrier.

The efficiency of the system provided an advantage to American during a time when it was difficult for the major carriers to differentiate themselves.

American created a profit center around the Sabre system by leasing it to other carriers. The system eventually became a profitable business unit and was spun off into Sabre Holdings.

The software is now used throughout the industry to manage the ticketing process. Had American decided long ago to outsource the ticketing process, it would not have developed the Sabre system.

At the same time, American never consciously set out to make Sabre the industry standard. The airline was merely trying to develop a system that enabled efficient ticketing.

Outsourcing so-called noncore processes must be undertaken with careful forethought because it is never clear how future competitive conditions will unfold and what types of competencies will be required.

Firms must distinguish noncore activities as critical, key, or support. Those activities that are tightly coupled to the core and are fault intolerant (i.e., mission-critical processes) should usually be retained in-house.

At the very least, they should be outsourced only when the interorganizational relationship is clearly focused on developing and deriving strategic advantages.

Knowledge management should be transparent from one firm to the other, and reciprocal exchange at insights should be considered routine.

Furthermore, a quest for innovation in the interlinking of the critical and core processes must be a paramount concern for both sides at the outsourcing relationship.

In fact, the major strategic component of a BPO initiative is the relationship between buyer and vendor.

Relationship costs are those that are involved in courting, establishing, and maintaining a relationship with a BPO vendor. This complex undertaking can be as far-reaching and comprehensive as a merger or joint venture.

Such transactions are distinguished by the need to mesh information systems, governance structures, and, not least, organizational cultures into a unified whole.

The complexity of the challenges of merging two formerly distinct enterprises is often too overwhelming for the executives who engineered the deal.

One or more top executives are often either asked or forced to leave as they become increasingly disoriented amid the chaos of the combined entity.

For instance, the merger at Hewlett-Packard and Compaq in 2002 led to a quick departure of Compaq’s then-CEO Michael Capellas. Departures related to that merger continued well into 2003.

A thoroughgoing BPO relationship can have many of the same complexities of a major merger or joint venture.

Firms that determine to outsource back-office processes are entering into a relationship with a vendor that will have important implications for their ability to compete.

The risk posed by this loss of functional independence requires careful prior analysis of the capabilities and integrity of the vendor. In the ease of a BPO relationship, it is amply unacceptable for any breakdowns in performance or integrity to occur.

The directly attributable costs of a BPO relationship are those that are associated with identification, analysis, and selection of the various vendor candidates, controlling the vendor relationship, and developing strategic knowledge management capacities with the vendor.

Hidden costs associated with the vendor relationship are primarily centered on the impact of transitioning formerly internal processes to external control. For instance, in many outsourcing relationships, employees of the BPO buyer become employees of the vendor.

This is often the case in data center management where a large organization such as EDS simply acquires the existing IT infrastructure, including staff, from the outsourcer.

This transition from one employer to another can have ripple effects throughout the organization, as uncertainty and fear are typically associated with changes of this type.

Others near to or friendly with those who have a new employer may pick up on grumbling or criticism and wonder whether they will be next in line for such a transition.

In other words, the social contract between employer and employee-whether explicit or tacit-has the appearance of being violated when employees are optioned to another firm.

It does, not matter that such optioning usually results in better efficiencies and working conditions.

The perception of violation of the social contract is enough to send some employees scurrying to Montster.com to seek out a new employer. The disruption of the work environment will always have hidden costs as morale and productivity are negatively affected by change.

Strategic costs associated with outsourcing can be mitigated through appropriate vendor selection and contacting.

Using stringent selection procedures ensures that the vendor chosen has the intellectual, technological, and social resources to become a true partner in the success of the BPO buyer.

The buyer-vendor relationship should not become a cat-and-mouse game focused on price issues. Rather, both sides should constantly strive to create positive-sum outcomes from their deep relationship.

That is, rather than constantly seeking to increase service prices, the vendor should seek ways to help the buyer grow and to participate in that growth.

Similarly, rather than constantly beating down the vendor’s price, the BPO buyer should seek to deepen the partnership and find ways to leverage the vendor’s capacity for mutual benefit. This is not a typical buyer-supplier relationship as outlined in the standard strategy textbooks.

With the financial and strategic cost factors identified and estimated, it is possible to create a Total Cost Management (TCM) project overview.

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Finding the right BPO vendor is a critical step in an organization’s outsourcing initiative and one at the most difficult to manage.

The promise of BPO is always tempered by the perceived risks associated with handing responsibility for an internal business process-no matter how noncore or mundane it may be-to another firm.

More than one manager has balked at launching a BPO project because of the occasional stones of vendor failure that appear in the media. Many would prefer to play it safe and stay with the status quo than to advance toward what will (or might) be.

With its implications for the long-term strategic direction of the organization, the vendor identification and selection phase of the BPO Life Cycle certainly must be taken seriously.

When an organization enters into a BPO relationship, it is assigning a third party the responsibility of managing part of its business. When such a decision is made, the organization obviously is assuming additional risk.

The vendor identification and selection process has a life cycle of its own, beginning with sourcing the Internet and other sources to identify potential vendors/partners, through the agonizing getting-acquainted stage, the evaluation stage, and, finally, selection.

If all goes well, service delivery works as planned and may even continue beyond the original contract period.

Both parties are satisfied. If things do not go well, the parties disassociate themselves, and the BPO buyer is forced either to find another vendor or to reestablish an internal version of the business process.

In some ways, the BPO vendor selection process is a highly subjective affair. For example, the decision about which vendor to select will ultimately be based in part on how well the buyer and vendor firms relate to one another.

It would be unwise, and probably considered a bit absurd, to select a BPO vendor that was offensive or whose organizational culture was a clear mismatch with the BPO buyer’s culture.

There undoubtedly are qualitative factors in vendor selection (as there are in romance), but the process can also be conducted systematically and with rigor. Large firms, such as Xerox, that pioneered BPO have well-developed systematic approaches for identifying and selecting outsourcing vendors.

Fortunately, the systematic approach that has been pioneered by the large early adopters at BPO has been refined and standardized over time.

The basic steps at identifying and selecting a BPO vendor are now well known. This quasi-standardization means that vendors have developed expectations of how they will be approached and how they will be required to bid on projects.

Becoming familiar with the standard procedures of vendor selection, then, can speed the vendor review and selection process for buyers and vendors alike.

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The financial costs associated with BPO are ongoing, as long as the project is active. Each project phase has predictable costs that can be forecasted, budgeted, monitored, and mitigated.

In addition to these phase-specific direct project costs, each BPO initiative has a variety of less obvious yet insidious hidden costs.

Project managers will do well to include these costs in their analyses because many initiatives accumulate unanticipated costs that can prove to be threatening to projects-and careers.

In the next section, the direct and hidden costs associated with each phase of a BPO project are examined. We also discuss mitigation tactics that can be used to control costs in each phase.

Phase 1: Analyze Opportunity
The first direct cost to consider in the analysis phase of the BPO Life Cycle is associated with the internal staff that will be enlisted to conduct the analysis. Organizations should use a team approach to identity and select BPO opportunities.

Organizing a BAT means that employees from diverse units will take time away from their normal duties to serve on the team. The time these individuals spend away from their normal dunes is a direct cost.

Costs associated with removing individuals from their normal job functions can be calculated in several ways.

One standard method is to count the hours spent on the BPO analysis for each BAT member (and anyone else they bring in on a transitory basis) and multiply this figure by the hourly wage for that individual.

The result of this calculation is then attributed to the BPO project. This approach is often referred to as transfer pricing. For instance, if the HR director is on the BAT and she has an hourly wage at $75, that figure would he multiplied by the number of hours she dedicated to the BPO analysis team (BAT).

The product of this calculation would be attributed to the BPO project. Project managers commonly use what is called a task based costing estimate to forecast personnel costs associated with a project.

This technique is commendable but may not tell the entire story. For instance, it is inevitable that BAT members will spend hours outside at their formal meetings thinking about BPO, analyzing opportunities in their minds, and talking with others informally about what the BAT is doing and learning.

These extra hours are usually not calculated and attributed to the project. A technique that can be used to account for this hidden cost is to apply a standard multiplier to the hours that are logged as officially attributable to the BPO project.

For instance, a person may spend one hour outside formal meetings working on the BPO project for every two hours spent in formal meetings.

A multiplier of 1.5 would capture that informal project time and provide a more realistic estimate of actual costs.

In general, a multiplier between 1.0 and 20 applied to formal meeting time is appropriate in estimating BAT member time spent on the BPO project during the analysis phase.
 
Another direct cost associated with the BPO analysis phase involves third-party professional support that may be required to assist the team.

BPO consultants, market research specialists, and change-management consultants are just some of the outside professionals the BAT may want to consider utilizing. This cost can be estimated at the beginning of the project using several heuristics, including:

? Prior BPO knowledge among BAT members and the organization as a whole
? Organizational history with BPO, reengineering, or other transformational change programs
? Top management support for BPO in the organization

The BAT member knowledge of BPO is a factor because lack of such background will usually require investment in outside support.

It is simply unrealistic to expect individuals with no BPO knowledge an experience to be effective BAT members.

Thus, training and preparation costs should be estimated. A good rule of thumb estimate is one week of person-time for each BAT member to read, review, and discuss what BPO is and how it can be utilized by the organization.

Organizational history with major change efforts can also reduce the costs of the BPO analysis. Firms that have such a history, whether with reengineering, TQM, or something else, will likely be better suited for the self-examination process that is required for effective BAT performance.

Prior history with transformational change, especially if such change had positive consequences, can ease the burden of the analysis process.

Individuals throughout the firm will be more willing to cooperate and work hard to analyze BPO opportunities it they believe that the process will result in positive changes.

Estimating the costs associated with a lack of history in transformational change will be a subjective affair. In general, the analysis phase cost estimates should include an extra week at BAT member time it the organization has no history with transformational change.

Top management support is critical to the success of any organizational transformation. Individuals enlisted to be members of the organization’s BAT must perceive that they are empowered to dedicate their time to the analysis process.

If top managers badger them about time spent away from their central duties, they will feel conflicted and the BPO analysis process is likely to take longer and be less effective.

Top managers must clear the space necessary for BAT members to undertake their analysis, while maintaining reasonable expectations about performance in their regular duties.

Hidden costs associated with the BPO analysis phase include those that rise from a lack of organizational capability to analyze the BPO opportunity. Reliance on third-party consultants to assist with the BPO analysis is common and in many cases recommended.

Nevertheless, overreliance on consultants can lead to additional project costs throughout the implementation, transition, and maintenance phases of the BPO initiative.

To avoid these hidden costs, BAT members and others should strive to learn as much as possible from the third-party professionals.

Failure to concentrate on organizational learning and building a knowledge base for managing BPO projects will lead to additional costs at some point in the project. Hence, the organization should seek to develop BPO champions within the organization.

These champions will be responsible ton absorbing, analyzing, communicating, and documenting knowledge gained from third parties and through the BAT’s internal research process.

The opportunity costs associated with the analysis phase-as with all phases of the BPO Life Cycle-center on employee time and organizational resources that could have been put to some other use.

Opportunity costs are notoriously difficult to measure. However, organizations should directly confront the issue of whether it makes sense to pursue BPO opportunities prior to and during the analysis phase.

At this point in the BPO Life Cycle, commitment is still relatively low and a decision to cut losses and exit the project would not be as difficult as later in the project. Beyond this point, it gets increasingly difficult to shut down the BPO initiative and accept the sunk costs.

Costs associated with the BPO analysis phase can be mitigated through a variety of tactics.

For instance, the exercise of mapping organizational processes in the interest of determining their suitability for BPO also reveals opportunities for reengineering.

Processes that have gone unexamined for a period at time almost assuredly have become bloated and inefficient in a number at ways, same subtle and same not so subtle.

The process maps developed during the analysis phase should be used to catalyze reengineering efforts directed at those inefficient an unproductive processes that are not outsourced.

The organization will derive benefits from the analysis phase if it is prepared to use its findings for organizational improvement regardless at whether a BPO project is initiated.

The organizational learning that is a consequence of process mapping is not confined to BAT members. The BAT should invite participation from individuals working within processes to assist with the napping.

These individuals can he encouraged to initiate changes to process inefficiencies when they return to their wonk units.

Another cost mitigation tactic that can be applied to the analysis phase includes the potential tam a general elevation in wonk productivity levels as a natural result at organizational self-examination.

The phenomenon of increased performance as a result of being observed is commonly referred to as the Hawthorne effect. The reference is to the famous studies conducted between 1924 and 1932 at the Hawthorne plant of Western Electric, wherein employee performance was increased merely because of the presence of the researchers.

Organizations can encourage operating performance improvement during the course of the BPO analysis based on this effect.

Communicating the process improvement objectives of the analysis phase to everyone in the units under scrutiny is a means of circumventing the potential for fear-induced performance declines.

Getting people involved in the change effort is a classic technique to mitigate the hidden costs associated with the common human tendency to resist change.

The result of the BPO analysis phase is a decision about implementing a BPO project. Implementing a BPO project has several subphases associated with it, including:

? Identifying a suitable outsourcing vendor/partner
? Negotiating a contract
? Establishing a project map for the transition

Phase 2: Vendor Selection
One of the first decisions any organization must make after identifying a BPO opportunity is whether to hire a third-party intermediary to assist with the vendor selection.

The decision about whether to use an intermediary during vendor selection can be an important one.

Obviously, conducting the vendor selection in-house can reduce costs in the short run, but that choice may add costs in the long nun. Especially for large and complex outsourcing initiatives, the vendor selection phase can be time-consuming and highly detailed.

Third-party intermediaries that specialize in request for proposal (RFP) drafting, distribution, and response evaluation can reduce the time it takes to identify a suitable outsourcing vendor and allow internal staff to stay focused on internal issues.

For companies that decide to manage the vendor selection phase in-house, financial costs will include the time spent in crafting an RFP, distributing it to vendors, managing and responding to queries, and evaluating the completed proposals.

Every RFP generates questions from potential responders. And the international distribution at many BPO RFPs raises the likelihood of misunderstandings and requests for clarification.

Staff time will be needed to held questions-some legitimate, some maddeningly trite on irrelevant- from all over the world. A fair response process that limits the potential for liability requires each inquiry to be managed with equal care and interest.

Depending on the complexity of the BPO project, it could take anywhere from a month to several months to write a comprehensive RFP-one that clearly articulates the scope of the BPO initiative, the expectations for service delivery, the qualifications at the outsourcing firm, and the range of services that will be needed to fully outsource the process.

On the vendor side, responding to the RFP can also be a time-consuming and labor-intensive process.

As such, the responder may require additional information and clarification throughout the response period. The response phase oft the RFP process may take another one to three months.

All told, it may take anywhere from two to six months or longer for the RFP process to be completed. Of course, at the end of that process the initiating organization will have an inbox full of complex and comprehensive proposals.

These proposals each must be examined to identify which at the potential vendors is best suited to carry out the BPO initiative. For many outsourcing RFPs, there may be upward of 50 proposals from highly qualified vendors.

If the initiating organization is merely seeking the low-cost provider, the process of selecting the vendor may (emphasize may) be made easier.

Nevertheless, event that approach to vendor selection can be deceiving. For example, a vendor that submits the low-cost solution may have scrimped on certain critical services or it may have suggested reduced service levels. Evaluating proposals on price alone may in fact bead to higher costs later.

The process of evaluating the RFP responses from potential vendors can take month or anger. Typically, the evaluation process moves from scrutinizing the written proposals to actual meetings with the leadership teams of the top candidates, including site visits. These meetings can add another month to the selection process because some of the vendor facilities may be in faraway corners of the world.

Organizations that manage the RFP process in-house should assume that the process can take anywhere from three to six months, depending on the complexity, scope, and range of services involved in the project.

They should also assume that the process will occupy 50 percent or more of the work time for at least one management-level individual during the process.

Hence, estimating the cost of in-house management of the RFP process begins with the east of one-half to one person-yean of management-level personnel. The cost estimate does not end there, however.

The decision to in-source the RFP process carries hidden costs associated with the risk of going it alone.

No matter the experience at the individuals managing the RFP process, going it alone likely means additional costs associated with writing an incomplete RFP, establishing an ineffective response-management plan, and selecting a less-than-optimal vendor.

Each of these is a reflection of the fact that RFP writing, distribution, and management is not par of the initiating organization’s come competence. This hidden cost can be estimated based ao the relative experience of the project’s lead individual(s).

An inexperienced project leader could double the costs of the implementation phase over the east of using a professional service provider. A highly experienced leader may increase costs by far less, but such a person probably commands a far higher salary. The Case Study points out that GE Real Estate hired a manager who dedicates half his work time to managing the BPO at the organization’s offshore outsourcing relationships.

Phase 3: Contract Development
The principal cost of the contact development phase concern those associated with negotiating a contract with the vendor.

It is highly recommended that the BPO buyer wonk with an experienced legal team when developing the BPO contact.

There is simply too much at stake in the specification of services, deliverables, and remedies to cut costs in this area.

Here, we simply suggest a rule of thumb contracting cost estimate. The rule is that contracting costs, in terms of internal time and legal review, should be less than 5 percent of the size of the outsourced project. Thus, a $1 million project may have contract development costs up to $50,000.

Hidden costs associated with contract development include the dangers inherent in failing to specify appropriate penalties, remedies, and exit strategies.

These ticking-time bombs don’t go off unless something goes wrong during the transition or operating phases of the BPO Life Cycle.

Since not every contingency can be covered in a BPO contract, general problem-resolution terms should be included along with more specific problem situations and types.

A legal team with experience in BPO can be vital to help buyer and vendor alike avoid downstream cost-traps via carefully constructed contract terms.

Ongoing BPO project needs and requirements will evolve over time and the scope and nature of the buyer-vendor relationship must adapt as well.

The typical BPO relationship will last four to six years and will involve ongoing negotiations and deal making.

Each of these encounters presents the possibility of incurring undue costs resulting from poor negotiating skills, an incomplete on poorly designed original contract, or a rotating bead-person tango by either the BPO buyer or vendor.

Poor negotiating skills can lead to less than favorable terms on changes in the original contracts or in the provision at new services.

Poorly crafted original contracts can lock in an organization to low service levels or draconian pricing.

A rotating lead person by either party can mean a loss at organizational learning and a need to return time and again to the fundamentals underlying the relationship.

This process is time consuming and can eat the cost advantages that are commonly part of a BPO relationship.

Stability in the buyer-vendor relationship is built on the foundation of a carefully constructed contract.

Hidden costs associated with a poor contact can destroy a relationship. BPO buyers shouldn’t scrimp on direct contract development costs and risk the potential for project-threatening hidden costs in the later stages at the BPO Life Cycle.

Phase 4: Transition
The transition phase is one in which the business process that formerly had been handled in-house is wholly or in part shifted to the outsourcing vendor.

The costs associated with the transition phase are driven by five primary characteristics at the BPO buyer-vendor relationship, as illustrated in.

The “asset ownership and location” driver concerns which firm will be better able to leverage people, technology, and other assets for competitive advantage, and where those assets should be located.

In some situations, a BPO buyer may want to retain all or part of its existing assets to continue to develop internal competence in a process.

For instance, a firm may elect to outsource a pant at its call center to a vendor as a means of freeing internal call center staff time to make improvements to the in-house operation.

The decision about how asset ownership will be allocated between buyer and vendor has direct cost implications.

For instance, by outsourcing asset ownership, an organization can turn capital into expense: Assets that had previously required maintenance and continuing investment of time, money, equipment, and people are converted into a variable or fixed cost on the income statement, depending on the type of BPO contract.

The decision about where assets will be located also has cost implications. Retaining a process on the buying organization’s premises usually means that the transition can be completed more quickly than moving assets off-site, but not necessarily.

There are many advantages to keeping assets on-site. One of these is that it is far easier to retain existing personnel, many at wham would he unwilling to relocate to the vendor (especially if the vendor is overseas).

Employees involved in a process that has been outsourced can become productive members of the vendor organization, but the transition must be handled with care.

It is not unusual for the BPO buyer to experience attrition, stuff cuts, and reassignments during the transition phase.

The vendor will often reengineer the outsourced process, reducing inefficiencies and enhancing individual productivity levels.

This means that staff who remain may harbor lingering fears for their own job security-fears that may show the transition and affect productivity. Proper management of the in-house transition to vendor management and process ownership will reduce these potential costs.

Regardless of whether the process remains on-site or is moved off-site, there will be a need to transfer process-related information, knowledge, and controls.

In addition, during the transition phase it will be necessary to establish information exchange and data interface protocols that mesh the existing standards and information management architectures at each firm.

It is nearly inevitable that this integration process will have a variety of workflow disruptions.

Data needed for routine day-to-day tasks may be unavailable from time to time during the transition. New interface procedures, such as logins or passwords, may create confusion and frustration.

The better the organization communicates with employees about these potential disruptions and their duration and scope, the less costly the transition phase will be.

Depth of relationship refers to the costs associated with developing and maintaining a strategic relationship with the vendor.

We discuss the nature of a strategic relationship between buyer and vendor in detail in the “Strategic Costs” section that follows. Here, we mention only that a commitment to developing a strategic relationship will be more costly depending on the expectations for value expected.

The greater the value expected to be extracted from the relationship, the more time and resources will be required to develop and maintain the relationship.

The breadth of the relationship between buyer and vendor meters to the range of processes that are outsourced.

In some cases, organizations outsource multiple functions to a single provider. On other occasions, multiple providers are used for a range of different processes.

The decision about the breadth of processes to outsource to a particular vendor has both direct and hidden costs.

In fact, working with a single provider for multiple processes may reduce costs as familiarity and trust develop over time. At the same time, the potential costs associated with vendor failure increase as dependence on the vendor increases.

A potentially significant cost associated with the transition phase of the BPO initiative is based on the need ton third panties to assist in the integration at the vendor and initiating organization’s systems.

For instance, it may be necessary to bring in specialists it the two firms have complex databases built on different platforms.

This is more likely if the initiating organization has legacy systems that have not been upgraded in several years or if it has homegrown applications that are known to only a handful of individuals.

The vendor should be expected to provide transition management expertise for most systems, but it cannot be expected to have expertise to manage a smooth transition if the initiating organization has outdated or, at least, very old databases and information architectures.

In that case, third parties may be necessary to assist in upgrading and migrating the buyer organization’s data to the vendor’s system.

Hidden and opportunity costs associated with the transition phase center on the effects of outsourcing a process on employees who work outside the process. They may experience a period of adjustment as the process is transitioned.

Adjustments include not only the need to understand and work with a reengineered process but also the need to interface with new people and unfamiliar systems.

As usual for organizational change of this magnitude, some people will take longer than others to ad just, and some will simply resist the changes altogether.

In general, organizations initiating a BPO project can expect some productivity dropoff in personnel who wonk internally with the outsourced process.

Of course, the expectation is that after the period of adjustment, the productivity levels will reach their previous norms and may reach new highs as the efficiencies of the newly outsourced process kick in.

Transition phase costs are mitigated by the fact that the BPO decision has been taken and the wheels of change have been set in motion.

This negative effect is usually reversed once the decision to change has been made and the organization is clearly pursuing its new objectives.

Those who had resisted the change will either adjust or, at least, stop resisting. Resistance to organizational change-or, for that matter, to nearly any type of personal change-usually reaches a peak just before the decision to move forward.

Once the decision is taken, the mental energy that had previously been applied to blocking an resisting the change is now committed to adapting and adjusting to the new way of doing business-or to moving on to a new employer.

Other cost mitigation strategies during the transition are associated, again, with whether the process is handled internally. Internal management of the transition increases the organization’s operational capabilities far additional BPO projects or other major change efforts.

The transition phase is characterized by complexities of integrating management styles, information systems, and work cultures.

Third-party consultants can assist in making the BPO transition easier and less time-consuming. In the short run, hiring third-party support for the BPO transition can reduce costs.

Organizations that are initiating BPO tam the first time may want to hire a service provider, but they should assign a high-ranking insider to work closely with the consultant to siphon off the knowledge that can be used to manage subsequent BPO projects internally.

Phase 5: Operate
The operating phase of the BPO Life Cycle meters to the period when the contract is being fully implemented and performance expectations drive the relationship.

Among the endpoints that should be monitored as part of an ongoing BPO initiative, include both financial and productivity ratios.

Financial ratios that should be monitored range from standard return on investment (ROI) no margin enhancement. Depending on the intentions at the BPO project, the financial ratios to be monitored will vary slightly.

As mentioned, some BPO projects are undertaken primarily for cost-reduction purposes and others primarily for strategic advantage purposes.

Cost-reduction BPO projects are intended to enhance margins through reduced overhead, a feat that can often be achieved within a period of 6 to 12 months after commencement of the contract.

In contrast, strategic BPO attempts to leverage the world-leading capabilities of the outsourcing partner and will focus more on new revenue over margin enhancement.

BPO implementation will not only have a financial impact on the organization but also a productivity impact. The productivity impact, it must be noted, will likely reach beyond the unit or function that is targeted for the outsourcing project.

Most BPO initiatives result in some job displacement or layoffs within the organization. Other employees will be concerned about whether their unit is a BPO target in the future.

Employees who are concerned about the security of their jobs are likely to demonstrate a dropoff in productivity-at least in the short term.

Productivity measures used to control the BPO initiative must account for these short-term fluctuations in overall productivity while keeping track of long-term objectives.

The distinction in metrics between cost-reduction BPO and strategic BPO is less pronounced tom productivity that it was for financial indicators.

Productivity measures are fairly consistent for the organization regardless of the cost-cutting or strategic initiatives undertaken. Several important productivity metrics that organizations can use to control a BPO initiative include the following:

? Output/employee
? Overhead cost/unit of output
? Output/capital expenditure
? Output/asset

These standard productivity measures will enable the firm to assess the pre- and post-BPO impact. The measures must each include a time element to account ton short-teem variation.

It would be a mistake to pull the plug on a BPO initiative based on early returns that showed a dip in overall organizational productivity. Such fluctuation should be anticipated and accounted for before launching the project.

Still normalization or improvement in productivity should be expected within a pre-established period and adjustments made to the BPO initiative if those targets are not being met.

Financial Performance Metrics
Cost- Reduction   BPO Strategic BPO
ROI    ROI
Net Margin   Gross Revenue
Sales/Employee  Market Share
Inventory Turns  Customer Acquisition Cost

Qualitative measures of the BPO initiative are far-reaching, including internal, external, and vendor-related metrics.

Internal qualitative metrics will focus on a variety of issues concerning the negative health of the organization.

Effectively managing the BPO rollout will require data collection before, during, and after the process. Before the process begins, organizations should collect data on several characteristics of the internal environment, including the following:

? Employee knowledge of BPO
? Employee understanding of organizational strategy
? Employee morale and sense of job security
? Employee capacity to deal with change

These various data points will help establish appropriate information and communication programs during and after the BPO implementation process.

For instance, if it is determined that employee knowledge of BPO and its potential to help the organization is low, the organization may benefit from training programs aimed at reducing the knowledge gap.

Research has clearly shown that people are more productive and likely to pitch in throughout a change process if they understand the rationale and direction of the change.

External factors to monitor for a BPO initiative include issues related to customers, competitors, and shareholders.

Organizations as a general rule should be colleting data regarding customer satisfaction, so we will not allude to it here as a new metric to monitor.

We do stress the importance of maintaining a close watch on customer satisfaction levels during the BPO implementation process, regardless of whether the BPO initiative involves a customer-facing function.

Of course, normal variations in satisfaction levels should not precipitate corrective actions, but variations beyond the norm must be carefully analyzed in case action is required. The latter is especially important if the BPO initiative involves a customer-facing process such as a call center or help desk.

If the organization has undertaken a strategic BPO initiative, competitive response will be a crucial external variable to monitor. Strategic BPO is undertaken precisely to gain and, ideally, sustain competitive advantage.

Competitors will respond to new moves within the industry, especially those that live potential market-shifting or disruptive capability.

Organizations initiating BPO for strategic reasons will be wise to establish a rollout strategy that keeps them beneath competitors’ radar screens, at least until a defensible position has been established. Careful monitoring of the competition can help determine whether the rollout strategy is working.

Organizations should also monitor the reactions of shareholders and other major organizational stakeholders to the BPO initiative. Because mast investors have a conservative streak, extensive reengineering or restructuring that includes a technology component may meet with anxiety and doubt.

Clear understanding at stakeholder knowledge at organizational strategy before and after the BPO initiative has begun can help circumvent unnecessary roadblocks that may arise as people hear about the outsourcing project.

The final qualitative data points that must be collected and assessed during the operating phase involve those between the organization and the BPO partner. This complex relationship will evolve oven time as the BPO partner performs on its contract.

Underlying each BPO partner relationship are the so-called service level agreements (SLA) that specify actions that will be taken to ensure customer satisfaction.

Organizations often have only a few individuals who have read and understood the SLAs. In the event that something goes wrong-and it always will-the SLAs will detail how to make corrections.

Organizations should carefully monitor performance on the SLAs-both its own capacity for enforcing them and the vendor’s capacity for responding to problems.

The costs associated with non-performance are obvious-direct loss of business. There are also hidden and opportunity costs associated with slow response times, including customer dissatisfaction if the outsourced process is customer facing, employee disgruntlement, and a loss of confidence and trust between buyer and vendor that may adversely affect the future of the relationship.

The BPO buyer must ensure that it is monitoring the “temperature” of the BPO relationship and that it can respond if things begin to go awry.

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No sensible decision can be made any longer without taking into account not only the world as it is, hut the world as it will be . . .

BPO is not right ton every company, nor is it right for every process in a given company, but its promise makes it imperative that managers seek out BPO opportunities and exploit them where possible.

Whether or not your company has formal functional boundaries, it has processes that may be suitable for outsourcing to third-panty providers.

BPO was pioneered primarily by large companies, eager to reduce their costs and bloated payrolls.

Today, many small- to medium-sized enterprises (SMEs) have discovered BPO advantages that enable them to compete with the larger firms that have been using outsourcing for years.

In 2001, 75 percent of BPO users were firms with greater than $500 million in revenue. By 2002, that number had dropped to 64 percent.

What is indisputable is that any business that has grown to more than about $25 million in sales has begun to encounter growth-related challenges in back-office processes that may be suitable for handing oven to an outsourcing partner.

For instance, an exhibits design company in Illinois has 25 employees. To control costs, the firm had whittled down its health care coverage over a period of years. As a result, it had begun to struggle to attract and retain talented employees.

In an effort to remedy the situation, the company outsourced is I-JR and benefits processes to a professional employer organization (PEO).

By outsourcing to the PEO, the company now can offer a lower-deductible plan with better health care and dental coverage, while gaining the use of a professional claims manager.

The firm was able to offer its employees these additional benefits while saving 40 percent overall on its health care costs.

Without question, the decision to implement a BPO solution for any organization has far-reaching consequences and risks.

At the same time, these implications at the decision-making process should not lead to paralysis- there are too many possible benefits to fall into the trap of doing nothing.

It is important for decision makers to recognize that undertaking a BPO initiative is a strategic action.

With the increasing sophistication at BPO providers, the decision to outsource is no longer one of mere east savings or headcount reduction; it is also one of performance enhancement in critical functional areas.

Is your technical support team overwhelmed by customer inquiries? Consider a BPO provider.

Is your new-product development cycle too slow? Consider a BPO provider. Is your accounts receivable department tardy in tracking down late payers? Consider a BPO provider.

In each of these examples, and many others, the choice of adopting a BPO solution is based on improving the company’s performance in that process. In each case, performance enhancement may mean much mare to the firm than simple east reductions.

With these potential advantages, it is not difficult for organizations to justify a decision to at least investigate BPO opportunities.

At the same time, inquiring into BPO has potential organizational consequences in the short term that must be considered and addressed.

The most effective way to analyze and select a BPO opportunity is to utilize a deliberate, systematic approach that minimizes risk each step of the way. We have developed and recommend a six-step process for analyzing and selecting the BPO opportunity.

This process has been designed to integrate and align the decision-making process with long-term organizational strategic objectives and near-term organizational needs.

If handled systematically, the BPO analysis and selection process can be an effective way for an organization to examine itself.

Whether a decision to undertake a BPO initiative is made or not, this process will shine a light on organizational processes and activities.

This illumination will, at a minimum, help the organization identity and change underperforming processes and activities.

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