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Innovations In BPO Contracting: A Lesson For Negotiators

May 29, 2009

At last week’s Shared Services & Outsourcing Conference in Budapest, IACCM led a ‘blue sky’ discussion group on the subject “How can you genuinely create organisational integration between client and provider at a global and local level?”

The hypothesis behind this session, delivered to about 40 BPO leaders and executives, was as follows: “It has become widely acknowledged that “smart contracting” is the key to a successful BPO relationship. However, traditional legally-driven negotiations often create ‘structured adversarial relationships’, designed to punish failure, rather than encourage the growth of a strategic relationship. This tendency is aggravated by the efforts of procurement experts to view BPO as a commoditised service rather than an incentivised business partnership.”

This statement – interestingly – came from SSON’s research of market trends and discussions with its executive audience, not from IACCM (although we tend to agree with the sentiments expressed). The session provided a rare opportunity to meet with senior users of legal and contract services, to establish how they really feel about contracts, negotiations and those who control large elements of the contracting process.

A Shared Concern

We approached the session by admitting that many of our members – professionals in negotiation and contracts – are similarly dismayed by the way that many relationships become bogged down in lengthy and adversarial discussions of risk. This is epitomized by the recurrent focus on indemnities, liabilities, liquidated damages and other mechanisms that protect or defend against failure. We then discussed the areas of contract that IACCM members believe should be the focus for negotiation – the areas that make the contract into a framework for relationship governance.

Our audience was nodding violently as they viewed the ‘new’ negotiations agenda that this shift implies. So then we posed the question: “In your opinion, what is preventing the shift in the focus of negotiations?” And the answer was unanimous – “Lawyers”.

The Problem Lies With Lawyers: Or Does It?

While many recognized the talents and contribution of individual attorneys (especially, it seems, those from outside the company – the view of in-house was rather mixed), there was a feeling that lawyers generally seek to dominate areas of the negotiation and that their instinct is to protect against unquantified fears. “They are simply too negative and the negotiation lacks balance,” was one comment.

The audience recognized that there are dependencies for escaping this negative battle over risk allocation. In particular, they accepted that there must be greater diligence in producing a mutually agreed scope of work and that the process for doing this must be more inclusive. If lawyers and contracts professionals are not adequately engaged during this phase, not only is precision likely to be lost, but also they will feel greater need to insert protective clauses ‘in case things go wrong’.

There was extensive discussion of the need to better understand the needs of end-users of the BPO service. They are typically not at the table, yet must be the focus. Successful deals tend to concentrate on how to build good communications and establish a strong on-going relationship, rather than using the available time and resources on traditional contract terms. A number in the group also acknowledged their accountability for failing to drive the right negotiations agenda. They commented that “We often allow third party advisers to skew the discussion” and “We allow some of the tougher stuff to slip down the list, not to be properly discussed”. For example, Change Management comes high in the ‘new’ top ten terms, yet is an area of complexity that is frequently ignored or put on one side ‘for later’.

An Action Plan

The discussion led to a number of agreed success criteria and some suggestions for how contracted outcomes might be improved:

  • Make BPO teams more inclusive from the outset and ensure roles are clearly defined
  • Ensure evaluation criteria (at both buyer and provider) focus more strongly on evidence of cultural alignment between the organizations and that the other side can provide evidence of its success at partnering
  • Build a negotiation strategy that aligns contract needs with partnership relationship needs
  • Do not abdicate responsibility to third parties, or have them act as a buffer that stifles communication, especially to user groups
  • Consider ways to create shared incentives for proper scope definition
  • Keep performance indicators simple – be clear about goals and ensure the measurements align
  • Spend time on establishing change management and communication disciplines and methods – prepare for the future
  • Move towards arbitration / mediation as the basis for resolving disputes

At a more general level, the group felt that work to develop standard terms would be helpful, even if these operated more as guiding principles for negotiators. The need for an impartial Association, such as IACCM, to sponsor such work would be welcome. “It is time for a non-profit to enter this market,” observed one senior executive.

This audience overwhelmingly sees today’s contracts and contracting practices as ‘a problem’. However, the discussion revealed a readiness by executives to contribute to a new agenda and to offer a more inclusive role for those charged with contract development. While many would like to simplify the way that BPO relationships are formed, they understand that there must be discipline and there must be instruments to manage the risk of failure. In the words of one participant: “Alignment must have limits; we do need contracts”.

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