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6 Things before you sign on the dotted line

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By Martin Conboy

contractAn outsourcing or BPO contract should be a flexible yet robust agreement – one able to withstand the test of time and changing circumstances. Over the years of facilitating and consulting on a range of outsourcing and BPO contracts, I have found that there are a few basic things that buyers need to consider when signing an outsourcing contract. Despite the growth and maturity of the industry, it’s surprising how many organisations still neglect or get these things wrong.

The more certain you are about what you’re negotiating, the easier it is and the less time it takes. For example, in a straightforward contract for sale of a house, both sides have clear-cut obligations. Once they meet those obligations, the deal is done.

Complexity arises where there is less certainty and where third parties are involved. As is the case in the outsourcing world. For example, if the vendor has to develop software or needs permission to use or licence an application then the drafting and negotiation process becomes much more detailed.

What happens if consent is not granted due to non complete clause or to protect IP? Do you appeal? Within what timeframe? The contract needs to take the full range of possible outcomes into account.

Both parties need to perform thorough due diligence on each other and describe in extensive detail the services to be performed, together with the customer’s role and responsibilities.

In structuring the contract, don’t focus purely on price. A restrictive contract that’s focused purely on price will encourage a provider to cut costs, impacting the quality and performance of the work.

Many outsourcing relationships have foundered on the craggy rocks of poor governance. The old tossing the ball over the fence and making your problems someone else’s is not a smart move.

Many large firms have in-house legal counsel however you may like to engage an BPO experienced external commercial lawyer. Lawyers who are out of their depth and not familiar with the machinations of a BPO contract can make negotiations far more lengthy and complex than they need to be.

The outsourcing industry has changed significantly. Rather than focusing purely on cost reduction, outsourcing and BPO is now about adding value and strategic innovation to drive a company’s future prosperity. Success, in this regards, comes down to the contract. It forms the initial framework for defining the relationship between the buyer and the provider. The following tips highlight the essential elements of the contract you need to consider to ensure success.

1. Scope or heads of agreement

A clear, concise yet detailed explanation of both parties’ expectations and outline of the services to be provided. Both parties need to perform thorough due diligence on each other and describe in extensive detail the services to be performed, together with the customer’s role and responsibilities.

A heads of agreement is a non-binding document outlining the main issues relevant to a tentative (partnership or other) agreement. A heads of agreement document will only be enforceable when it is adopted into a parent contract and subsequently agreed upon.

2. Contract Structure and Pricing Model

In structuring the contract, don’t focus purely on price. A restrictive contract that’s focused purely on price will encourage a provider to cut costs, impacting the quality and performance of the work. Modern contracts are moving away from being resource based, where the client pays for certain resources for a certain time frame, to being outcomes based – the provider is remunerated depending on the results achieved. As well as giving the provider the opportunity to make more money through innovation, it gives the customer greater control while minimising risk.

To be legally binding a contract must contain four essential elements. These four elements are:

  • offer;
  • acceptance;
  • intention of legal consequences; and
  • consideration.

The four essential elements of a contract can be briefly explained as follows; a contract is formed when one party makes an offer and that offer is accepted by another party for an exchange of some benefit or something of value by the parties (this is the consideration element). The intention of the parties is that they are legally bound by the contract.

3. Governance

Defines the processes and resources for managing the relationship. Many outsourcing relationships have foundered on the craggy rocks of poor governance. The old tossing the ball over the fence and making your problems someone else’s is not a smart move.

Typically, the customer has either neglected or misunderstood the level of resources they needed to devote to managing the project. In the bad old days of “lift and shift” where cost was the only factor, the outsourced process became out-of-sight and out-of-mind. As a general rule of thumb add an additional 15% for this process. Processes for managing the relationship and handling disputes in line with desired outcomes are vital to optimising the value extracted from outsourcing. They need to enable the two organisations to operate as a partnership with a shared and unified vision.

4. Transition

Poorly defined processes for moving the work from the customer to the provider or from one provider to another is another pit that organisations can fall into. Typically, the amount of time and effort required to make the shift is inadequately assessed. Due to poor coordination, internal departments can lose cohesion and direction. People become unsure of who is responsible for what.

Business process mapping refers to activities involved in defining what an entity does, who is responsible, to what standard a business process should be completed, and how the success of a business process can be determined.

The main purpose behind business process mapping is to assist organizations in becoming more efficient. A clear and detailed business process map or diagram allows an outside BPO service provider to properly consider the scope of the process being outsourced. It also helps them understand whether or not improvements can be made to the current process.

Business process mapping takes a specific objective and helps to measure and compare that objective alongside the entire organization’s objectives to make sure that all processes are aligned with the company’s values and capabilities. Failure to understand the full impact of a particular function or activity on an entire business process will limit the potential value of the outsourcing project.

5. Sub-contracting

Not every BPO service provider has every single skill set required internally to meet the objectives of a piece of outsourcing work, and may need to sub contract parts of the process to specialists. Ie software development The client needs to be aware of and comfortable with the use of any sub-contractors during the life time of the contract. The provider is liable for the subcontractor’s performance or non-performance. If there are too many sub-contractors, where the client is unsure of who is responsible for want, can create unnecessary complexity and confusion in managing the relationship

6. Exits and termination

Without proper consideration and discussion for contract termination early in the negotiating stage, things can become very messy and expensive if the relationship goes south. Without proper planning around contract termination, significant disruption to business and damage to reputation can be the result for both parties. I always like to say to the other party , ‘with the best will in the world, how can we disengage if we have to?”. It’s always better to state it up front and see what sort of a reaction you get.

As the outsourcing and BPO industry continues and grow the detailed requirements of each contract will need to adapt to a dynamic economic landscape. But a few basic principles will provide some guidance to help buyers and providers to move forward and negotiate the relationships that evolve.
June 30, 2015
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