Tech & Sourcing @ Morgan Lewis

Contract Corner

Business process outsourcing (BPO) transactions are on the rise, with bullish forecasts from industry analysts including a projected revenue annual growth rate (CAGR 2023–2027) for the global BPO market of 6.48%, reaching a market volume of $450 billion by 2027 and global revenue exceeding $500 billion by 2030, and the North American market alone projected to achieve 8.9% CAGR 2023–2030.

The increased activity is in part attributable to what we call the “traditional” outsourcing drivers, which include the desire to achieve

  • cost savings by leveraging lower cost resources to perform standardized processes; and
  • cost savings from increased efficiencies and productivity through process standardization and optimization.

In addition to the traditional drivers, most BPO deals in 2023 are focusing on process optimization, digital innovation, and outcome-based models as the foundation for long-term service delivery, resulting in the emergence of “next-gen” BPO transactions. For next-gen BPO transactions, the additional drivers include the following:

  • Race to implement bots and AI technologies to reduce the need for manual processing and increase the use of automation and machine learning—research by McKinsey suggests that as much as 45% of employee activities can be automated by adopting current technologies
  • Shift of workloads to the cloud to allow for greater and faster processing and storage capabilities and reducing fixed infrastructure costs
  • Desire to see less revenue leakage and fewer errors through the implementation of better quality control technologies
  • Enhanced user experiences and transparency to strengthen employee, customer, and third-party relationships through workflow and digital transformation
  • Introduction of outcome-based models focused on results and quantifiable business improvements
  • Transformation of data capturing and analytics capabilities, including for root cause analyses, process optimization, and predictive analytics

For technology and outsourcing lawyers, this means that BPO transactions require more than the typical model of transitioning existing processes to an outsourcing provider with some process standardization and improvement. Next-gen BPO requires a significant focus on the below:

  • Current and future state design and performance metrics (we covered 10 key components in a prior blog post)
  • Areas of strategic focus for enhanced user experience
  • Digital transformation road maps (with clear return on investment of the identified innovation)
  • Documentation of technology implementation projects (with milestones, deliverables, and timelines)

The potential for next-gen BPO is exciting. As with all new trends, it is important to understand the opportunities and challenges involved so that the parties can maximize the benefits and minimize the risks. There is and will be a lot for outsourcing and technology lawyers and sourcing professionals to consider—from ensuring savings commitments and implementing mechanisms to allocate liability for human and machine errors, to working with IT and InfoSec teams to assess the feasibility of the proposed digital tools (and the all-in costs).

Look out for future blog posts on key contract provisions to consider when negotiating next-gen BPO projects.