Browse By:
Balancing the Risk and Reward of Outsourcing
The best outsourcing agreement for your organization is not necessarily the one with the lowest price. Your primary goal when negotiating and structuring an outsourcing contract is to develop an agreement that achieves your business objectives not just on day one but throughout the entire term.
This white paper will help you understand the overall construct of a good outsourcing contract so that you can make certain you balance the overall risks and rewards in order to receive the services you need, at the levels you require, and within your price constraints.
Consequential and Direct Losses in the BPO Environment
In any Business Process Outsourcing (BPO) project one of the issues guaranteed to excite both provider and customer is the scope of limitations of liability. Negotiating overall caps on liability is a straightforward commercial haggle.
Negotiating overall caps on sourcing liability is a straightforward commercial haggle. The service provider aims low, usually hiding behind the "market practice" and "corporate policy" defenses. The customer reacts with a high figure, which more closely reflects the likely loss to the customer's business of serious supplier failure, but which often fails to take into account the risk/reward analysis that the provider has to perform in evaluating whether to proceed with the deal. After a process of practical risk evaluation and confidence building the parties usually arrive at a compromise figure.
Once the cap is agreed it is surprising how often the parties pay little attention to the types of loss that may be recovered. Any service provider will expect to include in the contract some form of consequential loss exclusion. However, to simply rely on or accept the presence of a boilerplate clause excluding either party's liability for "special, indirect, consequential or incidental damages", without any further detailed discussion and drafting about specific losses which would or should fall outside such exclusion, could potentially leave both parties financially exposed. In Finance and Accounting outsourcing, for example, the supplier will usually be responsible for cash management functions, accounts receivable, accounts payable and a degree of financial reporting. A failure or delay by the provider could give rise to a variety of losses for the customer. An underpayment or failure to pay a third party supplier could give rise to interest charges, loss of early payment discounts, order cancellation or delay in product delivery (which in turn could give rise to production losses and possible loss of business for the customer).
A failure to collect receivables could give rise to financing or overdraft charges, or cash flow problems for the customer. Late provision of financial reports could affect the customer's ability to submit statutory accounts or tax returns with the consequent risk of fines or interest charges. Do these losses fall within or outside consequential loss exclusion?
How to Implement the Results of a Benchmark
A benchmark can seem like an easy answer to improving the price performance of your outsourced operations. By finding out the market price of your services, you should be able to simply change your pricing to reflect the market, right? Wrong!
A sourcing benchmark needs to investigate the causes of any price differences to market, rather than just show the price difference itself. Without an analysis of causes, it is nearly impossible to make any changes to the price of your services because there could be multiple issues at stake. Will the provider agree to the change? What will that change do to the pricing mechanism? How will the price change impact the service? What effects will it have on the client/provider relationship?
To be effective in these circumstances, a sourcing benchmark needs to uncover the drivers of any price difference, such as volume changes, asset refresh rates, residual transformation charges, etc. These sourcing price drivers will determine the ability of either party to derive price benefits from the agreement.
This article describes how considering sourcing price drivers is essential to finding the best way to implement your sourcing benchmark results.
Are You Ready for Outsourcing?
Is your organization ready for outsourcing? It's an important question, and one that too many executives fail to consider.
Oftentimes, an organization makes a decision to outsource and leaps straight into the RFP process without looking back. A variety of independent research studies have put the percentage of outsourcing deals that fail somewhere between 50 to 75%. A well thought through process should focus on a comprehensive evaluation of the full range of sourcing options available, rather than simply churning out standard RFPs focused solely on reducing vendor pricing against cost points that may or may not have relevance to the success of the business or the vendor service delivery.
Conducting a thorough and deliberative feasibility and strategy phase before developing the RFP will help you avoid becoming one of the aforementioned statistics by (A) determining whether you should be outsourcing the function; (B) if so, how much of it; and (C) where the work should be done. This tenet holds true in all situations, but is especially important for complex, global organizations attempting to restructure multiple functions and processes.
Make no mistake about it: outsourcing is a risky proposition. Hopefully, the sourcing advisor you select will do their best to anticipate, define, monitor, and mitigate the risks involved - but you should accept that there are risks. Therefore, before knowingly taking the risk, it is important to understand whether it has a chance of paying off.
Most organizations perceive that much of the work required to create a sourcing strategy has been conducted under other initiatives, and that gathering the results of these "one-off" efforts can serve as a significant process accelerator. It is our experience that most such work has been done without a common understanding of the structure, content, or tools necessary for developing a total sourcing strategy.
This article discusses why a thorough assessment of an organization's current state (functions, processes, baseline costs, etc.), is essential to revealing the sourcing options available and the strategies to be considered for your organization.
1 
USEU