Written by Rene Mallari
Contents
Hiring a third-party company to handle some or all of an organization’s processes is known as “business process outsourcing” (BPO). Companies use this strategy to save on costs, focus on their core business, or do both.
Do you plan to outsource but need help drafting a business process outsourcing agreement?
Do you want to know how to draft a solid contract?
Keep reading to learn more.
What Is a Business Process Outsourcing Agreement?
A BPO agreement is an official contract between you (the client company) and a third-party provider. Under this legal deal, you allow the contractor, or service provider, to manage the non-core business functions of your business.
Some of the common functions of BPO are:
- Bookkeeping and accounting
- Data entry
- Technical or information technology (IT) support
- Human resources
- Customer service, including call centers
- Appointment setting
- Sales or marketing support
An outsourcing agreement is a performance contract in which you agree to pay the service provider after they complete the assigned tasks. The BPO contract also involves a long-term arrangement where the third-party contractor acts as your representative or offers a vital link in the operational supply chain (e.g., packaging, manufacturing, and transporting).
Why Shouldn’t You Outsource Your Core Processes?
Core competencies, or the business advantages over competitors, are processes directly connected to your company’s mission and goals. These competencies are strategic, add value to the business, and must be your focus to build or continue gaining an edge over market rivals. Thus, getting BPO companies to work on them on your behalf is not advisable.
Why Is a Business Process Outsourcing Agreement Important?
A BPO agreement
holds paramount importance due to its comprehensive delineation of the obligations incumbent upon you and your chosen service provider. Critical components of this agreement become clear, such as the specified work scope and the expected level of service excellence that the third-party contractor will uphold. Additionally, it articulates the metrics and Key Performance Indicators (KPIs) that must be met, along with the prescribed course of action to be taken should service levels fall short of expectations.
The essence of a well-structured BPO agreement lies in its capacity to foster transparency and underpin the establishment of a mutually beneficial, revenue-driven business relationship. It meticulously outlines your precise expectations concerning service quality, aligning them with the benchmarks and performance metrics set by the BPO vendor, all in pursuit of shared objectives.
Beyond these fundamental aspects, there exist compelling reasons why a written BPO agreement assumes paramount importance:
- Offers security. The contract is a shield of assurance and a source of peace in your interactions with a third-party service provider. It provides a definitive record of each party’s responsibilities and the agreed-upon duration of service. Furthermore, it affords protection against potential financial losses in the event of non-compliance or breaches of the stipulated conditions or terms.
- Provides details. A meticulously crafted BPO agreement is the conclusive manifestation of the understanding between you and the service provider. It crystallizes the services to be rendered and the corresponding financial obligations. This documentation holds legal weight, capable of being presented before a court of law for enforcement or recourse in the event of any deviations or violations.
Tips for Creating a Business Process Outsourcing Agreement
When embarking on the creation of a BPO contract, consider these six invaluable tips to ensure a comprehensive and effective agreement:
- Put everything in writing. Turn agreements into written contracts. A formal, written agreement is imperative because it holds both parties accountable to the specified terms and conditions. Verbal agreements are less dependable, given the potential for inaccuracies and bias in human memory.
- Write in plain English. Clarity is paramount in BPO contracts. Draft your agreement in plain, straightforward English, avoiding convoluted legal terminology whenever possible. It is essential that both parties fully comprehend all provisions within the contract.
- Be as specific as you can. Leave no room for ambiguity by elaborating on each party’s terms, responsibilities, rights, conditions, and obligations in explicit detail. Ensuring that the stipulations are unambiguous guards against differing interpretations that could strain the partnership.
- State the services and the payment amount. Clearly specify the services anticipated under the BPO agreement. Include precise details such as task volumes, timeframes, and desired targets. Similarly, delineate the payment structure’s terms, outlining how and when remuneration shall be made to the third-party contractor.
- Consider ownership rights and confidential information. During your engagement with a third-party contractor, the exchange of insights and access to each other’s business practices, intellectual property rights, and confidential information may occur. To ensure data privacy and protection, consider incorporating a confidentiality clause or a non-disclosure agreement (NDA) into the contract.
- Add a termination of a contract notice. It is imperative to establish a mechanism for swiftly terminating the agreement should the BPO provider fail to meet expectations or if issues arise regarding service payments. This exit management approach can also be applied during mutual agreement termination, contingent upon the successful fulfillment of contract goals and requirements.
What Should You Include in a BPO Agreement?
Your business process outsourcing agreement should include the following:
- Project, work, or task scope
- Service levels
- Disaster recovery and business continuity
- Designation of project managers
- Review rights
- Data protection and compliance
Let us explore the details.
Project, Work, or Task Scope
This describes all the services, deliverables, and resources third-party vendors should provide. It also includes other responsibilities related to the assigned processes.
As a client, you should specify which services, deliverables, and resources are qualified for payment in the business process outsourcing agreement. You can also include a clause requesting new or additional services not listed in the original. This is subject to the service provider’s approval.
Example of a work or task clause in an accounting outsourcing agreement:
ABC (the Company) is a company that offers various accounting services. The Company shall outsource the following services to XBPO:
- Assist in the handling of account receivables and account payables for the Company.
- Review and analyze the cash flow management of the Company and make recommendations.
Service Levels
This portion describes the measurable standards expected from the BPO provider. It includes the service level agreement (SLA) that sets specific benchmarks to meet your outsourcing requirements. An SLA is vital to a BPO contract and can be modified as your business grows. KPIs are found in this agreement.
Example of a service level clause in an accounting outsourcing agreement:
XBPO shall manage the accounts receivable from the Company’s clients and customers and the accounts payable to the Company’s suppliers. XBPO shall meet the following key performance indicators (KPIs):
- Days Sales Outstanding. XBPO shall collect the payment from the Company’s client within 15 days after the date of the client’s purchase.
- Receivables Turnover Ratio. XBPO shall maintain at least 7.0 from January 2023 to December 2023.
- Days Payable Outstanding. XBPO shall settle the payment to the company’s supplier within 30 days after the date of the Company’s purchase.
- Invoice Cycle Time. XBPO shall maintain an invoice cycle time for suppliers no longer than seven banking days.
Disaster Recovery and Business Continuity
This section describes the service provider’s responsibility to maintain security measures to protect the systems containing your customer and company data. In this regard, the partner should allow you to conduct data audits periodically to help you with disaster recovery plans.
A business process outsourcing agreement needs a disaster recovery plan for business continuity. Without it, you can experience data loss, low output levels, or reputational damage from an unexpected negative event. This can result in the loss of customers and income.
Example of a disaster recovery and business continuity clause in an accounting outsourcing agreement:
- Business Continuity Plans. XBPO shall maintain a business continuity plan for every service, describing measures XBPO will execute to recover from a disaster.
- Disaster Recovery Plans. In each business continuity plan, XBPO shall include a plan for recovering vital technology systems and measures for restoring business operations at an appointed recovery site.
Review Rights
In line with your disaster recovery program, the service provider should permit your appointed employees to access its systems, platforms, or facilities. Access allows them to perform periodic audits of the outsourced processes. You should send prior written notice of an audit. The third-party contractor should cooperate and help your assigned staff during the review.
Example of a review rights clause in an accounting outsourcing agreement:
Employees of the Company and its auditors will be given fair access to any site or facility where the services are being conducted. This will enable them to conduct audits of XBPO’s performance of the tasks and other matters included in this agreement.
Designation of Project Managers
This segment stipulates that you and the third-party contractor appoint project managers or executives. These individuals are authorized to act on matters provided for in the business process outsourcing agreement. They conduct regular meetings on behalf of both parties and make decisions following the BPO contract.
Example of a designation of project managers clause in an accounting outsourcing agreement:
The Company and XPBO will each designate an individual to serve as the “Project Manager” for each service. The Project Managers will represent and act on behalf of their respective parties in matters related to the services. They will meet regularly, at mutually agreed times and locations, to evaluate and discuss the progress of the services in the agreement.
Data Protection and Compliance
Including a data protection clause as part of the client-contractor agreement is required.
Outsourcing activities, including payroll handling and customer service, require access to bank accounts, credit card numbers, insurance details, and other confidential information.
Ensure that information is secure and compliant with the relevant laws. You must meet all the government requirements to enhance data security and avoid heavy penalties in the future.
An example of a data protection and compliance clause in an accounting outsourcing agreement:
- Data Protection. XBPO shall execute and maintain a full written information security program comprising proper security measures to safeguard the personal information of the Company’s employees, shareholders, officers, and directors that XBPO processes, maintains, stores, and receives concerning the services.
- Data Compliance. XBPO shall comply with the Data Protection Act of 1998 and any other applicable data protection legislation.
How Can I Avoid Common Mistakes in a BPO Agreement?
You can avoid common mistakes in a business process outsourcing agreement by spending more time and energy developing the contract. You must check all the details and ensure that every word in the document is clear and understandable.
Also, consider the tips listed above and the sections that should be included in the BPO agreement. Lastly, seek legal counsel, preferably from lawyers specializing in business or outsourcing contracts, to help you draw up a solid contract.
How Do I Resolve Disputes in a Business Process Outsourcing Agreement?
You can resolve disputes by including a dispute resolution clause in the business process outsourcing agreement. The section should specify how to address disputes or conflicts should they arise while operations are ongoing. Misunderstandings or misinterpretations are part of a business partnership. Always be ready.
Appointing a neutral third-party arbitrator during the initial disputes is recommended instead of going to court immediately. The arbitrator can be a group of individuals who listens to and reviews each case. It then shows relevant evidence to both parties before making a final decision.
The Bottom Line
An agreement is what BPO partnerships need for a strong start. Make this guideline your reference when creating a business process outsourcing agreement. Knowing how to draft a BPO contract helps you find the right service provider to make outsourcing a success.
Do you need more assistance with outsourcing? Contact us, and let’s connect!
About The Author
Rene Mallari considers himself a multipurpose writer who easily switches from one writing style to another. He specializes in content writing, news writing, and copywriting. Before joining Unity Communications, he contributed articles to online and print publications covering business, technology, personalities, pop culture, and general interests.
He has a business degree in applied economics and had a brief stint in customer service. As a call center representative (CSR), he enjoyed chatting with callers about sports, music, and movies while helping them with their billing concerns.
Rene follows Jesus Christ and strives daily to live for God.
