Steps in Creating a Business Process Outsourcing Agreement

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 is important because it details the obligations you and your service provider must fulfill to achieve the desired business goals. Among the details are the scope of work and the level of service you expect from the third-party contractor, the metrics or key performance indicators (KPIs) it needs to meet, and remedies to take if it does not reach service levels. 

Clearly defined service contracts provide transparency and support for building a revenue-driven business relationship. The terms and conditions include your service quality expectations and the BPO vendor’s benchmarks and performance measures to attain common objectives. 

Here are other reasons a written BPO agreement is necessary:

• Offers security. A contract gives you assurance and peace of mind when transacting with a third-party service provider. It specifies vital aspects, including each party’s responsibilities and the service length. It protects you from financial losses if the agreed conditions or terms are not addressed or broken. 
• Provides details. A written BPO agreement shows the final arrangement between you and the service provider, including the services it must deliver and the payments you must make. These details are legal proof and can be brought before a court of law for enforcement or litigation in the event of a breach. 

Tips for Creating a Business Process Outsourcing Agreement

Consider these six tips when drafting a BPO contract:

1. Put everything in writing. Create a written contract to serve as legal evidence. Each party should uphold the terms and conditions of a formal and official agreement. Verbal agreements are less reliable as individuals’ memories can be inaccurate and biased. 
2. Write in plain English. A BPO contract should be written clearly, using simple English words. Avoid legal terms as much as possible and use them only if necessary. Make sure that both parties understand all the contract’s provisions.
3. Be as specific as you can. Detail each party’s terms, responsibilities, rights, conditions, and obligations. Ensure that the stipulations are not open to different interpretations and opinions that might adversely affect your partnership. 
4. State the services and the payment amount. Specifying the services you expect to receive in the business process outsourcing agreement is necessary; include the task volume, time frame, and targets you want to achieve. Similarly, state how and when you shall pay your third-party contractor. 
5. Consider ownership rights and confidential information. When doing business with a third-party contractor, gaining access and insight into each other’s business practices, intellectual property rights, and confidential information is possible. If both parties prefer data privacy, inserting a confidentiality clause or a non-disclosure agreement (NDA) is advisable. 
6. Add a termination of a contract notice. A mechanism must be established to quickly terminate the contract if the BPO provider falls short of your expectations or you fail to keep up with the service payments. Such exit management can also be applied in a mutual termination of the agreement in which the goals and requirements in the contract are achieved.

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

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!