BPO or Business Process Outsourcing involves hiring a third party to perform a business function for you. Today, even small businesses and startups have realized the viability of BPO to save costs.
But if you’re thinking of outsourcing, you first need to have a BPO agreement in place.
Not sure how to draft one?
Don’t worry. We’re here to help.
In this article, we’ll take you through the important points to include in a BPO agreement.
We’ll also go through the benefits and risks of business process outsourcing if you’re unsure whether or not it’ll work for you.
This article contains:
(Click on a link below to jump to a specific section.)
- What is a BPO Agreement?
- 12 Essential Things to Include in a BPO Agreement
- 4 Key Benefits of Business Process Outsourcing
- 4 Major Risks of Business Process Outsourcing
Let’s dive in.
What is a BPO agreement?
A Business Process Outsourcing (BPO) agreement is a legal contract between a company and an external service provider to take over an essential yet non-core part of the client company’s business.
This business process or functionality being outsourced should not be a core value proposition.
BPO finds its roots in the manufacturing industry, where companies hire a vendor to handle parts of their supply chain. However, over time, other industries have joined the league as well.
Today, some of the common business processes outsourced include:
- Human Resources.
- Accounting.
- Customer services and call center.
- Information Technology management and services.
But why do you need a BPO agreement?
Since you’ll structure this contract as a service level agreement (SLA), it helps you define the scope of work and minimum performance standards (KPI) for the provider.
In simple terms, it defines everything that you expect as a customer from the outsourcing company.
In addition to the basics, an outsourcing agreement also outlines:
- Common goals.
- Shared principles.
- Reporting procedures.
- Decision-making.
- Intellectual property rights.
- Escalation of problems… and more.
By having a clear agreement, both parties know exactly how to approach the outsourcing arrangement. This also reduces the chances of misunderstandings or miscommunication.
So what should you cover in your BPO agreement?
Let’s find out.
12 essential things to include in a BPO agreement
While each organization may have its unique service level agreement, there are a few essential points that any BPO contract should cover.
Here are the 12 common points:
1. Scope
The first point of an outsourcing agreement is the scope of the project. It defines the requirements of the company.
For the supplier, the scope of the BPO contract specifies what the service provider will be responsible for handling on behalf of the client.
So under this section, you should clearly define the deliverables or anything that qualifies as a service entitled for payment.
2. Service levels
This section typically includes:
A. The outsourced service
You should clearly describe the required service in the contract or in a separate schedule.
This section should also include provisions to penalize the BPO company when it fails to meet the service level.
For example, a call centre could have a service level agreement to answer a fixed number of calls within a certain threshold.
Keep this section as comprehensive as possible by including critical service levels, key performance indicators (KPI), and other metrics. This helps mitigate the chances of dispute in case the supplier doesn’t provide the expected services.
B. Key performance indicators
You can use Key Performance Indicators (KPI) to measure the performance of a BPO provider against your company’s goals.
If the BPO vendor fails to meet the agreed KPI or service level, your agreement should also define the redressal terms.
Depending on the severity, the redressal could include service credits, payment for damages, or early termination of the contract.
C. Reviews and change requests
Every industry is subject to specific regulations and legislation that keep changing according to market trends and developments.
You need to prepare yourself for all sorts of challenges when you outsource.
But your outsourcing contract should also be flexible enough to accommodate industry-related shifts and disaster recovery efforts while ensuring business continuity.
D. Hiring subcontractors
Your service level agreement also needs to specify whether the BPO partner can hire subcontractors and the extent to which subcontracting is allowed.
In such a case, the provider should still take complete responsibility for the provision of the services.
Your BPO contract should also state if the outsourcing company needs approval from the client in advance.
This is simply to safeguard your organization from any damages if the subcontractor fails to deliver.
3. Pricing and charges
You should clearly mention the amount payable, mode of payment, and payment structure in your agreement.
The contract should answer when, how, and with whom you’ll make the BPO transaction.
The pricing should include the BPO services availed, any license fee, stamp duties, taxes, etc.
And not just that.
The agreement should also have a section covering the terms of cost negotiation over a specified time period.
4. Transfer of an employee
Sometimes you may need to transfer an employee to oversee or assist the outsourced business process.
If so, you should also mention the terms of employee transfer in detail.
If you’re the client company, you should address the concerns of any employee regarding their job security.
5. Use of assets
You could consider loaning your surplus equipment to your outsourced contractor. This may help you bring down the cost of the BPO deal.
Your contract should then state if any assets need to be transferred or leased to the BPO company as a part of the agreement.
There’re a few questions that you must address:
- What will be the terms of the lease?
- Who will be responsible for the upkeep of those assets?
- What will happen to those assets when the agreement ends?
If you need to sell or lease out any property to the BPO provider, you should also have a separate transfer deed or sign a commercial lease.
However, make sure that the terms of this lease are in line with the outsourcing agreement.
6. Ownership and intellectual property rights
Ideally, as the client company, you would want complete ownership of intellectual property (IP) rights over the final product.
But in certain cases, you might have to share the ownership with the BPO vendor.
For example, when the outsourcing company customizes its software or offers an extension of its existing software.
In such a case, you should mention the ownership rights of the software in the contract.
Similarly, if you want to go for offshore outsourcing, mentioning clauses to protect your IP goes without question.
Your contract should also include Non-Disclosure and Non-Compete Agreement, covering every legal term and condition for licenses, information sharing, etc.
7. Data protection
Suppose the outsourcing company accesses personal data on behalf of your organization. In such a case, your contract must have the necessary regulatory compliance.
For example, in Europe, your agreement must comply with the General Data Protection Regulation (GDPR), the Data Protection Act 2018, and other regulations.
In the USA, the US Federal State Commission enforces federal privacy and data protection regulations, while the CAN-SPAM Act lays out rules for commercial emailing. There are also several state-specific data protection bills like the California Consumer Privacy Act (CCPA) that a company must comply with.
It’s up to you to determine the relevant regulations surrounding data protection in your specific jurisdiction.
Additionally, if the BPO vendor appoints a subcontractor, they’ll also be subject to the clauses of data security included in the outsourcing contract.
8. Warranties
A warranty is a documented guarantee of quality promised to the customer.
The third-party vendor should give a warranty to comply with industry regulations and provide services with adequate skill and care.
And as a customer company, you should give warranties about the equipment and assets that you’ll transfer to the vendor.
Moreover, your agreement should include industry-specific as well as general warranties and liability clauses.
9. Limited liability clause
The liability clause limits the amount one party has to pay the other party if they suffer loss because of their service contract.
Legal liability can arise from:
- A breach of contract.
- Negligence.
- Misrepresentation.
- Infringement of IP rights.
The liability clause in your BPO deal will depend on the extent to which you can suffer a loss when the outsourced process fails.
In the majority of BPO arrangements, some liability aspects are capped or limited to an insurable amount. The other aspects may not be limited.
Either way, as a company, you need to keep such clauses reasonable and draft them carefully.
10. Monitoring and audit provisions
You should also make provisions to monitor your supplier’s services and conduct audits to ensure compliance with service levels.
This way, you can use effective contract management to identify potential issues early and prevent them from escalating into a dispute.
Some of the points you must include under this section are:
- Reporting duties.
- Reporting procedures.
- Step-in rights.
- Frequency of audits.
- Provision of increased monitoring when the service levels drop.
11. Dispute resolution
When outsourcing services are involved, the chances of disputes can double up.
As a client, you should be prepared for such disputes and safeguard yourself from legal battles.
To make provision for such unforeseen circumstances, you should appoint a third party or an arbitrator and mention their details in your outsourcing contract.
12. Termination of agreement and exit management
This is the last but the most important part of your agreement.
Holding termination rights enables you to end a contract if the outsourcing arrangement isn’t working out.
By terminating a service contract early, you can take back the business function or offer it to another vendor.
However, the termination doesn’t happen instantly.
Which means you need to have an exit plan.
You’ll need to consider:
- How will the BPO relationship be terminated?
- What assets will be given back or retained by the BPO partner?
- Who’ll have the intellectual property rights?
Now you know what points to cover in your outsourcing agreement.
If you don’t want to write the agreement from scratch, here’re two good templates to help you get started:
- Icao.int Service Level Agreement Template
- Model contract for outsourcing of technical and administrative assistance
If you’re still in two minds about getting into an outsourcing relationship, maybe understanding its benefits and risks will help you decide.
4 key benefits of business process outsourcing
Here’re some of the perks of hiring BPO service providers:
1. Financial benefits
A provider specializing in common business processes can deliver better results at lower costs. As a customer, you can also save money in terms of tax savings.
2. Improved flexibility
Signing a BPO agreement lets you modify the outsourced process according to the changing market dynamics.
3. Higher quality and better performance
Since BPO service providers have expertise in outsourcing services, they can complete the tasks with greater efficiency.
4. Access to innovations
An outsourcing company will be more aware of the advances in a particular business process. It’s also more likely to upgrade to newer technologies.
4 major risks of business process outsourcing
Now let’s see what risks are involved in hiring an outsourcing company.
1. Security breaches
You may need to share sensitive information or regulated data with your third-party service provider, which can serve as a potential security threat.
2. Overdependence
You’re fully dependent on the BPO provider to carry out a business function. You must manage the outsourcing relationship well to ensure that the arrangement meets your objectives. Otherwise, you will find it difficult to bring the process back in-house.
3. Outsourcing relationship challenges
There can be instances of miscommunication with your third-party vendor. Sometimes cultural barriers can also become a challenge in carrying out the processes smoothly.
4. Difficulty managing long-distance outsourcing arrangements
Offshore outsourcing can be tricky due to non-transparent communication and other geographical barriers.
Managing team productivity can also be a challenge unless you have the right tools in place.
To ensure a smooth ride on your outsourcing venture, try Time Doctor. Its comprehensive productivity management features help you track time for your outsourced team members, whether on-site or offshore.
Wrapping up
From the service levels to the use of assets, you need to define several aspects while drafting a BPO service level agreement. And as a customer, you need to be careful and be as comprehensive as possible.
Use the guidelines mentioned in this article as a good reference point to create your own outsourcing contract.
And once you have a BPO agreement ready, you can hire a suitable company to streamline your business processes in no time!
Andy is a technology & marketing leader who has delivered award-winning and world-first experiences.