Overview of a BPO Agreement
When we refer to a BPO Agreement, we are essentially talking about a contract that has been put in place between a business and a service provider in order to carry out outsourced services. The agreement is primarily used when a business requires something to be carried out in-house, but decides that it will be a more cost-effective decision to outsource the work to a third party.
A BPO agreement can therefore be seen as an alternative to establishing a traditional in-house structure. In other words , a BPO agreement can be used to reduce costs, manage business processes or renew obsolete processes. In a nutshell, a BPO agreement allows a business to pass along its risks to the service provider.
One of the most popular uses of BPO arrangements is for customer services, which account for at least one third of BPO activities in companies around the world. Computer programming, payroll and telemarketing also feature prominently on the list of business processes frequently dealt with by BPO agreements.
Components of a BPO Agreement
The foundation upon which the successful relationship between a business process outsourcing ("BPO") provider and a client is built is the BPO Agreement (the "BPO Agreement"). It is vital for the BPO Agreement to clearly and correctly set out the roles and responsibilities of the parties, the deliverables to be provided, compensation for same, and the Intellectual Property (defined below) that is created as a part of the engagement. Without these parameters, the BPO Agreement may well lead to the unexpected for one or both parties.
Service Level Agreements (SLAs)
The BPO Agreement will establish the SLAs to be adhered to by the BPO Provider and must address, among other things, things such as: The BPO Agreement will also address the procedures to be followed if there is a SLA breach, including, for example, the penalties or credits that shall be payable to the client by the BPO Provider if the requirements are not met.
Pricing
Pricing may be fixed or variable, and usually will be, or contain a clause providing a mechanism for, an annual increase in pricing. The terms of payment (i.e. advancement, born due, etc.), and the currency to be used, should be set out.
Confidentiality and I.P.
A BPO Agreement will address confidentiality with respect to intellectual property (the "Intellectual Property Rights") created during the period in which services are being provided. This is critical. In particular, a BPO provider must ensure that the BPO Agreement mitigates the risk that the client will attempt to appropriate the Intellectual Property Rights produced by the BPO Provider, and the client must ensure that the BPO Provider does not make use of the client’s Intellectual Property if it was not created during the term of the BPO Agreement, or in accordance with the services and deliverables to be provided therein. Often the party whose Intellectual Property is being used during the term of the BPO Agreement will be willing to grant access to its electronic databases, or its physical documents, but will not agree to give license to its Confidential Information, as that could give the BPO Provider a strong competitive position vis-à-vis the client’s customer base after the term of the BPO Agreement. Further, a BPO Agreement will require the BPO Provider to return the client’s property upon the expiry or termination of the BPO Agreement, and the BPO Provider will want the same from the client.
Termination Clause
The BPO Agreement will set out how and when the parties may terminate the BPO Agreement. A termination clause is a necessary protection and remedy for both parties in the event that the BPO Provider is not able to meet its obligations or if a dispute arises. Remedies for the failure by a party to fulfill its obligations will be set out in the BPO Agreement. The period of notice that must be given by either party to terminate the BPO Agreement will also be in the BPO Agreement.
Advantages of a Properly Drafted BPO Agreement
A well-drafted BPO Agreement offers numerous benefits to both the buyer and seller. First and foremost, it allows the parties to clearly delineate the division of liability for regulatory risks. For example, a BPO Agreement may place the responsibility for certain regulatory risks on the BPO provider, such as risks associated with the provider becoming a de facto loan originator or loan officer. The BPO Agreement may also allocate liability for other regulatory risks to the buyer, such as risks associated with allegations of fair lending violations or other fair lending issues. In addition, the BPO Agreement can identify an acceptable range for loan-to-value ratios, property values, and other underwriting attributes. This delineation of responsibilities maximizes the risk protection of both parties and reduces the likelihood of legal disputes regarding responsibility for various contingencies.
A well-drafted BPO Agreement also provides clarity of expectations for the buyer and seller. This clarity leads to an increased likelihood of a successful BPO transaction. Often buyers have their own forms they ask their vendors to sign, and in many cases, these forms contain liability disclaimers that appear to upend the BPO provider’s contractual rights. A failure to negotiate the terms of the BPO Agreement can lead to damaging uncertainty regarding which agreement controls. If the BPO provider has been negotiating a favorable BPO Agreement, and the buyer counters with its own agreement, the BPO provider may be at a distinct advantage with respect to certain pre-viability regulatory liabilities.
A properly structured BPO Agreement also fosters better communication between the parties, which improves efficiency and reduces misunderstandings. The BPO provider is well incentivized to find agreeable terms and conditions in the BPO Agreement because a poorly structured agreement can lead to incorrect valuations for the properties and overlooked legal, regulatory, and operational issues.
Further, a good BPO Agreement can identify the number of valuation reports the buyer will request from the BPO provider during a given day or week, and also set forth the maximum number of days a valuation report may be in format review with the buyer. Establishing these agreed-upon parameters for the valuation process can help the parties to better communicate and cooperate with one another.
Issues in Developing BPO Agreements
Most challenges to a BPO Agreement arise out of a failure to properly structure objectives, agree on measurements, and allocate contractual risks. The BPO Agreement must be structured to fulfil company objectives. The parties may wish to create incentives or create a penalty scheme. Contractual risk rises in an agreed measurement, and if that measurement is perceived as creating unbalanced risk in one party’s favor.
There are different contract structures possible to align each party’s interests. A compensation will usually depend on the margin between procurement and sales price. The contract should therefore define a target and deviation ranges for prices. In the event of a positive deviation, the procurement party should be rewarded, and in the event of a negative deviation, the sales party should be rewarded.
It is impossible to forecast long term price movement. Therefore, the parties could establish a second range in the event the margin percentage exceeds a certain level. If the margin exceeds the agreed range, the parties would negotiate the compensation.
Tenure of the agreement is important. If an agreement is of a very short tenure, maintaining and developing the supplier base is difficult. Due to the limited term, some suppliers may be reluctant to engage in the development of strategic relationships. A mid-term contract provides a modest level of confidence and room for the supplier to invest in the contract and still have sufficient time to recover that investment.
In order to achieve intended benefits from a BPO Agreement, expectations and goals must be clearly defined at the beginning , and adjusted/realigned throughout the term of the contract. Mismatched expectations at the outset will lead to friction between the parties and could sour the relationship irretrievably before the contract takes off. A supplier may not be incentivised to assist if they are not feeling the benefit of the arrangement.
Contracts are often difficult to navigate, and sometimes not even the most experienced employees know what is actually expected of them, or the intentions of the contract. Consider the position where a contract is drafted by a superior who is then transferred to another department/or company. Or what if the contractor who drafted the employee handbook is too busy dealing with other urgent matters? No matter what reasons have been supplied by management, employee compliance to the handbook remains. Employees may feel like they are expected to know everything they are doing wrong, even if there is no clear direction. It is imperative to draft agreements that provide guidance on how to manage and execute a BPO arrangement from the beginning to the end. Careful performance analysis of agreements before signature can save both time and money in the future.
Effective risk management can mitigate risks. These can include purchasing practices, such as the terms, conditions, and formats of an electronic contract; or marketing, such as general advertising conditions. The parties can also consider putting in place a metric in the contract itself to assess the performance of the supplier. The parent company of the supplier could act as a guarantor for satisfactory delivery of services, or the contract may require on-site visits and audits.
Legal Aspects of BPO Agreements
When entering into a BPO agreement, there are several legal considerations that require close attention. Chief among them are compliance with applicable laws and regulations, data privacy and protection, and intellectual property rights.
Laws and Regulations: The first question in determining the legally appropriate venue for BPO services pertains to applicable domicile requirements. Some regulated industries impose domicile requirements with respect to certain service providers; for example, some territories require banks and insurance companies to maintain an operational presence in the territory. Financial institutions, in particular, face a multitude of laws, regulations and rules governing the outsourcing of services, including enterprise risk management, concentration limits, due diligence requirements, application of national policies and guidelines, confidentiality and more. The location of the service provider may also implicate foreign currency manipulation and reporting rules and restrictions on permissible contracts and other advocacy considerations with respect to certain types of government clients.
In addition to domicile requirements, BPO service providers must address work permit and visa requirements for any non-resident employees. Because there is no single international law that regulates the immigration procedure applicable to BPO service providers, such procedures vary by country and must be determined on a case-by-case basis.
Data Protection and Privacy: Privacy laws and regulations are an increasingly important factor in the BPO market. Before entering into a BPO agreement, the parties must consider whether the contractual arrangements for the transfer and processing of the underlying personal data comply with applicable data privacy regulations and the contractual requirements imposed by their clients. It is also essential for BPO service providers to know where the personal data will actually be processed in order to assess the data protection implications that arise under the applicable laws of that jurisdiction. When operating in cross-border arrangements it is necessary to ensure that data flows between countries comply with the laws of each relevant jurisdiction with respect to privacy and data protection. The parties must consider the adequacy of the data protection laws of the relevant countries and ascertain whether they comply with EU Directive 95/46/EC, as well as the requirements for the international transfer of data.
Intellectual Property Rights: The parties to a BPO agreement should address intellectual property rights in the initial phases of the contract negotiation and include appropriate provisions in the agreement. Certain laws impose an obligation on parties to a contract to negotiate and draft provisions regarding ownership and the licensing of intellectual property rights. In some jurisdictions, the breach of such an obligation can result in the imposition of civil and, in some cases, criminal liability upon the parties. Even if there is no such legal requirement, it is prudent to specifically address intellectual property rights, confidentiality and restrictions on the use of information furnished by the parties through contractual provisions.
How to Successfully Negotiate a BPO Agreement
When negotiating a BPO agreement, it is important to approach the process with a mindset of collaboration and understanding, rather than contention. By employing a few effective strategies, both the buyer and seller can work toward a successful BPO agreement that serves their mutual interests.
Clear and continuous communication is essential throughout the negotiation process. Both parties should ensure that they are on the same page with regard to all contract terms, including the scope of work, pricing, and timelines. When both the buyer and seller fully understand all aspects of the contract, the likelihood for conflict during the subsequent phases of the transaction decreases significantly .
While it is important for both parties to remain focused on achieving the best deal possible, being excessively aggressive or unwilling to make concessions can result in damage to the transaction as a whole. When making demands and concessions throughout the negotiation process, both parties should carefully consider in advance how their positions will affect both the immediate and long-term success of the transaction.
Proper planning and preparation are crucial to the success of any negotiation. Both parties should do their homework prior to negotiating the BPO agreement in order to ensure that they have a thorough understanding of industry standards related to pricing, terms, and other key issues.