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Outsourcing Fundamentals

Independent guide to Outsourcing: BPO strategy, Service Provider selection, contracting and implementation projects. Assessing and improving your current service.

Contracting > Contract Terms

The Contract Terms related to Operations and Management of the services

My objective for this page is to provide a check list of contract terms of most significance to operation and management of BPO services and some explanation of their operational significance. Most legal advisors don't have direct experience of outsourcing operations. They are your experts at capturing your requirements in legal language and explaining how contract terms will be interpreted in a court - or in a meeting with lawyer representation, so it really is up to you to make sure the service you expect is understood by the lawyers and set out in the contract.

The following paragraphs each describe a contract term you should consider and discuss with your legal team:

Non-exclusive contract & minimum commitment

Defines whether the client is committing to use the services for all of the scope defined, or whether another provider or internal services can be used for the same type of activity. Providers try to have some level of commitment to cover their investments and help revenue projections. Where they do not get exclusivity, they will often ask for a minimum revenue commitment, which can be built into the pricing framework.

Termination

Covers the reasons why the contract can be terminated and the costs and charges associated with different types of termination. Reasons can include end of term, poor performance, insolvency, breaching the damages cap, or convenience. The allocation and level of costs and charges should reflect who is at fault and how much cost or loss of profit will result.

Benchmarking

Benchmarking can give an understanding of how a service compares with an equivalent service provided by other providers to other clients. I start from the premise that it is reasonable that a client be able to compare the price and performance of BPO services to those prevalent in the market. Formal benchmarking offers one means of doing this. However, not only is benchmarking technically challenging, but also all service providers are resistant to benchmarking and it is important to ensure you have some contractual rights to back up your requirements.

Service Providers' reluctance to benchmark is due to a number of factors: The benchmarking process adds to their costs and could disrupt operations; it has the potential to reveal operational information to competitors; comparison of performance data is always uncomfortable especially when the comparison process is less than perfect; and finally the results can lead to clients demanding changes in terms and, in some contracts, the service provider being obliged to make them.

Getting strong benchmarking rights in the agreement will be considered a bargaining chip with value to client and cost to provider; hence clients should consider carefully how much value they will gain from having the clause vs. having other benefits or indeed reducing pricing. Think through the value and the challenges of benchmarking by considering the following factors:

  • The length of contract term and sensitivity to cost competitiveness
  • Uniqueness of service
  • Availability of other services willing to join a benchmarking exercise

The topics to be included in an agreement may include:

  • In what circumstances or in what time period can the client initiate a benchmarking exercise.
  • The provider to support the benchmarking exercise including access to premises by the bench-marker
  • What aspect of the service is to be compared.
  • how the comparison will be made - normalisation factors
  • make information available and how confidentiality is managed
  • flexibility to define a scope for the exercise
  • how the third party undertaking the exercise will be selected
  • what set of benchmarking partners will constitute a valid benchmark
  • Service provider obligations to respond to benchmark results
  • Who pays for what parts of the exercise.

Compliance and controls (alignment with company standards)

commits the provider to comply with laws and any client policies that the client needs a subcontractor or supplier to abide by. Examples of contentious points are who has responsibility for ensuring a business process is legally compliant; which laws are the responsibility of the provider and the provider making sure there is no implied commitment for them being seen as a legal advisor.

Audit Rights

Sets out audits that the service provider will undertake and share results with the client. It describes the access available to client's auditors and support provided and the actions to be taken if deficiencies are found. It should be made clear what is included in the normal pricing and what is chargeable.

Step-in Rights

Allows for the client to take over running of the service where the provider has been unable to maintain performance. Can be contentious.

Continuous Improvement

This set of clauses capture commitments made by the provider to making improvements to the service during the term of agreement. If it is agreed that, for example, levels of quality will improve as the service matures then this should be defined here. Any impact of efficiency improvements would normally be built into the pricing.

Changes

The change control procedure is, in principle, quite standard. Change proposals from either side are reviewed; the cost of execution and implications assessed; charges negotiated and a decision whether to proceed made. However, because a badly designed process can cause considerable irritation or even become a real issue, make sure the process will work with both very small and very large changes; that it allows reasonable review and decision making within a reasonable time, and there is a way of resolving disagreements.

Service Locations

May prevent the provider from changing the locations used to deliver services without client consent. May also set out any rights for the client to require a change of service location.

Data Protection

Covers the commits required of a service provider in order that the client complies with data protection legislation

Consents

Clarifies responsibilities for ensuring licences cover the usage of software used in connection with the service.

IP Rights

Provides the rights for client and provider to make use of each other's IP as required for the services and, as allowed, after the contract term. Also clarifies who owns IP created or extended by parties during the term. This can be an awkward clause to agree with some providers.

Business Continuity & disaster recovery

When an outsourced service becomes a component of your business operation, your business continuity can depend on the recovery capability of the service Provider. Most Service providers build resilience into their services and may offer different levels of disaster recovery. This area of the contract will typically define what level of service will be restored within different times of a disaster. It should also be clear how disaster recovery is triggered and deal with the question of restoring full services.

Publicity

Service providers like to announce when they have won new business. The contract should include any constraint on publicity that you need.