Business Process outsourcing The Competitive Advantage phần 6 pdf

pro-From the BPO buyer’s perspective, the process of selecting an ing provider and negotiating the outsourcing contract is the first opportunity outsourc-to evaluate the corporate cultur

Based on the telephone conference, two to three vendors will be invitedback for a second formal presentation.

Vendor selection should be followed by a precontract period duringwhich the firms become acquainted, and a pilot project may be imple-mented to test the relationship

Even when laws have been written down, they ought not always

to remain unaltered.

—Aristotle, author and philosopher

It is commonly believed that many outsourcing ventures fail to meet theirobjectives What is surprising, however, is that the outsourcing success ratefor first-time users of the strategy has not changed much since 1998 Accord-ing to a survey conducted by the American Management Association in 1998,three-quarters of U.S managers surveyed reported that outsourcing outcomeshad failed to meet expectations.1 Four years later, in a 2002 study con-ducted by DiamondCluster International, 78 percent of the companiessurveyed admitted to ending at least one prior outsourcing relationship pre-maturely because it was not meeting expectations.2Although the reasons fordissatisfaction with outsourcing relationships are as varied and complex asoutsourcing relationships themselves, there are several common reasons forfailure cited in the studies

Outsourcing failures are generally not strictly legal in nature, but carefulconsideration of the elements of a good outsourcing contract can help avoidmany of the significant risk factors In fact, a poorly drafted outsourcing con-tract is one of the most significant reasons cited by companies for failed out-sourcing relationships.3Just as significantly, however, the careful negotiationand drafting of a good outsourcing contract will eliminate most of the otherreasons for dissatisfaction with outsourcing relationships.4

This chapter examines the legal side of the outsourcing relationship, but

it must always be remembered that the buyer–vendor relationship in ful BPO initiatives must have a foundation of interpersonal and interorgani-zational trust The legal wordsmithing that is part and parcel of contractnegotiations should be managed in a spirit that reflects the strategic nature ofthe relationship, while being thorough and precise in its terms so as to cir-

BPO Contracts

cumvent future problems Contract development is an important phase of theBPO project life cycle It is the first phase after a vendor has been selected, and

it is the first opportunity for the buyer and vendor to begin to work together.The Executive Viewpoint highlights a few rules of thumb that should be fol-lowed in BPO contract development

This chapter is segmented into two major parts: contract negotiationsand contract terms Although negotiations are an important part of contractdevelopment and a critical skill to develop, we spend only a brief time dis-cussing important elements of a BPO negotiation There are many great ref-erences on negotiating tactics and skills already on the bookshelves, and we

do not want to compete with them in this brief chapter We decided tospend more time discussing the terms that should be considered in a BPOagreement Let us begin with a brief look at the essentials of negotiating BPOagreements

NEGOTIATING BPO AGREEMENTS

Because of the complex and evolving nature of the outsourcing process, gotiation of BPO agreements requires a different mindset than that required

ne-in traditional commercial contract negotiation.5Outsourcing is by definition

a collaborative effort, rather than a zero-sum game Zero-sum negotiatingmeans that each party is motivated to extract as much value as possible fromthe limited available resources, even to the detriment of the other party.6Bycontrast, in positive-sum negotiating, the parties are interested in creatingmore resources and value than currently exists and then dividing up the gains

The $64 word often associated with this type of negotiating is synergy.7ABPO negotiation should be conceived as closer in nature to negotiations with

a joint venture partner than to negotiations with a vendor Exhibit 6.1 vides insight into a few of the differences between the different types of ne-gotiation settings

pro-From the BPO buyer’s perspective, the process of selecting an ing provider and negotiating the outsourcing contract is the first opportunity

outsourc-to evaluate the corporate culture and mindset of the vendor Organizationsthat 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 Forexample, if the vendor fails to recognize and take seriously this critical stage

of the outsourcing relationship, that could be a red flag that the relationshipmay not develop as planned

BPO buyers can use several strategies to determine the character of thefirm they have selected as their vendor For example, different negotiatingstrategies may be employed to distinguish a cooperative vendor from an

EXECUTIVE VIEWPOINT Rules of Thumb for Effective BPO Contracting

David S Piper, attorney, Boyer & Ketchand, LLP, Houston, Texas

Developing an effective BPO contract has several basic rules of thumb.First, everyone involved in the contracting process should keep in mindthe nature of the BPO relationship The alignment of the long-termstrategic 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 describeservices and performance levels in precise language The contract shouldinclude details about measuring service performance and steps to take toremedy performance shortfalls Finally, it is important for the parties toplan for exit This element of BPO contracts is often overlooked because

it suggests that, at some point in the future, the relationship will end.However, handling exit provisions in the contract is a good way to makesure that when the relationship does end it ends amicably

When it comes to common mistakes that companies make in veloping an outsourcing contract, one is the failure to test performancemetrics and measurement strategies One firm that I recall outsourcedits help desk process Part of the agreement was that the quality ofservice would be measured using a help desk customer survey Thehelp desk vendor applied the quality survey to every single help deskinquiry, which greatly annoyed the BPO buyer’s employees To makematters worse, completion of the survey was required to close out thetrouble ticket As a result, help desk staff frequently called employees

de-to implore them de-to answer the survey questions so they could close outthe ticket Overlooking the impact of the survey on the attitudes of em-ployees led to a lot of criticism and needless griping in this case

To help keep legal costs to a minimum in BPO contract ment—and this may sound paradoxical—get the legal team involvedearly Early involvement ensures that the team is well versed in thebusiness process and understands appropriate service levels metrics.Firms should also get the legal team involved with the operational staff

develop-so they do not end up writing the contract in the abstract The more miliar the team is with the actual business process, the better it will beable to draft effective service level standards

fa-adversarial one At the outset of the selection process, clients may attach aproposed form of the master outsourcing contract (without detailed exhibitssuch as scope of work, service level agreements, and pricing) to the RFP inorder to evaluate which prospective vendors will accept the buyer’s generalterms and conditions Vendors who are unwilling or reluctant to accept thebuyer’s general terms and conditions without significant negotiation can bereadily identified and disqualified.

The significance of the collaborative effort is not limited to the buyer–vendor relationship, however This cooperation is also required among themembers of the buyer team The contracting process requires that the buyer’slawyers and the personnel involved in the outsourced process work closelytogether BPO buyers should be sensitive to personnel issues in this process.Employees whose jobs are being outsourced may not be cooperative or com-pletely candid with attorneys working to bring the outsourcing initiative tofruition 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 tion, the outcome is win-lose in that one party or the other gets its way, usu-ally to the detriment of the other In a standard buyer–vendor relationship,

negotia-it is not uncommon for the winning negotiating team to be overheard ging about “beating them down” on price It is a mark of distinction to bethe party that prevails in such a negotiation The result of such a strategy may

brag-be lower prices, but the relationship may brag-become adversarial rather than laborative Working with a BPO provider requires long-term collaboration

col-to ensure that organizational learning and strategic advancement is occurringthroughout the life of the project An adversarial, win-lose negotiating strat-egy is unlikely to promote this type of relationship

EXHIBIT 6.1 Standard Vendor Negotiations versus BPO Negotiations

Negotiations with Vendor/Supplier

Negotiations with BPO Provider Zero sum

Adversarial Win-Lose Short-term Fixed terms

Positive sum Collaborative Win-Win Long-term Flexible terms

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, flexiblecontract terms This will require compromise by both parties At the sametime, risks associated with compromise can be mitigated through creative in-centive clauses and remedies in the event of nonperformance Such contractinnovations are part of the terms of a BPO contract.

TERMS OF THE BPO CONTRACT

We have stated that the BPO contract negotiations should be conducted in apositive-sum spirit, with an eye toward building a trusting, synergistic rela-tionship At the same time, it would be naive to assume that trust is a sufficientgoverning mechanism In fact, drafting precise contract terms, including av-enues for remedy in case performance falls short of expectations, can help pre-serve a relationship during difficult stretches

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

in-Service level agreementsPricing

Term of the contractGovernance

Intellectual propertyIndustry-specific concernsTermination of the contractTransition

Force majeureDispute resolution

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

high-Scope of Work

The linchpin of the outsourcing contract is a description of the nature of thework being outsourced, often referred to as the “scope of work” or “statement

of work.” The BPO buyer’s attorneys must work closely with the buying ganization’s personnel to become intimately familiar with the details of theoutsourced processes in order to prepare a statement of work that is clearand complete Provisions of a well-drafted outsourcing contract must alsooutline the change process as it pertains to the scope of work, whether suchchange is incremental because of technological developments or organic be-cause of acquisitions or divestitures by the client.

or-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, hardassets, and soft assets, such as intellectual property, vendor contracts, and li-cense agreements, all may be transferred to the vendor

Particular care must be taken in the personnel area Employees with keyinstitutional knowledge or other unique capabilities should be considered forretention Well-qualified project managers must be retained to staff the buyer’sgovernance team

Attention must also be paid to the employment laws that regulate theBPO provider For example, in the European Union (EU) in certain caseswhen a business unit is transferred, the new employer must offer the trans-ferred employees the same wages and benefits that the employees have withtheir current employer Staffing needs should be carefully considered becauselayoffs and reductions in force are often more complicated in foreign juris-dictions Buyers and vendors should discuss and agree on the vendor’s inten-tions regarding the use of subcontractors Attention must also be paid to U.S.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 employ-ment laws, which vary widely from country to country For example, the EUhas enacted stiff worker protection laws that protect workers from loss of in-come if their employer should decide to outsource their jobs The AppliedRights Directive was enacted nearly two decades ago and is designed to pro-tect employees’ jobs, pay, and conditions when organizations sold or out-sourced parts of their business operations to other companies or contractingfirms

The United Kingdom (UK) has enacted similar legislation known asTransfer of Undertakings Protection of Employment (TUPE) Together,these regulations are potent protectors of employment rights and make it dif-ficult for European firms to realize dramatic cost benefits from outsourcing.The Case Study highlights difficulties experienced by Compaq as it wrestledwith TUPE regulations with an outsourcing client

CASE STUDY

European Regulations Confusing to BPO Vendors

International regulations governing workers’ rights are going to play a role

in the future of BPO In fact, it is likely that workers and politicians will seeknew regulations as more and more jobs are uprooted and moved about theworld

Compaq and France’s Atos Origin found themselves embroiled in anemployment dispute stemming from employment protection laws that left

60 IT support staff members facing the prospect of job loss The outsourcingservice providers became embroiled in the dispute because it was not clearwhich firm was responsible for employing 30 former Atos support staff mem-bers in the United Kingdom and another 30 overseas, following a decision

by Lucent to transfer an outsourcing contract from Atos to Compaq The pute arose over confusion about Europe’s employment protection laws,known as the Applied Rights Directive, and Britain’s Transfer of UndertakingsProtection of Employment (TUPE) regulations TUPE guarantees staff mem-bers employment under existing terms when their work is outsourced to athird party

dis-The dispute began when Lucent decided to end its outsourcing contractwith Atos Origin and transfer the work solely to Compaq Both suppliers hadbeen contracted to provide desktop and network support services to Lucent

in July 2000

Under TUPE regulations, Atos staff in the United Kingdom, Netherlands,and Germany should automatically have transferred to Compaq, but Compaqblocked the move Compaq e-mailed the Atos staff members affected, deny-ing responsibility for their employment

For its part, Compaq argued that TUPE rules do not apply because itplans to use a different operational model from Atos, service fewer users,and will provide services in fewer countries

Employment lawyers say that the case highlights the confusion arisingfrom conflicting TUPE case law and will place further pressure on the gov-ernment to clarify the legislation

Sources: Bill Goodwin, “Outsourcers Face Tribunals,” Computer Weekly (September

12, 2002), p 1; Bill Goodwin, “Dispute May Force Employers to Confront TUPE

Muddle in Court,” Computer Weekly (September 12, 2002), p 18.

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 SLAprovides the buyer with various rights and remedies A carefully crafted set

of SLAs aligns the interests of the vendor and buyer.8Poorly drafted SLAsalmost ensure a failed outsourcing relationship.9

Unfortunately, SLAs are among the most difficult of outsourcing tract provisions A well-drafted SLA requires an intimate understanding ofbusiness processes by the attorneys drafting the SLAs (SLAs should not bedrafted by nonlawyers) The parties need to be able to document in great de-tail the requirements of each outsourced process and agree on the manner ofmeasuring the service levels and the consequences for the failure to meetthem.10

con-The foundation of the SLA is defining which service levels and key formance indicators (KPI) to measure An SLA may be tied to anything thatcan be objectively quantified, but is usually a measure of such KPI as quality,speed, availability, reliability, capacity, timeliness, or customer satisfaction.For example, for a call center, service levels might include the average time

per-to answer a call, the duration of the call, the percentage of issues satisfacper-to-rily resolved in the first call, and customer satisfaction Service levels must beintimately tied to pricing in order to properly align the financial interests ofthe vendor and the business goals of the client For example, pricing tied to thenumber of problems fixed may create a disincentive to stop the problems fromhappening in the first place Quality is generally a better service level meas-ure than quantity, especially in fixed-price scenarios

satisfacto-Once appropriate service levels are agreed upon, terms must be used withprecision For example, what does it mean for a computer system to be “avail-able”? If the buyer can access the system, but it performs sluggishly, is thatsystem 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 failedservice level in that instance? Drilling down to issues such as these in the ne-gotiation 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 ables Response times should take these factors into account, including dif-ferences in time zones Agreement must be reached between the partiesregarding how to measure service levels Technologic capabilities may be aconstraining factor, particularly with smaller clients and vendors Softer meas-urements, such as customer satisfaction, may meet with resistance, both fromthe vendor and from the client’s personnel who are now required to fill outsatisfaction surveys as a result of the outsourcing process If possible, the client

vari-should implement the service level measurements before outsourcing, both toobtain a baseline and to determine the adequacy of the measurement process.The SLA should address who is responsible for measuring service levelsand how often Depending on the type of activity being measured, service lev-els can be measured by the vendor, the buyer, third parties, or some combina-tion The time period for which the service level is measured should be longenough to be meaningful, but not so long as to be cost prohibitive or unfair tothe vendor Of significance is the fact that pricing, in the form of credits orbonuses, may be tied to achieving or failing to achieve service levels, as well asevents of default Credits can be handled either through cash rebates to thebuyer or credits against future amounts owed to the service provider Report-ing and availability of compliance data should be agreed upon.

One common mistake in setting service levels is to set a standard or erage, but to neglect to define appropriate service levels for the out-of-compliance performance For example, if the service level for a call centerrequires that 95 percent of all calls must be answered within a certain timeperiod, the SLA should also address the minimum acceptable standard forthe remaining 5 percent of the calls SLAs should set target service levels andminimum service levels Deviations from target service levels result in cred-its to the buyer or bonuses to the vendor, as appropriate Failure to meetminimum service levels may result in termination of the outsourcing contractfor cause

av-Careful consideration should be given to the buyer’s remedies resultingfrom failure to meet service levels Beyond credits, termination of the out-sourcing contract may be appropriate in the case of failure to meet minimumservice levels, material deviations from target service levels, or failure to meettarget service levels on a repeated basis

As with scope of work and pricing, the BPO buyer and vendor alikeneed to anticipate that service levels will change over time, whether because

of changes in customer requirements, technologic advances, regulatory quirements, or improvements in the service provider’s processes Because ofthe specificity required in SLAs, vendors and clients should fully discuss thechange processes that will be agreed on Both parties need to keep in mindthat the touchstone for SLAs and change processes should be to align theinterests of the service provider and the buyer as much as possible Exhibit6.211is an example of an SLA

alterna-agreement, BPO buyers should be aware that certain costs relating to the agement of the outsourcing relationship can never be eliminated BPO costswere discussed at length in Chapter 4.

man-The choice of fee structure for a BPO contract should be motivated marily by the outcomes that are to be attained Buyers and vendors alike mustthink carefully about the fee structure of the contract because unexpected fu-ture events could lead to financially burdensome obligations For example, aBPO contract may specify that the vendor receive compensation for every suc-cessful handling of a returned retail item This may be a workable fee structure

pri-if the retailer controls its returns and has trained its customers to returngoods only if they have the receipt However, the fee structure would becomeunworkable if the retailer unilaterally decided to waive the receipt require-ment Under the changed policy, the BPO vendor may be overwhelmed withreturned goods that it has no way of verifying

EXHIBIT 6.2 Sample Text for Service Level Agreements

Scope and Definition:

Outsource contractor shall “own” continuation engineering for mature products,

as agreed upon by the company and the outsource contractor This will enable outsource contractor to design the product for a high volume assembly

environment and with component parts sourced to take advantage of outsource contractor purchasing leverage This is expected to drive significant cost reductions

in future products.

Outsourcing Contractor Responsibilities:

• Release bill of material for new SKU number.

• Assume responsibility for initiating, executing and implementing engineering change orders in support of ongoing product enhancements.

• Perform cross-functional cost reduction and product improvement activities.

• Provide technical assistance to Company in effecting resolutions to product quality problems.

• Provide a cost reduction plan to Company The plan should include feasibility report, design study, and analysis of specifications.

• Support product “end of life” activities to minimize scrap and obsolescence.

• Review and approve component-level first article inspection.

Company Responsibilities:

• Develop, maintain, and provide customer requirement specification.

• Approve key technology and engineering changes initiated by outsource

contractor.

• Provide all specifications, artwork, and packaging of the products.

• Provide firmware support for outsource contractor–initiated and approved engineering changes.

Company-Outsourcing arrangements can run from thousands to millions of dollarsover the course of a multiyear agreement, depending on the size and com-plexity of the work In general, contracts can be written on a fixed-price orvariable-price basis With fixed-price engagements, the vendor assumes therisk of absorbing cost variability When set too low, fixed-price arrangementsdiminish the vendor’s flexibility and motivation to respond to changing busi-ness objectives or emerging technologies Although variable pricing allowsfor increased risk sharing, it may also create misunderstandings if and whencosts exceed expectations, especially if scope and accountability are poorlydefined.

Many BPO buyers opt for a “pay as you go” utility model for BPO ices This sounds good, in that companies pay only for as much capacity asthey use, but how do you measure capacity? Not long ago, the utility feemodel was based primarily on technology metrics, such as CPU cycles orstorage consumption More recently, firms have been using business metrics

serv-to determine fees Canada Life, for example, pays IBM a small fee for eachpolicy it sells in return for hosting its claims processing application DigitalRiver’s fees are based on the amount of paraphernalia sold through the MajorLeague Baseball Web site it built and hosts.12Exhibit 6.3 provides an overview

of the various BPO contract pricing alternatives

EXHIBIT 6.3 BPO Pricing Models

Cost Plus: This model entails the service provider to be paid the actual costs, plus a

predetermined profit percentage This model allows very little flexibility when business objectives and technology change during the duration of the outsourcing contract Neither does it provide any incentive for the service provider to perform more efficiently.

Unit Pricing: This model assumes a predetermined rate established by the service

provider for a particular level of service The organization pays based on its usage.

Fixed Pricing: In this model, a fixed price for the service is established for the

duration of the contract Some organizations prefer this approach, as they know exactly what the service provider’s price will be, even in the future The challenge with this approach is that the organization must adequately define the scope of the process and design effective metrics before signing the contract If not, the impact will be the service provider claiming a particular service or service level that is beyond the scope of the contract, making the buyer liable for additional charges.

Variable Pricing: This model involves the use of a fixed price at the low end of the

service provider’s service with variances based on higher service levels The effectiveness of this model depends on specifically defining the scope of process and metrics.