Thursday, April 15, 2004

Five Rules for a Great Business Process Outsourcing Agreement

Business Process Outsourcing (BPO) involves looking closely at the processes that compose the business and its functional units and then working with service providers to outsource these functions. Such functions as claims management, human resources, finance and compliance can be outsourced. The outsourcing provider then administers these functions on their own systems to agreed service standards and at a guaranteed cost.

BPO agreements are frequently negotiated by executives not connected with the business being outsourced. To ensure that your company will obtain the service levels and cost benefits desired, it is necessary that the executives in HR or finance or other process being outsourced understand the details of the outsourcing agreement so they can attempt to influence them before the contract is signed. Through the establishment of five rules, here are some of the operating requirements and infrastructures necessary for a successful relationship. Although my expertise is in human resources outsourcing, these rules are important for any outsourcer to get right.

Rule #1: Get the Outsourcing Agreement Right

Even though the human resource or other pertinent executives may not be "approvers" of a BPO agreement, they play a key role in evaluating the competency of the provider and providing a framework of knowledge to ensure the interests of the company and the employees are well served.

Most companies have a motivation for considering outsourcing. This motivation frequently is misplaced during the throes of due diligence, solution building and contracting. Every negotiating team should establish a short list of its reasons for outsourcing (e.g., operating costs, improved service, cost avoidance, headcount reduction, etc.) and then test vendor proposals against the list. This is not as easy as it seems. If there is a dedicated "deal team" in place, its idea of success and completion may be different than the executives who will have to manage the ongoing relationship.

Many executives discuss having a "seat at the table." In this instance, the seat at the table is the negotiating table. The intent is to receive agreed upon services at an agreed upon price for a period of time. If services and price don't match, there will be unpleasant consequences later. A corollary to this is to remember the provider also needs to make money. If the deal is too one-sided, then service or investment in new technology and processes will suffer. Executives with a longer-term focus can validate the need for change and counsel the negotiating team if the cost focus overwhelms the service focus.

Typical sourcing initiatives fall into two groups: Sole Negotiation and Request for Information/Request for Proposal (RFI/RFP). The RFI/RFP route may be conducted by internal resources or by a sourcing consultancy or consultant (such as TPI, EquaTerra, Everest, Deloitte Consulting LLP, etc.). The debate as to which option provides a better return will not be answered here; instead here are timelines on both alternatives (see Chart 1).

In addition to understanding the process, there needs to be a clear definition of roles and responsibilities. Identify decision makers, advisors, constituents, key staff and the deal team. Each has a distinct role and together they will ensure objectives are met and support the previously established definition of success. In addition to the decision makers, a project management office (PMO) must be established to ensure work is done and timelines are met. The PMO is established when it appears a contract is likely and continues throughout transition. Some organizations have the PMO established when RFIs are issued.

Rule #2: Change Management Cannot Start Early Enough
Change management is all about ensuring the organization supports the business initiative. It's also about leadership and communications. The effort should begin before any potential vendor is involved. There must be a communications strategy to ensure employees, especially those who may be at risk, understand the reasons and feel they will have some level of protection during and after the vendor selection. This is not easy and if your organization does not have the professional staff to support this effort, outside resources may be necessary.

Different constituencies have separate interests and needs. The change management process must include all of them. In HR outsourcing, the most common alignment of the internal groups includes employees, human resource leadership and senior/line management. External groups could include financial analysts, shareholders, unions/works councils and current third-party providers. The internal program should work in tandem with the provider's program to ensure clarity and consistency of message.

Note that "change management," as defined here is leadership change management and is different than the change process that accompanies the actual operations. Once operations begin, there will be a change process with elements such as change orders and work orders. If there is a large IT component involved, make the distinctions early to reduce confusion.

Rule #3: Get the Transition Right

In the simplest definition, transition is all about getting processes and people from internal control to external control. For this process to work, internal resources must be a willing part of the process. This takes some effort if employees' positions are at risk (see change management). It may be necessary to devise retention programs for key employees. Turnover during this phase must be controlled or orderly transition will fail.

Transition can be further defined as the detailed, desk-level analysis and documentation of all relevant tasks, technologies, workflows and functions. It also covers the movement of people if they are in-scope.

If the process is to be moved "as-is," the focus is on the current state.
If the process is to be transformed, changed or will use new technology, the focus is on the delta between current state and future state.
Process Transition: The provider will assign team leads to manage one or more processes. The teams will include staff from both client and vendor. The team members will be needed for significant amounts of time. During the transition process, documentation is created and assembled. Job shadowing may be part of the methodology. The client should sign off on the readiness of the provider before accountability moves to the provider.

People Transition: The scale will depend on the nature of the contract. If there will be employees moving to the provider, the usual process of interviews, job offers and acceptance periods will follow. It may be necessary to devise retention plans for key employees, and severance plans and reassignment programs for impacted staff. Expenses for retention and severance plans are generally borne by the client. People issues must be a major focus of leadership during the critical transition process.

Technology Transition: If the provider will be assuming licenses or operations of client-owned systems, applications or infrastructure, then all in-scope systems must be identified and documented. Licenses, maintenance agreements, hosting, LAN, WAN and telecom are subject to review and may be part of the transition. If separate entities will manage applications and/or hosting, protocols must be established to ensure roles and responsibilities are clear.

The governance process will be finalized during transition. This is the fundamental basis for managing the relationship during the "build" and "operate" phases of the relationship. There are multiple models for this subject; the key point is to appoint individuals with sufficient authority to manage the relationship on a day-to-day basis. The governance methodology should cover the change process and issue resolution as well as the actual contractual relationship. Web portal design and content also need to be part of the governance process.

Service level agreements (SLA) and key performance indicators (KPI) are determined as part of both the contract and transition period. They are generally finalized at the end of transition, although they may be reopened at an agreed time if new processes or technologies have been implemented. One word about service level agreements: Don't over measure; instead look for leading indicators.

Rule #4: Love Your Client Manager
Business process outsourcing agreements are long-term, complex and personal relationships. As end-to-end BPO is not commoditized, it takes "care and feeding" to make it work. Legally it is a client-vendor relationship, but it can and should work collaboratively as a partnership.

Both parties will have relationship managers. These individuals ensure that changes occur in a timely, orderly manner and that issues are resolved appropriately. Selection criteria for the client's manager should focus on relationship skills, knowledge of the organization, business case and analytic skills and reputation within the organization. They should also be senior enough to make decisions in a timely manner, without further approvals, within defined boundaries.

Give a good reference, where deserved. This is a significant way to signify approval of the results and relationship. It's almost as good as paying invoices in a timely manner.

Rule #5: Get Over It; It's a New and Better World
Moving to an outsourcing model will not make you more strategic. What it will do, by eliminating large organizations and consolidating SLAs, is allow more time to understand the needs of the organization. Understanding the basic business better allows you to propose and implement more creative and effective strategies. In addition, your provider will have more resources and access to best practices to support those business objectives. Outsourcing can be an enabler to becoming more strategic.

Outsourcing is based on outcomes. The client defines the outcomes, and the vendor supplies the means. Once trust is established, the total team can create a true partnership to the betterment of all. As more and more organizations move to an outsourced model, choices and processes will improve and the journey will become easier.

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