By Marc Tanowitz
Most outsourcing contracts contain provisions that are to be completed post contract execution, require periodic updates, or simply vary over time. As we kick off 2012, the time is right to take a close look at these “active” obligations, identify any elements that require service provider action, and develop a plan and timetable to ensure that your relationships are ready to succeed in 2012.
Staying Current with all Contractual Elements
While there is nothing particularly unique about the beginning of the year as it relates to most contracts, we find that there is no time like the present to revisit and tie up those terms that may have been left untouched. While some elements are purely administrative, there are several others that can have a significant impact on performance and cost.
Nonetheless, each is important to address as fulfilling these obligations is fundamental to realizing the full value of the deal as it was envisioned when the initial outsourcing decision was made. Staying current with these elements enables buyers to: (1) ensure that metrics, measurements, and reports provide meaningful insight into the operations and results; (2) obtain a thorough understanding of their outsourced operations and how the service provider interacts with the retained organization; and (3) ensure the services delivered match the services under contract and for which the company is paying.
Furthermore, this effort can make a healthy deal more effective, provide a platform for productive service provider interactions for deals that are not yet achieving their expected benefits, and minimize transition risk for buyers that are contemplating transitioning services away from their current service provider(s).
Some key contractual elements to review include resource and productivity commitments, pricing and fees, pass-through expenses, continuous improvement plans, and benchmarking.
Many contracts specify the number of service provider resources that will be providing services in each year of the contract and in many cases this is linked to productivity or volume commitments (see below). Buyers should ensure that the number of resources providing services and other volumetric attributes of services being delivered are correct for the current year.
There is often a minimum level of service provider productivity in each year of the contract. In many cases, this is linked to the number of resources to be paid for by the buyer (see above) or volume commitments. For example, a contract may specify an increasing number of transactions processed per resource in each year of the contract, or it may specify a maximum number of resources that can be charged to the buyer based on a projected volume of transactions. Buyers should ensure that the productivity commitments are being realized through lower costs or an increased number of transactions with no additional charges.
Pricing and Fees
Pricing and fee structures are affected by factors such as the volume of services being consumed, number of resources being provided, annual adjustment provisions, etc. Buyers should review recent invoices (best practices typically include thorough invoice audits at least once per quarter) to determine whether both the cost per unit and units being invoiced are accurate. In addition, many contracts link price to escalators (e.g., cost of living adjustments, currency) that may result in pricing changes throughout the term. Buyers should be aware of the contracted pricing algorithms and indices so they can anticipate, model, and verify that pricing is reflected accurately in the invoices.
Pass-through expenses are typically charged as incurred, but are often subject to limitations and restrictions (e.g., compliance with policies, advance approval). These charges can add up to a significant percentage of overall fees. Buyers should review these expenses to determine approaches to minimize, if not eliminate, such charges.
Continuous Improvement Plans
In addition to committed productivity levels or resource reductions, service providers are often required to document proposals for increased efficiency and/or effectiveness. This idea is an important component of overall business optimization and can provide buyers with valuable insight into additional opportunities or non-value added activities that should be eliminated. Buyers whose contracts include these provisions should ensure they have received and reviewed any proposals.
Benchmarking can be challenging to implement and is a potentially costly activity, but if included in your contract, it can provide for meaningful productivity and cost improvements. Contracts with limited productivity improvement commitments may benefit most from utilizing this clause. Buyers that feel their services are “out of market” should examine their contracts to determine if this type of clause is present, and consider initiating such a benchmarking assessment. A surprising number of buyers go through the arduous process of negotiating benchmarking clauses, yet fail to exercise them (or even suggest exercising them) as permitted in the contract.
Next week, we will evaluate additional BPO contract elements that should be reviewed and, if necessary, revised.
Marc Tanowitz is a principal at outsourcing advisory firm Pace Harmon.