10 critical considerations for your BPO contract: all kinds of potential pitfalls await companies that decide to outsource key business process functions to third parties. Two attorneys offer a list of items to examine as the contract is being drawn up or renewed.

• Author: Spilko, Howard T.
• Position: Outsourcing

The business process outsourcing (BPO) revolution is rolling along, driven by cost savings and the desire to concentrate on core competencies. After all, business process outsourcing enables a company to outsource to a third party one or more discrete business processes or functions, such as finance, treasury or administration; transaction processing; technology or human resources support; customer service; and distribution and logistics functions.

Whether your company is a BPO veteran or is about to engage in its first BPO transaction, new and sometimes difficult issues are likely to emerge as you negotiate a contract. What follows is a summary list of these issues and some of the related considerations that should be addressed in your contract discussions.

1 What Services Are to be Performed?

Although it may seem obvious, the parties to a BPO contract need to perform thorough due diligence on each other and describe in extensive detail the services to be performed by the service provider, together with the customer's role and responsibilities. Many BPO projects involve the management of financial documentation or the delegation of responsibility over processes that could affect the customer's financial reporting. Under Section 404 of the Sarbanes-Oxley Act (the "Act"), public companies must annually assess and report to the Securities and Exchange Commission (SEC) on the effectiveness of their internal controls over financial reporting, including their service providers' applicable controls. Outsourcing customers subject to the Act must not only understand and document what services will be performed, but also what controls the service provider has in place and whether those controls are effective in properly authorizing, recording and reporting transactions that affect the customer's financial reports.

Regardless of whether the Act applies, customer employees responsible for the functions to be outsourced should take an active role in developing the scope of services. Beware--this process may prove difficult and frustrating. Customer employees will need to think about and document their daily activities and responsibilities associated with the outsourced function. However, the parties' efforts at this stage will prove very beneficial as the contract is prepared and the outsourcing arrangement is implemented.

2 What Happens if a Change In Services Is Required?

The BPO contract should be a flexible agreement--one able to withstand the test of time and changing circumstances. Consider the following events that could affect the scope of services:

* A change in applicable laws, rules or regulations or industry best practices that affects the...