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Rules of Thumb for Effective business process outsourcing (BPO) Contracting

2,419 Comments · Business outsourcing

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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