Keys to Successful BPO Relationships

Giera concurs: "If a massive end-to-end HR outsourcing contract calls for you to send over a lot of your technology and 500 of your employees to the BPO provider, what happens to that technology and intellectual capital if you want to end the agreement? Can you at least lease it back?"

Negotiating changes in service during the BPO engagement is difficult, contends Stikeman. "If you go back to the provider and say I'd like to negotiate a change in the way service is provided, the provider is likely to respond that it will cost you more money since this was not priced out in the original agreement," she says. "Everything looks good on paper," she adds, but since BPO is all so new, "not everything can possibly be spelled out."

"The key question is whether or not you will have the flexibility to change a process down the road," says Lepeak. "What typically happens within an organization is one group will select the BPO provider, another will negotiate the BPO agreement, and a third will manage the relationship. All three areas must be intertwined, however. Otherwise you run the risk of a partnership that fails to meet expectations."

Out of House, but Not Out of Mind
BPO risks can be managed to create benefits for both the client and the provider. The first part of managing the relationship is contractual — the establishment of service level agreements (SLAs) that stipulate what the provider promises to do and measures progress toward this objective on a regular basis. "If you're going to have an accountable vendor, you need to hold them accountable," says CFO Calat. "We've got a detailed set of SLAs that our governance committee reviews monthly. If they are below contractual agreements, there are penalties."

But contracts don't guarantee a successful relationship. "It sounds corny and trite, but the key to a BPO endeavor really is partnership," says Sekhar Ramaswamy, vice president of HR at Prudential Financial. When Prudential engaged BPO provider Exult in January 2002 to service multiple HR functions on a consolidated, integrated outsourced basis through 2012, the Newark, New Jersey-based insurer spent considerable time and effort beforehand ensuring the best possible partnership.

"For us to win doesn't mean Exult has to lose," explains Ramaswamy. "Ten years is a long time to engage a BPO provider. We do joint planning on business goals, many of which are joint goals. We have a joint roadmap for success." Managing the partnership is a steering committee that includes representatives from both companies. "The committee's job is to review a weekly project-status scorecard that reviews performance against project milestones," says Ramaswamy. "Everything is measured and tracked."

Indalex, a Chicago-based provider of aluminum extrusions, bases the success of its procurement process outsourcing to ICG Commerce on "routine, friendly meetings between us and them," says Mike Alger, executive vice president of the $750 million company. "We've got SLAs that require certain responsiveness from ICG and penalties if they fail, but what makes this work is that we are partners in the truest sense. They're the part of our team doing procurement, and we hold them accountable in the same way we would our own people."

Relationship management also is the cornerstone of a BPO engagement for CIBC, a Toronto-based financial institution with 1,200 branches and 8 million customers that outsources end-to-end HR to Plano, Texas-based EDS. "We've created a governance model that requires structured meetings, so there are regular opportunities for folks to meet and work on issues, even if there aren't any," says Hugh MacDonald, vice president of strategic alliance management in CIBC's HR division.

Without these meetings, says MacDonald, "it would be like a guerilla leader and a NATO platoon commander meeting out of the blue at the Khyber Pass to negotiate. That's no way to run a partnership."

Russ Banham is a contributing editor for CFO.com.

Off Limits?

BPO presents risks beyond the transactional. Indeed, companies that have shifted key business processes to service providers in India and China have endured negative public relations. Not that this is slowing the trend toward "offshoring" — Forrester Research predicts that American employers will move about 3.3 million white-collar service jobs and $136 billion in wages overseas in the next 15 years, up from $4 billion in 2000.

"Companies should be nervous about taking a key business process and moving it to a country 10 times zones away, particularly when the country is politically unstable and where the protection of intellectual capital is not their strongpoint," says Forrester's Giera. "Offshore may be OK for a call center, but it's not the place yet for BPO. And is offshoring really worth the bad public relations?"

The risk of a foreign government mandating anti-American business sanctions also looms large. "India is extremely bureaucratic," says John Minor, head of political risk at Chicago-based insurance broker Aon Trade Credit. "In Maharashtra, where a new Enron power project was in the works, a new provincial government campaigned on the slogan 'Throw Enron in the sea.' And when they were elected, they fulfilled their promise, canceling a multibillion-dollar project that involved not only Enron, but also General Electric and Bechtel. It doesn't take much of a spark these days to ignite anti-American or xenophobic attitudes overseas."

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