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No matter how successful a company is, its inability to pay outstanding debts weakens its foundation. Amid financial turmoil due to various market issues, some enterprises might find themselves at the crossroads of bankruptcy.
Providers in the business process outsourcing (BPO) sector are no exception. They support various organizations in boosting operations, cutting expenses, and enhancing global competitiveness. However, they are not immune to economic challenges.
This article tackles how BPO companies deal with these financial uncertainties and how bankruptcy laws influence them. Keep reading to learn more.
Bankruptcy and its impact on outsourcing
Debts resemble nightmares in the finance industry, especially when your business cannot repay them due to unforeseen circumstances. This financial issue, combined with a lag in sales and revenue, often results in bankruptcy.
For instance, General Motors filed for Chapter 11 bankruptcy in June 2009 due to an economic recession and over $30 billion in debt. Fortunately, government funding and restructuring saved the company.
Bankruptcy is what BPO companies risk when they experience market fluctuations, operational inefficiencies, and high debt levels. Compliance issues, natural disasters, geopolitical tensions, and health crises also strain their financial resources. Their lack of risk management and contingency planning makes them prone to this regulatory proceeding.
BPO firms and clients can encounter the following consequences without proper financial planning:
- Jeopardized or canceled contractual agreements
- Disrupted business operations and supply chain
- Low-quality output and service
- Missed deadlines and backlogs
- Insufficient data security
- Reputational risks
- High BPO transition or termination costs
Keeping BPO firms afloat: Bankruptcy laws you should know
BPO firms and their clients need to understand bankruptcy laws. These regulations establish a structured framework to help resolve financial difficulties when companies cannot meet debt obligations.
Although they vary by jurisdiction, bankruptcy rules share common principles. The legal proceeding facilitates the fair distribution of assets among creditors and assists in reorganizing or liquidating the debtor’s assets.
See below some examples of bankruptcy laws that influence the BPO industry.
The United States Bankruptcy Code
Enacted as Title 11 of the United States Code, the Bankruptcy Code details policies and procedures for individuals and companies seeking relief from overwhelming debts. This set of comprehensive laws consists of chapters, each addressing various types of bankruptcy. Here are the common ones:
- Chapter 7, also known as liquidation bankruptcy, is when a trustee sells the debtor’s non-exempt assets to pay creditors. It provides debtors with a fresh start after discharging certain debts.
- Chapter 11 bankruptcy helps businesses continue operating while restructuring their debts. Debtors propose a plan of reorganization outlining how they will repay creditors. The approach is subject to court approval.
- Chapter 13 is primarily reserved for individuals but is also applicable to small business debtors. This chapter allows them to reconstruct their debts without liquidating assets. It includes developing an installment repayment plan over three to five years.
- Chapter 15 handles cross-border bankruptcy cases that affect U.S. interests. It enables collaboration between U.S. and foreign courts to tackle a debtor’s financial challenges across different jurisdictions.
An automatic stay becomes effective upon the filing of a bankruptcy petition. It bans creditors, including BPO clients, from taking specific actions to collect debts. Meanwhile, service providers can assume or reject existing contracts. They must resume their work when assuming a deal. Conversely, an agreement is canceled when denied; clients thus need to seek new partners.
The Philippine Financial Rehabilitation and Insolvency Act
The Financial Rehabilitation and Insolvency Act (FRIA) of 2010 provides guidelines to assist financially distressed businesses in the Philippines. The law aims to efficiently and fairly rehabilitate and liquidate a company’s debts. It also helps safeguard the rights of creditors.
Under the FRIA, financially troubled BPO firms can initiate rehabilitation proceedings to revive and improve their monetary conditions. The bankruptcy law also assists in developing rehabilitation plans to protect, modify, or terminate outsourcing contracts.
Besides, the FRIA outlines provisions for a stay order, which halts a creditor’s actions against the BPO company. This decree allows providers to create and execute the rehabilitation plan without the immediate pressure of legal activities from creditors.
In cases of unsuccessful or unfeasible rehabilitation, the law enables the orderly liquidation of the company. The process helps maximize the value of the debtor’s assets and distribute the proceeds equally among creditors.
If your U.S.-based business intends to work with a Philippine service provider, your legal teams must know these key regulations. Doing so lets you draft a well-defined strategy to prevent or mitigate unexpected financial challenges.
Other bankruptcy laws in BPO hubs
Meanwhile, if you want to explore outsourcing opportunities from other countries, here are the bankruptcy laws to note from the top BPO hubs:
- India’s Insolvency and Bankruptcy Code, 2016 (IBC)
- The Mexican insolvency and bankruptcy law (Ley de Concursos Mercantiles or LCM)
- Canada’s Bankruptcy and Insolvency Act (BIA)
- The UK’s Insolvency Act 1986
- The Enterprise Bankruptcy Law of the People’s Republic of China
Steps BPO firms take to ensure financial resilience
In an analysis of data from the Bureau of Labor Statistics, LendingTree noted that nearly 21% of private companies in the U.S. fail within their first year. More than 48% and 65% have failed after five and 10 years, respectively.
BPO companies employ practical solutions to avoid experiencing bankruptcy or business closure. They implement the following strategies to ensure financial resilience:
- Diversify service offerings and client portfolios.
- Identify and resolve potential financial risks.
- Optimize resource distribution.
- Incorporate flexibility into client contracts, such as adjustable pricing models.
- Automate repetitive processes.
- Expand market reach and global presence.
- Use sophisticated financial modeling and forecasting.
- Maintain healthy cash reserves.
- Implement cash flow forecasting strategies.
- Regularly monitor key performance indicators (KPIs) and financial metrics.
The bottom line
Regardless of company size, businesses are vulnerable to financial ruin when debts become unmanageable. BPO companies also encounter similar drawbacks. Hence, they take various steps to stabilize their finances.
In addition to the financial resilience practices discussed, BPO companies study bankruptcy laws to know the critical steps in legally addressing their financial issues. The abovementioned practices guide them and their clients in avoiding or mitigating the negative impact of insolvency.
Let’s connect and exchange insights into crucial bankruptcy rules and regulations. This vital information helps us align our financial plans when negotiating a potential service-level agreement (SLA).
