How to transform your BPO contract negotiations

posted by John Sheridan and Nicolas Walden
16 June 2022

As BPO solutions become more sophisticated, procurement must adjust its approach to secure the best outcomes for C-suite stakeholders.

In key business process areas such as finance, human resources, information technology and even procurement, early generations of business process outsourcing (BPO) deals were all about transactional services and cost reduction driven primarily through labour arbitrage.

In a digital world, while cost reduction remains high on the agenda, high-performing businesses are looking for BPO providers to deliver truly transformational change that enables significantly improved business value and operational insight, in addition to cost-efficiency.

Forward-thinking procurement organisations are engaging with C-suite stakeholders to understand what their objectives and pain-points are, and using this insight and knowledge to shape strategic transformational BPO relationships that are focused on value creation and business enablement – not just pure operational savings.  

What should you be doing differently? For starters, consider these recommendations:

1. Look through your stakeholder’s eyes. While competitive tendering and on-contract benchmarking can be effective at comparing individual supplier prices for a given scope, these approaches don’t define what your future targets should be to reflect the disruption that digital is bringing to the BPO delivery model. They also may not take into account stakeholder pain-points and what may be preventing them from realising optimal value. A focused, value assurance review that covers a number of commercial and operational value levers – not just pricing – will provide you with critical insight to significantly improve your current BPO deal(s) or set the bar for a future competitive market engagement. Given the pace at which the BPO market is changing, the longer you delay the more value you will lose … and timely action will significantly enhance your future commercial leverage. Knowledge is power.

2. Give your current providers the first shot. There is a lot of churn in the BPO market now as dissatisfied clients look for a better transformation partner. Changing suppliers is expensive, disruptive to your business and often doesn’t address your underlying barriers to value generation. Unless your current BPO relationship or service model is fundamentally broken, consider starting by renegotiating with your current BPO partner to see if they can help you reach your new goals. Use the offer of potential contract extension as a carrot and the output of a focused commercial and performance review as the basis for creating clear and actionable renegotiation parameters. In parallel you could also warm up the market with very little overhead, which helps to keep your incumbent honest and hungry.

3. Test your exit strategy and plan. If your current BPO providers aren’t going to make it to the next level and you’ve decided to either repatriate services or re-tender with the aim of transitioning to a new service provider, then a clear exit strategy is critical to ensuring you mitigate risk and maintain business and service continuity. Many supplier-provided exit plans are insufficiently robust to meet the needs of a complex and business-critical exit process. Performed early, a comprehensive pre-exit and transition review can improve your commercial leverage during renegotiations, assist in creating the statement of work for exit services, and will ensure that your business stakeholders are well prepared for their important roles in orchestrating the exit process.

4. Future-proof your contracts. To build a new kind of relationship, you need a new kind of contract. Too few contracts are structured with a digital transformation agenda in mind – they lack the flexibility, performance and incentive mechanisms, and governance structures that are critical for mutual success. Reviewing and updating your BPO contracts now to ensure they reflect an accelerating rate of transformational change will help you to align with your stakeholder’s objectives and unlock true business value.

This next generation of BPO services requires a supplier – scratch that: digital partner – with a very different mindset. While you may or may not need to change your BPO provider, you will need to change yourself and develop a set of skills that go beyond traditional sourcing techniques to get the transformational support you need. Bean-counting still matters in this new world. But pure bean counters need not apply.

 John Sheridan is an associate principal in The Hackett Group’s European Sourcing practice. Nicolas Walden is senior director of The Hackett Group’s Procurement Executive Membership Advisory programme.  

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