Cesar CantuContracts and long-term business relationships are hard to come by in today’s economy, and many nearshore service providers are willing to endure too much in order to secure them.
We recently wrote about how often providers of BPO and tech services tend to hold back litigation against their client even when a lawsuit might be justified. Barring heavy reputational damage, talent poaching or exorbitant amounts of unpaid money, service providers would rather settle the matter quietly or, when possible, let it slide for the sake of keeping the relationship going.
Such an approach, however, has led to situations in which clients hold an unhealthy amount of leverage.
“I’ve heard of such situations, but it is rarely spoken about,” commented Jesús Hoyos, Chief Strategist at CRM consultancy firm Solvis Consulting. “Some clients will be very restrictive with SLAs for BPOs, particularly if the provider is on the smaller side.”
“For small BPOs, the option is to endure the situation and try to pull better profit margins until renovation time comes around,” Mr. Hoyos added. “Bigger firms might go for the legal option, but agreements are generally arrived at. That depends on the service offered, of course.”
Though an unwise strategy at first glance, it’s hard to argue against it given the landscape that most service providers are currently navigating. Following a couple of years of bonanza during and right after the COVID pandemic, nearshore providers in the BPO and tech space have been struggling to win back the levels of success seen during those couple years.
Harsh macroeconomic headwinds, high interest rates, technological disruption and new, more flexible hiring practices have made decision makers in business extra selective about third party partnerships.
Since at least 2022, service providers have been trying to convince stakeholders and themselves about a positive turn. Market conditions have indeed improved, but projects in the pipeline aren’t as big, long-lasting or frequent as they used to, and there’s the looming risk of sudden setbacks caused by constant fears of uncertainty.
Bleeding for the referrals
“If it makes it to legal action, you’ve already screwed up a thousand different ways,” commented Jeremy Stryer, a tech entrepreneur based in Queretaro (Mexico).
Mr. Stryer is currently the CEO of nearshore dev staffing agency HolaDev, but he has a long history in tech outsourcing and is well acquainted with the ways in which clients take advantage of the leverage they know they hold in a business relationship.
“One time I was present in negotiations with a big gaming studio,” he said, retelling a situation that happened to one of his former employers. “They can bully you as a smaller dev shop. They would tell us how much they loved working with smaller shops, but then they would try to put [in the SLA] a 90 day cadence for payments. That’s not sustainable in terms of cash flow.”
On one occasion, while working at another dev firm, a client accumulated US$60,000 in unpaid invoices. When confronted about it, the client (a startup) refused to pay, claiming subpar work. The dev firm had to initiate an arbitration process and ended up recouping just a fraction of the money owed.
“It was a long and painful process. I think it ended up taking about six months,” Mr. Stryer recounts. “It was decided that they [the client] would pay about a third of what was owed in multiple payments over the course of a year. The agency had to accept it and take what they could.”
In a different instance, another startup client owed the agency over US$75,000 worth of services. It turns out the client was broke and unable to pay.
“I was on the call with their CFO,” Mr. Stryer said. “He told us they didn’t have the funds to pay for work that had already been done, even though there was a contract. Basically he said ‘Well, sue us’. We ended up negotiating. Got about half of what was owed and the rest just got written off.”
Though he has been through some sour experiences with clients, Mr. Stryer understands that the services industry is all about recommendations and leaving a positive impression, even if you have to bleed a little, so to speak.
“You can lose the battle but win the war, even if you have to take a hit by earning less money or losing money. The relationship always needs to be number one,” he commented. “Don’t do business with someone you don’t trust, and that applies both ways. Have good terms for yourself and do good work. Underpromise and overdeliver.”
The other side
Not everything is as one-sided as service providers might have you believe. While third party partners tend to find themselves at a disadvantage in contract negotiations, particularly when they lack the size needed to put their foot down, clients also have to deal with unscrupulous partners.
“In my experience, it’s generally the other way around,” Juan Coronado, Managing Director at Deloitte’s Tech Strategy & Business Transformation practice, commented. “It’s the vendors who are sloppy and seek to maximize margins through several tactics.”
“We’re speaking of subpar services, delivery teams with too many juniors and even subcontracting through staffing agencies,” Mr. Coronado explained. “That’s very common. More than it should.”
We’ve chronicled some due-diligence horror stories, but there’s so much more that isn’t spoken about publicly. From marketing junior devs as mid-levels or seniors, to massive delivery failures, the pitfalls are many.
It takes two to tango,after all. Though SLAs are meant to keep the terms of a business relationship as clear as possible, there are plenty of ways in which the reality of that relationship escapes what’s put on paper. The services sector is all about human interaction, and those can get messy real quick and in manners unforeseen.
Hey Cesar!
Great read, as always! The whole “bleeding for referrals” situation? Yeah, we’ve all been there. Relationships are crucial, but trying to keep everyone happy while burning out your own resources just doesn’t make sense in the long run. We all know it – but sometimes it’s easier said than done, right?
We’ve found that balance between keeping the relationship strong and staying smart about business. Instead of letting long payment cycles run us ragged, we’ve partnered with an invoice factoring service that keeps the cash flowing. Clients can stick to their regular payment terms, but we don’t end up chasing our tails to make payroll. Everyone wins. No 90-day stress fest here – we keep the lights on and the team happy without missing a beat.
But here’s the real game-changer: we built our own platform to get ahead of these challenges. Unlike the traditional vendors who just kind of hope things don’t go sideways, our platform lets us stay agile and adapt to market changes in real-time. We’re not just reacting to client needs, we’re staying ahead of them. That’s the difference between getting stuck in the old way of doing things and thriving in today’s fast-paced world. Plus, it’s a huge value add for our clients — we’re in tune with their dynamics and can pivot right alongside them.
So yeah, sure, it’s important to keep good relationships, but not at the expense of everything else. You can lose a battle here or there, but we’re all about winning the long game. And that’s how we do it – with better tools, smarter partnerships, and making sure no one’s bleeding unnecessarily along the way.
Thanks for the great insights, Cesar. Always a pleasure!