Overview of Small Business Outsource Contract

After seeing success in big corporations small and midsized firms started adopting Business Process Outsourcing (BPO) as part of their strategy to cut cost and improve business efficiency. Though the adoption rate is slow, as the BPO industry matures more small and midsized businesses will start using BPO firms for their outsourcing needs. Any time a company engages with an outsource vendor they need to enter a legal contract. Big corporations have their own corporate attorneys looking into the details of the contract and they actively engage in negotiation with the outsource vendor to have suitable verbiage in the contract. Small businesses may not have their own legal department working for the small business owner in contract negotiation with the outsource vendor. Nevertheless small business owners must understand all the details of their outsource contracts before signing it. This article gives tips and techniques for small business owners to understand various contract terms and gives a brief outline of negotiating suitable contract terms and conditions with their outsource vendor.

1. BPO Contract Negotiation
Any outsourcing project is a collaborative effort between the small business and the outsource vendor, the contract should be negotiated so that both parties can mutually benefit from the outsource engagement. For small businesses owner it will be a first opportunity to understand the outsource vendor’s management and their cultural fit after the pilot project phase. Small business owners should use this opportunity to identify how the outsource vendor’s management is willing or unwilling to accept the terms and conditions of the contract. Both parties should be willing to compromise in their terms and conditions and make it as a win-win outcome based on flexible terms that can be renegotiated overtime.

Small business owners should evaluate their short-term and long-term goals for the project and make sure those are addressed in the outsource contract. Since the outsource vendor’s team is in different country and probably in different time zone, a trust should be established between the small business and outsource vendor’s employees. The outsource contract along cannot guarantee the trust and collaborative effort between two teams nevertheless it should be addressed in the outsource contract. Every small business has its own needs for their BPO projects; it is not possible to have an outsource contract that is suitable for all the needs. However there are certain terms and conditions an outsource contract must have and we’ll explore it in the next section.

2. Common BPO Terms & Conditions
Following are some the outsource terms that should be included in any outsource contract, it is not a complete list, but gives an idea for the small business owners what to look for in their outsource agreement.

2.1. Statement of Work (SOW)
SOW describes what the outsource vendor will do in a BPO project and it is the most important part of the outsource contract. As a small business owner you need to make sure that you clearly describe the responsibilities of the outsource vendor’s team and your own team in executing the project. Rules must be added for the change processes in the project with the clear definitions on “what makes up the change?” You need to specify the changes are due to technology or changes in your business conditions. Attrition rate in BPO industry is high and this is specifically a major issue for the Indian based outsource vendors. Because of attrition rate your outsource vendor may change their team members working in your project. You need to specify what steps outsource vendor will take to ensure the team members continuity and how the responsibilities will be transferred in case if they leave the company. Sometimes it is desirable to specify what not the responsibilities of the outsource vendor are. Your pilot project with your outsource vendor gives you valuable details and you should use it as a reference in preparing the statement of work.

2.2. Pricing
Small business owners can negotiate the pricing in several different ways like variable pricing, fixed pricing, unit pricing, volume of transactions, hourly, and monthly. The choice of fee structure for an outsource contract should be crafted based on the results produced by the outsource vendor according to the “Statement of Work”. Both the small business owner and the outsource vendor must consider unexpected future events in crafting the price structure. Typically for small business owners hourly rate or a monthly rate for fixed number of transactions would be sufficient and if needed can be reworked as the demand increases for the BPO work. This is called as “pay-as-you-go” pricing model. But for some BPO projects it may not be possible to measure the work in advance or the work varies regularly. In this case “pay-as-you-go” model may not work and the small business owners need to come up with other pricing models described earlier.

2.3. Service Level Agreement (SLA)
In SLA you describe the detailed performance the outsource vendor needs to provide in the BPO project and what are the remedies if the vendor fails to meet the specified performance objectives. A well drafted SLA will align the interest of both parties in the outsource relationship. As a business owner you need to understand the outsourcing process in great detail and agree on the ways the finished services will be measured and the results for the failure to meet them. The SLA should also address who is responsible to measure it and how often it should be measured. Typically SLA is measured by both the small business and outsource vendor employees together. The time period between the measurements should be long enough to have meaningful results.

The cornerstone of SLA is to define the outsourced services and key performance indicators (KPI) to measure it. Some examples of KPI are quality, accuracy, reliability, capacity, time, customer satisfaction. For example in accounting outsourcing it could be number checks processed every day and how accurately it tallies with the amount in the bank.
Like statement of work and price the SLA can change over time because of changes in technologies, business processes, regulatory requirements, and volume of outsourced work. Both the small business owner and the outsource vendor should understand and agree the SLA changes and those should be put in the contract.

2.4. Intellectual Property in Outsource Contract
Though Intellectual Property (IP) is a must in KPO, in BPO projects depending on the business process, IP protection may be necessary in the outsource contract. IP laws varies around the world, several countries are signatories of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). But the implementation and interpretation of the laws varies from country to country. If your business needs the IP protection then you need to consult legal help to draft your contract.
Countries like India have strong IP protection laws that have been used by several outsourcing firms in sending work to India. But as a small business owner you must perform proper due diligence before considering a country to outsource the business processes. It is necessary to specify measures to be taken by the outsource vendor to continuously protect and monitor work performed by the outsource vendor’s employees. It is also necessary to provide proper clauses in the outsource contract to notify you the business owner in case of any breach in your Intellectual Property Rights.

2.5. Outsource Governance
Governance in outsource contract describes how the outsource process is administered and monitored to serve the interest of small business owner and the outsource vendor. The governance section of the outsource contract helps the small business owner and the outsource vendor to mange the changes in scope of work, SLAs, and Pricing. Monitoring outsource contract will be a challenging task for the small business owner, it is better to identify employees from their own company and the outsource vendor to be responsible for it. For simple outsourcing tasks governance may not be necessary. For large and complex outsourcing projects, governance of the contract helps both the small business owner and the outsource vendor to manage the overall contract continuously throughout the lifetime of the outsource relationship.

2.6. Outsource Contract Termination
This part of the outsource contract focuses on various reasons under which the small business owner can terminate the outsourcing relationship. A small business owner can terminate the outsourcing contract either for “no reason” or for a “specific reason”. It is desirable for the small business owner to have the flexibility to terminate the contract without giving specific reason to the outsource vendor. Of course in this case the small business owner will pay a nominal fee to the outsource vendor with the contract termination. Generally the outsource service provider is not allowed to terminate the contract for “no reason” just like the small business owner. But sometimes the outsource provider may insist on termination on “no reason”, the termination fee from the outsource vendor to the small business owner should be drafted in the outsource contract.

The outsource contract can be terminated by the small business owner for a “specific reason” and all the reasons like Material Breach, Nonmaterial Breach, Anticipatory breach, and fundamental breach should be specified in the contract. Both the small business owner and the outsource vendor must use the SLA and Statement of Work to specify parameters that constitutes a breach of the agreement.

Though it may not be necessary for small business outsourcing, sometimes it may be necessary to tie the termination with the retention of key outsource vendor’s employees working in the outsourced project. These are important measuring levels for the outsource vendor to provide quality work in the outsourced project. High turnover levels in outsource vendor’s organization shows the outsource vendor has problems in their managements and that may place the small business owner at risk in getting quality and timely service from the outsource vendor.

Finally, termination for “Specific Cause” should include changes in management of both the small business and the outsource vendor. Change control in outsource vendor’s company may result in changes in the management team in which the small business owner placed the trust in establishing the outsourcing relationship. The new management may provide the same services to competitor of the small business and that may create Intellectual Property risks for the small business owner. Management changes in the small business may also create problems in the outsource relationship. The new management in the small business may not want to outsource or they may not be comfortable with the current outsource vendor, or the small business may not like to do business with the new management. For these reasons the outsource vendor will have the right to terminate the outsourcing contract. In either case contract termination is an important clause in the outsource contract and both parties must understand agree on all the possible reasons for the termination.

2.7. Force Majeure
Just like any other general contracts outsourcing contracts should have clauses for force majeure that excludes the outsource service provider from providing services due to natural disasters like fire, flood, and earthquake. However the small business owner should have a clause in the contract that links the force majeure with disaster recovery plans and business continuity plans. Sometimes outsource vendor may put war and terrorism may in force majeure, here again the small business owner should make sure it is linked with the business continuity. Force majeure is applicable to small business owners also, they should list all the reasons under which they can’t continue to outsource the work.

2.8. Outsource Transition
If the outsource relationship fails and if either the small business owner or the outsource vendor decided to terminate the contract then the small business owner will bring back the outsourced process or find a new outsource vendor. In either situation detailed transition plan of the business process must be clearly mentioned in the outsource contract. Small business owners should go through the pilot project phase to identify steps and tasks that are carried out in sending the work to the outsource vendor, use that as basis to draft the transition plan to bring back the work from the outsource vendor. Small business owners must identify all the documents, procedures, tools and software created by the outsource vendor, those should be listed in the transition section of the outsource contract. Also specify a general clause that entitles you to be the owner of the work produced by the outsource vendor employees and they need to help in the transition process. Consider any time a termination of the outsource contract will make the outsource vendor unhappy and it may not be their best interest to help you in the transition process. So it is better to outline a detailed plan to be followed by the outsource vendor in the transition process.

2.9. Outsource Dispute Resolution
Outsourcing contract is a living document which needs to be referred by both the small business owner and the outsource vendor any time if there are serious issues arises in the outsource relationship. At that time the dispute resolution process starts with the governance and if it couldn’t be solved then the small business owner has to start the dispute resolutions process. Though it is not a good situation for both the parties, in the contract negotiation phase both parties should agree for an amenable dispute resolution process and those should be captured in the outsource contract. Dispute resolution may be started with binding arbitration. During contract negotiation if the parties agreed to use the arbitration process then the rules and procedures for the arbitration must be drafted in the outsourcing contract based on the arbitration rules set by International Chamber of Commerce. If the outsource vendor has an office in US then for US based small business owners can use the arbitration rules set by American Arbitration Association.

2.10. Outsource Regulatory Concerns
Depending on the nature of the business process that is outsourced small business owners must address the regulatory issues in the outsource contract. Suppose if your outsourcing involves health care information then your outsource contract should address the HIPAA rules and regulations which includes the steps and procedure outsource vendor should follow to satisfy HIPPA. These procedures include internal audit, incident reporting, and data protection policies must be drafted in the outsource contract. If the small business owner outsource financial related information then GLB Act should be specified in the outsource contract. The outsource vendor must implement a comprehensive outsource security infrastructure and those should be documented and it should be linked with governance and termination clauses of the outsource contract.

3. Conclusion
Developing an effective outsource contract is an important step for the small business owners to maintain a long relationship with the outsource vendor. Small business owners should not take this step easily and they should actively participate with the outsource vendor in the contract negotiation so both parties can understand and accept the conditions drafted in the contract. Both the small business owner and the outsource vendor can use this article as a reference to understand the outsource contract negotiation process. Not all the terms and conditions described in this article might be needed in all the small business outsource contracts. But as a small business owner you need to know all these details and pick what is needed for your outsourcing relationship with an outsource vendor. Finally this article gives an overview of small business outsource contracts and as always you should consult an attorney and get legal help in drafting and signing your outsource contract.