We can all agree – the goal of a contract is to guide a relationship clearly and efficiently based on the requirements and objectives agreed upon during the sales process. Although the negotiation can be uncomfortable at times, if both sides of the negotiation remain focused on the objectives and act in good faith, the process can be fairly painless.
Specific to contact center outsourcing contracts, we have seen nightmare contracts of 100+ pages that required a dedicated contract manager to ensure the Service Provider didn’t fall into the breach on a daily basis – not ideal, in our opinion. On the flip side, we’ve seen contracts that read like a children’s short story and didn’t include much other than pricing – also not ideal.
Our goal for this blog is to offer high-level insight into what makes for a win-win contact center outsourcing contract. My firm, CX Solution Source, does offer a 3-day course for anyone who is contracting and managing BPO relationships called “the art of a win-win outsourcing relationship.” We go deep into each of the topics below and walk participants through a BPO’s financial model, so those who manage these relationships as clients can view things through the same lens as their counterparts on the BPO side. AND so those on the BPO side might be able to explain these elements to their clients with more clarity and foster alignment of dialogue on a day-to-day basis.
The Basics:
Master Service Agreement (aka MSA): This document houses the legal components of the relationship. We won’t spend any time on this document. However, we do suggest that all BPO outsourcing contracts have an MSA, which should be negotiated by each party’s legal counsel with guidance from the business owners and executive team.
Statement of Work (aka SOW): The SOW is the heart of the relationship. If the SOW is healthy and gives both parties the clarity and flexibility to manage the business and do the right thing for the end customer, that’s a good start. The SOW includes all the operational components and associated requirements for outsourced work. While SOWs can be extremely detailed or extremely light, we recommend the document provide enough detail that anyone reading the document can quickly gain a clear understanding of each company’s obligations from an operational and communications perspective. Here are some of the major SOW components and how to ensure each party holds up their end of the deal…
Rate Method: There are five major pricing methods used in most BPO outsourcing contracts; each method creates a different risk profile. Choosing the right method depends on a number of considerations; however, the most important variable is the degree of confidence a brand has in its ability to deliver volume based on the interval forecast. Below, we introduce each method at a high level, and would be happy to discuss this subject in more depth at any time. Here are the definitions and considerations for each method:
- FTE/Month: A flat fee is charged per FTE per month. The key here is to agree on the definition of an FTE (number of hours per month). This is the least risky for BPO.
- In-Center or Paid Hour: This method includes all paid time an agent spends on the BPO “timeclock.” including talk/type, wrap, hold, available, meetings, coaching sessions, paid breaks, & training. Lunch and any Paid Time Off (PTO) are NOT included. This is also a low-risk pricing method for the BPO Partner
- Production Hour: This method includes all time the agent is logged in at their desk to handle work. Specifically, this would include talk/type time, wrap time, hold time, and time in an available state. This approach places mild pressure on the BPO Partner to effectively manage the utilization of their agents and ensure they are in their seats handling work.
- Handle Minute: This method includes only those minutes that an agent is actively handling work. This includes talk/type, wrap, hold, but not available time (e.g. time waiting for the next call or chat session). This method shifts risk more toward the BPO but also places dependency upon the client to provide contractual forecast guarantees and an accurate forecasting methodology.
- Transaction: This method places the most risk on the BPO, as their rate is built using historical AHT and agent occupancy assumptions. This method is favorable for the brand, as it nearly eliminates the risk of paying for resources that weren’t needed. However, this method does require a forecast commitment and accurate AHT assumptions, so it is typically reserved for brands that have those elements dialed in. A level of trust and fairness is also required between the parties, as elements outside of the BPO’s control might impact AHT from month to month, in which case some level of monthly concession may be warranted.
Forecasting: An accurate forecast is a baseline for a win-win outsourcing relationship. The BPO Partner heavily relies on the forecast for their recruiting, hiring, training, and eventual staffing plans. A brand must consider its ability to accurately forecast contact volumes for each channel. If that is not possible, consider providing the BPO Partner with minimum forecast guarantees by week to ensure they have adequate staffing in place and are not “hedging” their staffing model to account for an inaccurate forecast which significantly dilutes the BPO’s margin. Or, go with an hourly pricing model until forecasting accuracy can be improved.
Training: Training is the catalyst for how quickly an agent will move from “Newby” to “Proficiency”. Many brands will negotiate “free” initial training into their contract. Although not a bad way to reduce the initial costs for ramping up a new partner, this approach immediately puts your BPO Partner in a financial hole, which they’ve probably accounted for by increasing your price. The truth is, making a BPO Partner “eat” the cost of training upfront doesn’t allow them to invest in the launch. We believe that a BPO who is willing to “over-resource” during the launch will always move more quickly to proficiency than one that manages to the tight rations and margin targets from day one. We call it “Performance before Profit”. We encourage paying for training at a slightly discounted rate (80-90%) of the ongoing production rate as a win-win approach to training.
Performance Management: For this discussion, “performance management” means the Key Performance Indicators (KPIs) that a brand uses to measure the success or failure of its BPO Partner. There are many brands who feel their BPO Partners should always perform better than their own internal sites – why? That doesn’t make sense in most cases – we encourage clients to hold their BPO Partner to the same standards as your internal agents. This also includes building a “ramp-in” plan for KPI targets to account for the learning curve and get to proficiency in the “right way”. After all, the goal is to create a successful partnership, not to create so much pressure on your partner that they start to cut corners.
Incentives/Penalties: This is always an interesting discussion with our clients. Should we build in penalties and/or incentives into our contract? The real question here is, will it drive the right behavior? We could spend hours discussing this topic with the reader and encourage anyone who wants to have that discussion to reach out, but the overall goal of incentives and penalties must be to drive the right behavior. The last thing you want is to create a situation where your BPO Partner is financially forced into focusing on the wrong things – like encouraging agents to reduce their talk time in order to avoid a penalty for high AHT, to the detriment of customer experience.
Attrition: Attrition is the killer of all things good in a contact center. The very first question we ask any BPO that we are vetting is, “what’s your all-in attrition in each location.” Attrition increases cost, impacts the accuracy and quality of support and reduces customer satisfaction. It’s bad for the brand and bad for the BPO Partner and can lead to the death of an otherwise positive partnership. We encourage our clients to dig deep into attrition numbers and understand the assumptions being built into the pricing models. And always remember, if you push too hard on price, there’s a good chance your price reductions are driving a reduced agent wage…negatively impacting attrition! Being transparent with each other about attrition will help create a win-win contract. By the way, the BPO Partner should always be willing to cover the cost to train new agents hired to replace attrition.
Termination for Convenience: This is always an interesting topic in a BPO contract discussion. All BPO contracts need to include termination for “cause”. The more difficult termination clause is “termination for convenience.” We encourage our clients and BPO Partners to include a term for convenience clause in the contract, with reasonable limitations for some delivery period from the initial launch (perhaps 6 to 9 months). Most BPOs build in all of the program implementation costs into their hourly rate, so a reasonable recovery period is only fair. We also encourage mutuality in the termination for convenience clause, with a fair notice period. Here’s why: if a BPO wants to terminate for convenience, the relationship is either not profitable, or those that are managing the relationship for the brand are creating an environment that is unhealthy for the BPO operations team – we can’t think of any other reason for a BPO to want to exercise their TFC right. If the brand forces the partnership to continue, the BPO will start cutting corners and making bad choices that will likely negatively impact the customer experience. From a BPO’s perspective, we recognize there have been investments made, but if you can’t meet the expectations of the committed clients, let them find a partner who can – own it!
Overall, the contract document is less important than the relationship and each party’s ability to deliver on their commitments. Ideally, the relationship is so good that the contract goes in a drawer once signed and rarely has to come out! Everyone will have an opinion – listen to them, and their perspective will add value. Our best advice is to work with an advisor like CXSS to help ensure you don’t fall into the contract traps that are out there.
– Tom
