Business process outsourcing (BPO) has many obvious advantages for companies which decide to outsource one or more of their non core functions or services to lower-cost or higher-value locations. However, there are also risks or challenges associated with this strategy, and it is important that a company is aware of these when embarking on the BPO path.
Thomas Duening and Rick Click explain in Essentials of Business Process Outsourcing that “mitigating risks is a primary concern for any BPO initiative: outsourcing necessarily entails ceding control of formerly internal processes, a prospect that is frightening to managers on many levels.” In many instances, BPO client companies also share information with their outsourcing partners that may be of great interest to their competitors.
International innovations in data security have to a large degree helped to mitigate the risk of sharing sensitive data with service provider companies. However, client companies have to ensure that their BPO service providers adhere to the client’s security policies and that all work done adheres to up-to-date security procedures, and therefore the issue of security should be addressed in contracts with BPO service providers and in service level agreements.
Duening and Click advise that both client and service provider should also review their internet security policies, keeping in mind the following principles:
- Limiting access – i.e. the fewer people with access to a system, the better;
- Developing a secure password policy;
- Establishing a procedure for granting access rights;
- Having backup and emergency procedures in place before going live, including disaster recovery and actions to be taken in the event of a security breach; and
- Implementing an external audit by a professional auditing company, which should also be on call in case of a security breach.
Negotiating BPO contracts
Negotiating a business process outsourcing contract involves the arrangement of a long-term collaboration and therefore critical to the success of the venture. Aspects which should be included in nearly every BPO contract are: Scope of work, service level agreements, pricing (fixed price or variable pricing agreement), term of the contract, governance (i.e. monitoring performance and compliance through reporting and benchmarking), intellectual property, industry-specific concerns, termination of the contract, transition in the event that either party terminates the contract, force majeure and dispute resolution.
A common mistake of service level agreements is failure to define appropriate levels for out-of-compliance performance: For example, if the service level for a call centre requires that 95% of all calls are answered within a certain time frame, the service level agreement should also stipulate the minimum acceptable standard for the remaining 5% of calls.
Collective bargaining and labour relations laws effective in the outsourcing location present another challenge to business process outsourcing ventures. For example, laws restricting an employer’s right to terminate employees exist in many countries that are typical outsourcing destinations and failure to follow the appropriate process may result in fines for the client company. For this reason it is important for companies considering outsourcing to study the labour laws in the country to which they want to outsource services. On the other hand, being implicated in so-called sweatshop labour practices may damage the image of a client company at home.
The legal risks associated with outsourcing originate to a large degree from the fact that there is a relative lack of precedent for, e.g. remedies or damages that can be demanded from an outsourcing service provider in the case of a security breach or other contravention. One way of successfully minimizing the possibility for legal disputes has been splitting contracts between different services outsourced. Another method that has been successful in minimizing risk has been the development of milestones for project deliverables, with accompanying fee payment milestones.