As in any professional or personal relationship, the best way to keep things on a positive note is communications. And since first impressions last, it’s crucial that business process outsourcing (BPO) relationships get off on the right foot, according to Claude Hartridge, Partner and leader of the BPO Transaction Development Group in Europe for PricewaterhouseCoopers So it’s essential that both the client and the outsource provider share a common perspective in establishing and maintaining their partnership. Working from a shared vision of the ideal working relationship, the client and outsource provider can negotiate in good faith without creating an adversarial situation that may create distrust.
A History of Adversity
From its beginnings about 30 years ago, outsourcing was approached as another product or service procurement. In exercising fiscal and management diligence, clients carefully described the services they needed to a variety of vendors who bid competitively. The approach seemed to work satisfactorily when service levels could be clearly defined. In the case of data processing deals, parameters were fairly straightforward. But the traditional “low cost bidding” process didn’t yield mutual benefits to both parties. Squeezed to minimize costs during the bidding process, service providers only reluctantly shared the benefits of lower costs during the life of the agreement.
As outsourcing’s benefits beyond cost reduction became apparent, more functions and processes were outsourced. As those services became more sophisticated, the most productive relationships resembled business partnerships more than buyer-vendor relationships. “Our experience is that BPO contracts should spell out the ground rules for working together as partners, because when either party feels they are likely to be taken advantage of, it’s very difficult to recover from the lack of trust” says Hartridge.
A Better Way
What are the implications for contract negotiations? Both client and service provider must be willing and prepared to create an agreement that shares risks and rewards. If the benefits of improved service, processing, and costs are enjoyed by client and provider, both parties are motivated to seek those outcomes. If there is a shared view of the desired outcome, then the provider is motivated to creative, innovative approaches which benefit all. If the contract spells out every functional step in the business process, there’s no incentive for substantial improvements and every change has to be documented.
Hartridge cited one case where a vendor began with a staff of about 400, which shrank to about 250 over time, but the client still paid the same price. If there is openness and an agreement to share gains, clients can be assured that they are getting what they are paying for and enjoying the benefits of efficiency.
What the Service Provider Can Do
“In response to our client’s particular needs, we operate several of our agreements on an open-book, cost-plus basis. We share the gains with our clients. We measure performance and cost reductions, and the client gets a significant portion and we benefit in the longer term. Right from the beginning we tell our clients what’s in it for us and estimate our profitability. We explain that of course we’re in business to make money, for which we will add value and provide good service, but we want to do it as a partner, not as a vendor,” Hartridge explains.
Why? Hartridge replied, “First, BPO is hands-on, day-to-day working with the client, interfacing with their users, in contact with their customers and suppliers in areas such as accounts receivable and accounts payable. Second, because three months after the contract is signed, the whole landscape can change. We need a relationship that allows us to tailor our services to meet the needs of our clients now as well as a year or two down the road. And third, we want the opportunity to make a difference by creating value and opportunities for ourselves and our clients.”
What the Client Can Do
Examine the typical competitive comparison processes. Two or three companies may be invited to bid based on expected costs, service levels, and performance expectations. The problem is that their approaches are likely to include different assumptions, implementation requirements, and will not be comparable. To solve that problem, some clients hire consultants to provide a detailed solution.
Hartridge notes, “We offer our clients a list of issues we believe they should consider in a competitive review. It’s not biased in our favor because it includes things like how well the supplier knows the client’s industry, whether they’re in the geographic locations where the client does business, do they have operation centers which demonstrate their expertise in the client’s issues, languages, or specific needs?” Clients can then rate potential partners based on their ability to deliver the kind of expertise they require. It’s very much more like hiring a consultant than the transaction-driven deals that characterize information systems deals.
Role of Contract Negotiations
The contract is the framework by which the partnership operates. It’s like the rehearsal for the rest of the relationship. Hartridge stated, “We firmly believe that it’s most important to have the business people responsible for the services in control of the negotiation process. The active parties from both sides should lay out the ground rules. They can discuss why certain provisions are in the contract, and what’s intended to be achieved by specified service and operating level agreements. Then they can communicate those ideas to the people who are actually doing the work.”
In the traditional contract negotiation scenario, there is a great deal of emphasis placed on specific details, which often causes distraction from the real reason service and performance levels exist in the first place. That doesn’t mean that both parties will stand tough and negotiate important points, but when contract language is more focused on the desired outcomes, there’s less likelihood of losing focus.
Consider a year or two after the contract is signed. There have been changes in client personnel, operations, procedures. There have been personnel shifts by the service provider. It might be hard to find someone who understands what went into the contract negotiations. Hartridge said, “We are committed to routine and regular communications with our clients at all levels to review issues, progress, reductions, planned staffing cost, failures, missed deadlines, late payments, or any other issues. Our experience proves that when problems inevitably come up in the context of an ongoing relationship, there is not a crisis reaction.”
One thing you’ll find different about our organization is the establishment of a joint oversight group which meets routinely to keep both parties informed of changes, growth, new locations, strategy shifts, or other issues that might affect service, like different production requirements or a new financial system,” added Hartridge. This joint group sustains the momentum of the partnership spirit, and problems which develop are dealt with in the context of routine communications instead of a sudden crisis.
How the contract deals with change is usually determined by the degree of detail for service and performance levels. Ongoing, regular communications are essential to managing changes smoothly. “Because changes happen so frequently and so quickly, it’s another reason we prefer contracts which focus more on outcomes and strategies than on specific performance metrics,” according to Hartridge.
Lessons from the Outsourcing Primer:
- The tone of the relationship is set at the negotiating table, where the spirit of trust, give-and-take, and shared risks and rewards are established.
- The negotiating process should be controlled by those who will live with the performance (the business process managers) in cooperation with purchasing and legal staffs.
- Ongoing, regular communications establish a routine for problem-solving and avoid crisis management.
- The nature of BPO is like a business partnership, so focus primarily on quality, confidence, experience, trust, and reputation.