SEO Marketing Research

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.