From Drug Testing to Automation: Ensuring Your Outsourcing Contracts Reflect New Risks

Are you sure your outsourcing contracts reflect the industry's contemporary risks? Barbara Melby, Partner at Morgan Lewis, offers some great advice for ensuring your contract is up-to-date.

Barbara Melby

Outsourcing contracts are essential components of any nearshore partnership. Good outsourcing contracts include service level agreements, penalties and rewards, time frames and measurements, regular reviews, and basic exit strategies, but, as the industry evolves alongside technology, and security becomes a larger concern, new clauses now have to be considered.

In her 20+ years focusing on outsourcing, technology, and commercial transactions, Barbara Melby has dealt with her fair share of complex contracts. Melby is a Partner at the Philadelphia offices of law firm Morgan Lewis, and represents a number of clients on the buyer side of the outsourcing relationship. In an interview with Nearshore Americas, Melby offered some expert advice for ensuring your contract is updated in this rapidly evolving industry.

The Transition Phase

Barbara Melby Morgan Lewis
Barbara Melby: “Working through the transition steps is the best way to move towards a successful deal.”

Migrating your business processes from an internal system to a BPO vendor can be a daunting prospect, and, according to Melby, a lot of deals fall apart during this transition phase. “Encouraging clients to treat transition as a major project in and of itself is key,” she said. “For me, a critical piece of the deal is getting my clients to realize that transition is as important as working on service level agreements.”

Transitions are often examined at the last minute, with important steps regularly being overlooked in outsourcing contracts. Clients and vendors must consider whether or not to retain existing employees, whether those employees will be available for knowledge sharing, how the new provider will understand historical client issues, and how this information is stored from a database perspective. “You have to make sure that the workload, knowledge, and expertise is transferred to the vendor in a structured way that primes the vendor for success,” Melby pointed out. “Working through those transition steps is the best way to move towards a successful deal.”

Security and Privacy Protection

With the recent slew of data breaches coming out of Latin America, the topic of security and privacy is a hot topic in the Americas right now. Some of the biggest issues surrounding legal considerations of BPO buyers and vendors are centered on this topic, including, for example, how connectivity and data flow occurs between sites. “If it’s an F&A or an HR deal, then it’s presumed that agents in nearshore locations would have access to customer systems wherever the home location is,” said Melby. “It’s vital to understand what security requirements need to be in place, both at the customer side and the service provider side. Furthermore, it should be clear how the customer governs and audits these security policies on a regular basis to ensure compliance.”

Melby confirmed that companies are trying to tie up these security risks in order to prevent unauthorized access, explaining from a contractual perspective how to cope if the worst happens. “Be proactive by first getting ahead of security requirements, and then making sure there is compliance from an implementation perspective and an ongoing governance perspective,” she said. “If there is a breach of security protocol, ensure the contract has strategies in place to deal with them, such as how notifications are made, dealing with remediation, and liability clauses.”

Personnel Background Checks

outsourcing contractsOne of the ongoing diligence issues and contractual obligations of vendors is making sure that members of staff are vetted through regular background checks. These checks can be made against designated national lists, or involve drug testing. According to Melby, most customers in the U.S. require Latin American vendors to perform drug tests as it is not generally prohibited by law in the region. However, the reality of these checks occurring is usually customer-specific, and will usually only come into play if there is a problem to be investigated.

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“When dealing with regulated customers such as financial institutions or big pharma companies, they often require reports or certifications that the background checks have been done,” added Melby. “They may require annual certifications or periodic reporting, which we’re seeing a lot more of as an increased amount of regulated companies move into outsourcing.”

Termination & Exit Clauses

When dealing with contract terminations, Melby looks at whether the agreement was breached. “Perhaps the vendor didn’t have an appropriate backup in place, or there was a financial issue; these events would mean we would have to take action,” she said.

Most contracts include these typical termination for breach clauses, but could also include termination clauses with expedited notice periods. For example, if a natural disaster or a disruptive political event occurs, or if something happens from a business continuity perspective, then a relationship can be terminated fairly quickly without having to wait out the notice period. “These events are rarely the fault of the vendor, but, in these instances, clients may want the right to exit contracts quickly without being liable for a fee, which is why they should be included in contracts.”

Considering Future Technologies

With automation and robotics growing in popularity in the outsourcing industry, new contract clauses are appearing to protect clients in this new technological age. Vendors are starting to bring more automation tools to their customers, and customers are becoming more aware of the availability of the tools. “Some of my clients are asking vendors to come to them with ideas for automation tools, even going so far as to add contractual obligations to do so,” said Melby. “They want them to bring new innovations to the table on a regular basis and explain how they will positively impact the business.”

But, with the almost experimental introduction of these relatively new technologies, who takes responsibility if they fail? “One of the new things we are putting into contracts is that vendors are committing to taking the risk,” said Melby. “Vendors then become responsible for reducing costs by implementing the automation tools that they are bringing to the table. We try to shift the risk onto the vendor side as much as possible to make sure that they actually deliver what they promise.”

Does your nearshore outsourcing contract include clauses for all these considerations? What other clauses could be included as the industry evolves? Let us know in the comments.

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