Nearshore Americas

Runaway Complexity of BPO Contracts Due Partly to “Unrealistic” Demands of Clients

If you are a BPO professional and have had a sneaking suspicion in the past five to 10 years that contracts are getting more complex, it’s more than a hunch. For reasons including the growing importance of IT to the BPO equation, increased sophistication of BPO buyers, and the evolution of BPO beyond a means of lowering transactional labor costs, BPO contracts are growing more and more complicated.

To find out more details about the situation regarding complexity of BPO contracts, Nearshore Americas recently spoke with two BPO contract experts: Marc Tanowitz, principal at outsourcing advisory firm Pace Harmon, and Stan Lepeak, director of global research, management consulting at KPMG. Tanowitz and Lepeak discussed exactly why and how BPO contracts have become more complex, the effect this increased contractual complexity is having on the BPO industry, and how vendors and buyers can collaborate to reduce contractual complexity while preserving the integrity of BPO projects.

BPO Grows Up

The most basic contributor to the complexity of BPO contracts is the simple fact that as BPO matures, users want to do more with it. “Five to seven years ago, BPO was focused on labor arbitrage,” says Tanowitz. “It was about finding resources in low-cost locations to do what they were told.” Tanowitz says this earlier iteration of BPO mostly dealt with broad transactional work such as accounts payable (AP) and general ledger.

However, according to Lepeak, more recently BPO has become a vehicle for delivering more sophisticated services. “There is now a more broad scope,” he says. “Multiple processes are pulled together and there is an offshore element.”

Technology Creeps In

Another major factor Tanowitz and Lepeak both cite was the growing importance of IT to outsourcing, even to BPO projects that don’t primarily focus on outsourcing technology systems. The increasing role of IT in BPO is also a reflection of outsourcing’s growing scope and sophistication.

“Now you often find IT bundled with business processes,” says Lepeak. “Companies also outsource the infrastructure supporting processes.”

Tanowitz’s commentary echoes that of Lepeak. “The BPO market shifted from labor deals to deals with a large IT component,” he says. “Providers deliver analytical support for discrete business processes, such as a collection tool.”

BPO Buyers Want More

Tanowitz and Lepeak both also refer to a maturing of BPO buyers along with a maturing of the BPO market. “BPO contracts were originally fairly simple, some were even written on vendors’ contract paper,” says Tanowitz. As a result, contracts were heavily skewed in favor of vendors, providing them with protections while not giving buyers the same level of protection or options for adding services or changing scale as their needs changed through the life of the contract.

However, Tanowitz said that eventually BPO buyers became more savvy and started demanding service level agreements (SLAs), price benchmarks, and other considerations which better protected them in the event of changes in project scope, currency value or vendor performance, but also greatly added to contract complexity.

Lepeak says buyers actually became “unrealistic” in their demands. “For example, BPO buyers wanted big cost savings, but no offshoring,” he explains. “Or they wanted to put in an ERP system but not change their processes.”

Lepeak vendors who did not have experience in delivering these types of sophisticated BPO services agreed to unrealistic contracts, “Which is why most of the big BPO deals of six to seven years ago were flops.”

Finding a Contractual Balance

Tanowitz and Lepeak both agree that the worst days of BPO projects being held up or resulting in vendor-buyer disputes due to contractual complexity are over, but the industry can still do much more to relieve complexity without damaging the quality of service delivery. Lepeak says buyers need to find a balance between pushing too hard and settling for too little, while having realistic expectations of BPO innovation.

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“In reality, it is difficult to create a contractual arrangement that guarantees innovation,” he says. “Innovation comes from taking risks and doing things outside the box, which are hard to put in a contract.”

Instead, Lepeak says buyers should understand that lawyers and risk managers representing both parties in a BPO contract will likely nix anything that seems too risky, and accept the fact that well-written BPO contracts “offer less innovation but fewer failed deals.”

Tanowitz offers what at first sounds like a counterintuitive strategy of making contracts more complex upfront to provide more flexibility later in the life of the contract. “Do it right, do it once,” he says. “Deals change. Service levels may need to increase or be relaxed. Put in the mechanisms upfront to enable changes (without having to renegotiate the entire contract).”


Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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