What are the essentials of a good business process outsourcing contract?

Posted by Outsourcing Insider on Jan 21, 2013 7:00:11 AM

I have always advocated investing in time to carefully develop and negotiate your business process outsourcing agreements. They can be a powerful mechanism for promoting accountability, efficiency and mutual success.

I am not a lawyer and would never attempt to dispense with legal advise. But I have been involved with enough outsourcing engagements to know what a typical manager should keep in mind during this phase of the outsourcing lifecycle. And having your agreements reviewed by an attorney is a must.

Most contracts contain four major parts – the master agreement, operating principles, Statement of Work (SOW), and Service Level Agreement (SLA). For me, it has always been easier to develop these in reverse order or, as Stephen Covey suggested, ”begin with the end in mind”.

So let’s begin with the SLA. The essential elements of the SLA are listed below:

  • Start and end dates of the service
  • Schedule for reviewing performance
  • Data to be used in measuring the service level
  • Required levels of service
  • Measurements to be utilized
  • Measuring period
  • Minimum quality of work
  • Provisions and penalties for over- and underperformance

These components are pretty basic, but it is surprising how often some are overlooked.

One final comment on SLA’s, I believe it is a good idea for the client company to explain why the SLA’s are important to your business and/or your clients. This level of understanding will help create the appropriate level of urgency from your partner.

The other components of business process outsourcing contracts are listed below.

  • Master contract

Defines overall legal arrangement
Codifies operating rules
Provides legal protections
Trademarks and copyrights
Trade secrets and intellectual property protection
Ensuring the security and privacy of your data
Applicable Law
Responding to a vendor that fails to perform its duties
Termination of relationship
Indemnifications and warranty
Force Majeure
Conflict resolution
Term expiration and renewal
Other notices

  • Operating principles

Define how parties will work together
Logistic of engagement
Reporting protocols
Governance procedures
Work orders/methodology for scheduling work
Work forecasts
Support processes – problem resolution, etc.
Communication plan
Conflict resolution
Change management process
Performance measurement process
Disaster recovery
Exit strategy
Security plan

  • Statement of Work

The statement of work is so important that I devoted a previous blog to it.

As a final check, the contract must clearly describe:

  • The scope and nature of the engagement
  • Roles and responsibilities of client organization
  • Roles and responsibilities of vendor organization
  • Metrics for evaluating performance
  • Recourses in case things do not go as expected

I hope you find this information helpful. Feel free to comment with things I may have missed.

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