So you want to renegotiate your BPO contract…

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1 in 3 marriages end in divorce, but the rate of relationship breakdown between clients and vendors in the BPO (business process outsourcing) world is certainly higher. There are many reasons for this: for example, when new executives arrive at companies, they bring with them change, which may include preferred vendors they’ve worked with before, thus upending the incumbent. Or perhaps the BPO isn’t technology-savvy, hindering the client’s customer experience goals. Whatever the reason, there’ll inevitably come a time, in most BPO relationships, for reassessment and renegotiation.

The partnership approach

Lasting business relationships in any domain are based on a win-win, which means understanding each other’s situation and goals to ensure ongoing benefit for both sides. A client should understand both “market price” for the service it is buying/has bought, as well as the evolving cost elements of service provision. For example, while telecommunications and technology infrastructure costs have come down recently, wages have gone up in many markets. What was negotiated five years ago may no longer be reasonable.

In the open book, “cost plus” model, this is all transparent, however most BPO contracts are based on a transaction fee or hourly rate model where the BPO is unlikely to share the ins and outs of its client program P&L. Nevertheless, when there are major cost triggers affecting client or BPO, it is actually important to confront the issue and have an open discussion to ensure the sustainability of the partnership.

Before rushing to ask for a discount…

The first instinct for many service buyers, who perhaps are coming under pressure to reduce the cost of service delivery from above, is to ask for a discount. This strategy won’t always work, particularly if the existing pricing is already reasonable. Therefore approach the negotiation with a full understanding of what other companies are paying for similar work and volume in the same location. If volume has dropped due to automation, it may be that the BPO has less room to move than ever.

Consider carefully whether the service being provided is even fit for purpose any more – or has the market changed so much since the contract began that the scope needs to be redefined before simply renegotiating a cheaper price for the existing offering? Perhaps there is even a better fit BPO for the new skillset needs of the client.

Another factor to be cognisant of is exchange rates. 20 years ago, Australia was considered the equivalent of an offshore destination for call centre work by US companies, when A$1 equalled US$0.50. Now the Australian dollar is considerably higher, this is no longer the case. Beware of pricing in different currencies and be clear about who is absorbing the risk, and how this is mitigated.

Risk in any form carries cost, and if the BPO is subject to penalties for not meeting strict service levels, expect that this will bloat the price. Relaxing the service levels, on the other hand, should leave room for negotiation.

Removing exclusivity clauses may also present an opportunity for cost reduction. If a client has insisted that the BPO cannot work for its competitors, loosening the definition of “competitor” may open up new revenue potential for the BPO, which presents a win-win opportunity for all sides.

Aligning for outcomes

At the end of the day, clients care about outcomes more than anything. Introducing an outcome-based component to the fee structure aligns the BPO to the client’s goals, whether that’s to improve the customer experience with a higher Net Promoter Score or reduce unnecessary demand through customer-centric automation initiatives. While it’s unusual to have pricing based entirely on outcomes, a hybrid model combining fixed/variable fees with incentives for outcomes is often a healthy approach.

Having historical or industry data at hand is key to designing a favourable outcome model.

For example, a credit card issuer may pay a provider of concierge services an annual “per cardholder” fee, as that’s how the card issuer budgets, but that’s only possible because the provider has enough data to predict roughly what percentage of cardholders will make use of the service, and at what frequency.

Single country or multi-location outsourcing?

Rationalising a panel of five BPOs down to two may realise quick savings due to volume discounts with fewer vendors. However Covid-19, and the increasing number of natural disasters, led many companies towards a multi-country risk diversification strategy in 2021 and 2022. Now in 2023, many companies outsourcing to the Philippines, for instance, are examining whether they should divvy up the work by adding another destination – such as Fiji or South Africa – or even repatriating some work onshore. This also provides opportunity for a champion-challenger model, and leverages the strengths of different countries’ workforces for different skills.

Ebook: Cost of Outsourcing in Fiji

What if the BPO won’t budge on the contractual terms?

It’s disappointing to see occasional cases of intransigence of vendors who contractually lock in clients for long-term arrangements which become unworkable and highly unfavourable for the client over time. While this may be lucrative for the BPO in the short term, it can also be damaging in the long term: not only will the client jump ship at their first opportunity, but word will spread through the industry that the BPO is inflexible and not a true partner for its clients, affecting reputation and future sales opportunities. And Covid has taught us that flexibility is one of the most valued assets a business can have.

While there is a lesson to be learnt for clients who don’t build flexibility into their vendor contracts, BPOs should also beware of the implications of a one-sided legalistic approach in market.

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Last updated on: January 17, 2023