Unfortunately, many client organizations do not understand the complexities involved in setting up and managing a business process outsourcing (BPO) deal. The intricacies of a BPO deal require focused management attention from both the client and provider in order to be successful.

Alsbridge consultants who specialize in advising clients on their sourcing strategies, have come encountered three common mistakes clients make when setting up a BPO deal. These common pitfalls could all be avoided if properly addressed in the deal planning and construction phase. All too often these fundamentals are missed in the rush to get the deal done.

1. Failure to get key stakeholders on board. These deals are not just rational and economic; they are political and emotional too. Those people effected by taking a function out of your organization and giving it to a third party to run may find it difficult to accept. Especially when the inference is that the in-house team wasn’t doing a good job, or when it comes with job losses and the attendant publicity. The key is to identify who key internal and external stakeholders are and ensure they are properly involved in the decision.

If key stakeholders are not involved, it is likely the deal will not even be signed. Disgruntled stakeholders can easily derail a complex and sensitive deal. Deciding who the key stakeholders are requires careful consideration. In one instance a major corporation on the verge of a multi-national finance and accounting outsourcing deal aborted the entire deal just before contract signature.

Even though the CEO and FD had approved the deal, the Chief Accountant raised a last-minute concern about confidentiality which resulted in the deal being shelved despite over six months of work and considerable expense on both sides.

2. Failure to understand the economics of the deal. The sustainability of all deals rests on their economic viability for both parties. If the deal doesn’t work for one party, it puts intolerable strain on the deal as whole. The only way for a client to know whether a deal is sustainable is to understand how the provider makes their money. If the provider is taking over a function and doing it better for less, the client needs to understand how it is done.

Whether the provider plans to deliver results through re-engineering, automation, or offshoring, they must be able to deliver the services, charge a lower fee, and still make a profit. Otherwise the deal will either collapse or be renegotiated which can be costly for both sides.

With outsourcing Alsbridge is always at pains to stress to clients that there is no secret sauce available to providers. Providers may change the way services are delivered, they may even be fundamentally better at it but a deal that will work for both sides need to be understood by both sides.

There is simply no point in negotiating such a tough deal that the provider is unable to make money. The only long-term result in that case will be that either the client will not get the service it needs, or the provider will out of business.

3. Failure to anticipate future change. A deal may be reasonably structured for the circumstances in place when the contracts are signed, but how will the deal handle future changes? Will a deal which is state-of-the-art in 2011 still be good in 2015? Will it still meet the needs of your organization in four years time when new products, new geographies or acquisitions, and divestments have changed the face of the organization?

It is a minimum requirement to have a structured change control process, but that in itself this isn’t good enough. There was a case at the height of the dot-com boom when a major telecom player signed a deal to help handle its booming growth only for the bottom to fall out of the telecoms market. When transaction volumes collapsed neither the provider nor the client had thought to plan for such a scenario.

Net result – the contract had to be terminated through negotiation, which was time consuming and expensive, and a new delivery model established by the client. Extreme scenarios may well be hard to accommodate in a deal structure – if business volumes really are collapsing, that’s clearly going to be bad news for all involved – but at least both sides should know what they would do in such a situation.

We now advise clients to include costed scenarios in the contract before they sign. That way everyone goes in with their eyes open – who pays for what, who takes what risk? You can’t control the future, but you can make sure you have anticipated the likely scenarios and planned accordingly.

Outsourcing can act as a catalyst to drive change and provide access to skills, resources and systems that may not be available to clients through any other means. But it is not a panacea for management to hide behind. It is better to put in the effort up front to structure a deal which is sustainable for both sides and all stakeholders than to potentially spend years sorting out the mess caused by avoiding these issues in the first place.