How to avoid getting burned when outsourcing

Telltale ways of spotting the danger signs with BPO suppliers
Written by Nick Heath, Contributor

Telltale ways of spotting the danger signs with BPO suppliers

Want to avoid getting burned when signing a BPO deal? There's a set of warning signs that buyers should look for in order to avoid unreliable vendors.

Choosing the right BPO outsourcing partner is becoming increasingly important with analyst house Gartner predicting that one quarter of the biggest BPO providers will not exist in their current form by 2012.

Because BPO deals mean companies trust a third party with running an entire department - such as HR or finance - any unforeseen changes to a vendor can prove very disruptive to a business.

BPO firms that are "struggling to survive" will be pushed out of the market by new vendors or be swallowed up by existing vendors Gartner predicts - with bids likely to be mounted by big software vendors and services companies, who will pick up specialist software providers and large domestic services businesses, according to analysts PAC.

To avoid the unforeseen demise of vendor companies Gartner says companies should screen potential outsourcing partners using the checklist below.

Gartner has six top tips to avoid losing money when outsourcing business processes

Gartner has six top tips to avoid losing money when outsourcing business processes (photo credit: JasonRogersFooDogGiraffeBee via Flickr.com under the following licence)

Do they make money?
Of course profitability is key to the health of a business. Persuading the vendor to share information on its takings is a good way of limiting "long-term risk to both parties".

Try and discover how profitable the vendor is - and look out for companies that have portfolios of unprofitable contracts.

Are they winning new business?
A lack of new business activity can indicate a vendor is choking on a backlog of business.

Examine a vendor's track record of winning new business over a sustained period of two to three years.

Look for evidence that a vendor is capable of handling multiple deals at once.

Are they satisfying key clients?
The loss of a major customer is often a significant indicator of trouble, particularly if the vendor does not have many other deals on its books.

Ask the vendor's biggest clients for references on their experiences and find out how committed the client is to staying with them.

How much money and expertise has the vendor got?
BPO deals often require a significant amount of investment and expertise on behalf of the vendor to build new technology platforms.

The types of vendors that are most likely to struggle with BPO deals are those who are unable to raise large amounts of money or those that primarily focus on moving business operations to a cheaper location offshore, without the experience to deliver more complex BPO deals.

Try and find out how much money a vendor could raise in order to fund investment in a new BPO deal.

Are they heavily reliant on the financial sector?
The multibillion-pound cost of the credit crunch to the banking sector was bad news the BPO market, with one-third of its value wrapped up in financial services deals.

This drove down revenues from existing BPO deals within the financial services sector and saw the number of FS customers reduced following subsequent mergers and acquisitions.

This means that BPO providers could be vulnerable if they are tied too closely to the FS market. Look to see if the vendor relies on the banking sector for a significant proportion of its revenue, for example more than 85 per cent.

Plan for the worst
The number of BPO deals being cancelled rose sharply in 2008 over cancellation rates in 2007.

Buyers are advised to build exit strategies into contracts and contingency plans in case of early cancellation, such as these tips for cast iron outsourcing.

This will help minimise the high expense of switching BPO deals and ensure that all options are explored before terminating the deal.

Editorial standards