Some Essentials in Structuring a Successful BPO

The banking industry has been a leader in business process outsourcing. As recently reported in this publication, many institutions now view BPO as a integral part of their drive toward improved performance (via raising return on assets or reducing their cost-to-income ratio) with its potential to reduce operational expenses and optimize processes.

But attaining performance improvement and BPO success requires financial institutions to master the structure and management of their business process sourcing deals as a core business competency. So before initiating a BPO transaction, financial institutions should develop an approach which includes the following seven essential elements:

1. Articulated Objectives
Institutions must decide upon and clearly articulate the business objectives that will define sourcing success. Such objectives typically include reduced costs, improved service levels and the freeing up of management resources to concentrate on core competencies. It is through identifying and revisiting sourcing objectives throughout the selection, negotiation and management process that institutions develop a clearly understood and beneficial relationship with the BPO provider.

2. Clearly Defined Scope
Unlike IT, which is typically a discrete function within an organization, business processes are most often ingrained into the underlying business, with their delivery requiring industry-specific expertise. Accordingly, BPO requires a more tailored solution than traditional IT outsourcing. Providers of BPO services need to understand what performance is required from them in order to properly develop a technical solution and price the deal. Without this information, service providers may qualify their responses by making them subject to due diligence. It is, therefore, important for institutions to undertake their own rigorous due diligence in the scoping of their services request. The due diligence process will provide both a comprehensive understanding of the business processes being outsourced and a platform from which to properly scope the transaction requirements and evaluate provider responses.

3. Flexibility
In an effort to accommodate technological and business change, institutions should structure their BPO deals to allow for flexibility. For instance, in scoping the service requests, an institution should clearly define the required process outputs for the outsourced function, but avoid unnecessarily narrow descriptions of the technology or service delivery mechanism which the provider must employ. Likewise, in negotiating the services agreement, institutions should be sure to accommodate organizational change by allowing for the rapid ramp up and ramp down of business process volumes, as well as include methodologies for price and scope adjustments.

4. Performance Measures
Sourcing success requires that service levels be at least maintained, if not improved upon, over the term of the BPO deal. As part of an internal due diligence process, institutions should accurately measure their current performance to provide a verifiable base from which to develop fair and objective service level requirements for the services provider. Institutions should, therefore, invest time up-front to establish both the quantitative and qualitative standards of performance that will be required of the BPO provider.

5. Cost Predictability
Although the pricing model may vary depending on each company's preferences and the nature of the BPO transaction, it is essential that the pricing provisions of every BPO contract deliver specificity and cost predictability while giving financial institutions the flexibility to make adjustments to accommodate changing circumstances. The contract should also stipulate appropriate amounts and responsibility for "fees in" and "fees out" (such as transition and termination costs), as well as the mechanism by which prices are to be adjusted for changes in the cost of living or other price indices.

6. Process & Control
In negotiating any BPO transaction, institutions must endeavor to put in place a robust services agreement and not be distracted by "blue sky" offerings in the form of partnerships or joint ventures. Accordingly, when negotiating a contract, institutions should strive to build in processes and controls over such areas as the key personnel assigned to the engagement, changes to the systems and applications, the provider's methodology of performing the services (e.g. work practices and procedures), and the platform and architectures used to perform the services.

7. Exit Strategy
Before entering any outsourcing relationship, institutions must ensure that the contract stipulates what will happen in the event of termination or expiration. Institutions should ensure that they can continue to provide all business functionality following the termination or expiration of the BPO agreement by requiring that the provider assist in the transition of services to a new services provider or back in-house.

As BPO momentum builds, sourcing success will increasingly require the essentials of clearly defined objectives. These and other key elements need to be well defined and reflected in a robust services agreement between the parties.

Both members of Shaw Pittman's Global Sourcing practice, Milton Whitfield is a partner in the firm's D.C. office and Roberto Grande is an associate in the Los Angeles office. They can be reached at www.shawpittman.com.