Digital BusinessIn its Technology Vision 2016 report, Accenture predicts that 25% of the world’s economy will be digital by 2020.  The global consulting firm contends that we are witnessing a major technology revolution, specifically a digital revolution.  It’s a revolution of emerging “digital platforms” comprised of cloud services, artificial intelligence, cognitive computing, predictive analytics and intelligent automation.

These platforms transform and replace traditional business processes in areas such as finance & accounting, HR, marketing, procurement, supply chain and more.  To quickly leverage these digital solutions, companies increasingly look to outsource traditional in-house functions to third party providers in what are referred to as Business Process Outsouring (BPO) transactions.

In a June 2016 research report, Gartner (a leading IT research and consulting company) predicts that total BPO spending will approach $3.8 trillion by 2020.  Much of this growth is driven by the promise of digital platforms.  They promise to deliver greater agility, efficiency, productivity, compliance, data-driven insights and, ultimately, improved outcomes.  Traditional methods, by comparison, are viewed as capital and labor intensive, prone to error, disconnected, and financially unsustainable.

The legal considerations in BPO are complex. Not surprising, so too are the underlying BPO agreements. In many cases, a BPO deal involves a front end divestiture and transfer of assets (equipment, people, software, data) to the vendor. On the back end, the vendor makes a long term service commitment to the customer in the form of a BPO service agreement.

The business, technical and legal planning required to successfully orchestrate a BPO transaction is considerable. Each discipline is needed to structure an arrangement that properly captures the benefits intended by the customer. From a legal perspective, strategic guidance is required in multiple substantive areas including:

Tax.  The location of service delivery and service receipt will impact tax liability significantly, in some cases over 20% of the dollar value of the deal. Proper structuring of the transaction can minimize tax exposure and be the difference between the desired ROI or not.

IP.  BPO arrangements require strict attention to ownership of IP assets and granting of appropriate cross-licenses among the customer, vendor and third parties. Failure to address IP ownership at the front end, most often results in unanticipated license fees and, of most concern, potential loss of valuable company IP assets.

HR.  To minimize loss of employment, many BPO deals involve the transfer of employees to the vendor. In the European Union, the transfer of employees is often required by law.  The legal implications to disturbing existing employment agreements and union contracts can be significant. Often employers must consider the prospect of employee claims (age discrimination etc.) and the need to offer appropriate severance packages for departing employees.

Data.   BPO deals require the transfer of data to vendors who will be responsible going forward for storing, managing and securing the information at their hosted facilities, often in foreign jurisdictions. The regulatory compliance obligations around data privacy, security and technology export are substantial.

KPIs.   Well-crafted BPO agreements will contain service level assurances from the vendor. The assurances should be designed to identify in comprehensive detail the performance expectations with regard to Key Performance Indicators (PKIs). Creating PKIs is time consuming and requires a cross disciplinary effort among the technical teams, business team and legal counsel to ensure that the PKIs are accurate, reasonable and enforceable.

Decommissioning.  While many will concentrate most effort on transitioning into the BPO deal, a sophisticated customer will spend similar time and effort on structuring the inevitable exit. A strong BPO agreement will address this and include standard decommissioning provisions.

Remedies.  Ultimately, the customer must have appropriate remedies in place under the BPO agreement to address failures of the vendor. Crafting proper remedies requires an experienced approach to harmonizing the warranties, indemnities, limits of liability and insurance provisions in the agreement. There is no worse outcome than finding the business locked in without remedies in a long term agreement with a foreign vendor who fails to properly perform core administrative functions.

While the points above are not exhaustive, they do provide insight into the legal complexities involved in structuring a BPO deal. These transactions are not day-to-day IT purchases. They are more akin to a board initiated corporate divestiture or a sale / leaseback transaction and will be among the most significant transactions completed by a company.

Yet, the upside is promising and the choice to engage in BPO has become more mainstream. With a proper understanding of the roles of various advisors in the process, your company may enter into a highly valuable BPO arrangement and capture the benefits of the digital revolution predicted by Accenture and others who will soon comprise this 25% of the global economy.