IT BPO1 – Fundamentals of Business Process Outsourcing 101

I. Chapter 2: IT-BPM Engagements

II. Introduction

This module answers the questions following questions: 1) Why is a business contract
important? 2) How does a contract protect your business? 3) For a contract to be
effective, what should be indicated in its terms and conditions? And therefore, when
dealing with a contractor/ service provider, how can you protect your business through
a contract?

Topics cover in this module are Attributes of Client-Service Provider Relationship; IT-
BPM Contract: Pricing Models; IT BPM Contract Financials; and Regulatory
Requirements.

Below are different vocabularies for your reference.

Amortization

The systematic repayment of a debt; in accounting, the systematic writing off of some
account over a period of years.

Bonus

A payment which is backward-looking and usually discretionary or at least not expected

from the employee(s).

Incentives

A plan which is forward-looking. Payment is tied to the achievement of specific

objectives that have been pre-determined and communicated to the employees that are
on the plan. The purpose of the incentive scheme is to influence behavior to reach the
objectives by providing an incentive to work towards the goals.

Key Performance Indicator (KPI)

A set of quantifiable measures that a company or industry uses to gauge or compare

performance in terms of meeting their strategic and operational goals. KPIs vary
between companies and industries, depending on their priorities or performance criteria.
Also referred to as "key success indicators (KSI)".

Service Level Agreement (SLA)

A part of a service contract where a service is formally defined. In practice, the term
SLA is sometimes used to refer to the contracted delivery time (of the service or
performance).
III. Learning Outcome

By the end of this module, students will be able to:

1. Describe the attributes of a client and service provider relationship.
2. Differentiate the following: SOW, MSA, SLA and KPI.
3. List the five (5) core elements of an IT-BPM Contract.
4. Define and distinguish CAPEX and OPEX.
5. List and explain what the IT-BPM Contract Financials are.
6. List and discuss the different regulatory requirements.

IV. Learning Content

Client-Service Provider Relationship

Let us get started with our first topic – Client-Service Provider Relationships. Part of
this first topic are key concepts like: attributes, Scope of Work (SOW), Master Services
Agreement (MSA) and core elements

Attributes of Client-Service Provider Relationship

Client company is concerned with:

- Quality transition of processes

- Efficient operation of business functions that were once handled in-house

Service provider company is concerned with:

- Scope of service
- Performance measures
- Benchmarks to ensure objective standards in assessing work quality

The nature of outsourcing is when a client company fully entrusts or turns- over the
successful delivery of a service formerly handled in-house to either a third-party or
shared service center service provider or vendor- company. What are at stake are
business sensitive issues like; company reputation and profitability. An IT-BPM
contract is created for the benefit of both client or buyer and the vendor or service-
provider. Therefore, as a result of these relationship attributes, the IT-BPM Contract is a
unique, “tailor-fit” agreement captured in a document that resembles a performance
contract.

The IT-BPM Contract

A business process management (IT-BPM) contract is a formal agreement between a

client and a service provider to take over a “pre-agreed portion” of the client’s business
operations.
This “pre-agreed portion” is documented in the contract as the Scope of Work (SOW).
The IT-BPM contract, with all its attachments, assumptions and documented
agreements, is referred to as the Master Services Agreement (MSA).

Scope of Work

Definition: Describes specific work to be delivered, by when, at what cost.

Considerations
- Can be similar to a “job order”
- Is generally an attachment/ addendum to a Master Service Agreement, points to
covering terms
- May state that in case of terms inconsistency, the SOW or Master Service
Agreement supersedes

The Statement/ Scope of Work is a formal document that captures and defines the work
activities, deliverables, and timeline a vendor must execute in performance of specified
work for a client. The SOW usually includes detailed requirements and pricing, with
standard regulatory and governance terms and conditions.

Master Services Agreement (MSA)

Definition: Covering agreement that summarizes terms applicable to every job-order

with the service provider.

Main Element
A. Service to be provided
B. Performance management, issues, change management
C. Country laws

A Master Services Agreement is a contract that contains generic terms regarding

requirements and obligations of the contracting parties which in this topic are the client
and the service provider.

Core Elements

Listed below are the different core elements

1. Service to be rendered or provided as documented in the Scope of Work (SOW)

- Outbound sales calls

- In-bound inquiries or subscriptions
- Delivering food or flowers or mail

Service to be rendered or provided as documented in the scope of work it covers

exactly what the client is turning over to the service provider.

2. Performance standards expected from the service provider; Service Level

Agreement (SLA) and Key Performance Indicators (KPI)
 - “Handle Time” and “Average Handle Time”
- Sales attainment
- Customer satisfaction rating

Performance standards expected from the service provider we are inferring to

criteria that is critical to the client that service provider is able to consistently attain.
A service provider that takes calls for another company regarding directory
assistance sets the performance standards at an average of sixty (60) seconds to
complete one call. If the agent hits the average, he/she delivers what is expected
from him. If he/she fails and takes more time to finish a call that makes him/her
inefficient and would incur the company some added cost.

3. Timeline of the contract; start date (“go live”) and duration

- It is a detailed schedule of when the transition period starts and when the service
provider assumes control of the contracted processes.
- In terms of type per duration, most contracts are typically multi-year contracts,
however and when deemed most effective, on-demand contracts may also be put
into effect

When we talk about timeline of the contract, it refers to two (2) things. When will
the transition start and for how long the contract will be in effect?

4. Costs to the client

- Refers to the payment made by the client to the service provider for honoring
contractual agreements

5. Other specific operational requirements

- Who will provide the service

- Qualifications of personnel
- Locations of operations
- Outline of reporting procedures, decision-making, and escalation of problems
- Legal provisions (e.g., non-competition, confidentiality)

When it comes to other specific operational requirements, we are referring to very

specific contractual details that protect both the client and service from ambiguity.

Taken together these core elements empower the relationship between the client and
the service provider.

IT-BPM Contract Pricing Models

Let us get started with our next topic, the IT-BPM contract pricing models. There are
two (2) pricing models: the fixed pricing model and the time and material pricing model.

1. Fixed Price
- This pricing model is easy to plan and more predictable than other pricing
models.
 - A fixed, pre-agreed price unit is negotiated (e.g., a fixed price per call or a fixed
price per transaction)
- Advantages for service providers: it is known in advance what will be paid and
what will be delivered
- Advantages for clients: provides greater cost certainty
- Disadvantages: several risks with capital requirements and lower flexibility

An accessible way to quickly understand this particular pricing model in everyday

terms is through this example; you and your group mates decide that you will be
having your next group meeting at McDonalds. There is no way to predict with one
hundred percent (100%) certainty what you and peers will order when you arrive at
McDonalds. On the off chance that you all decide to order the same combination
value-meal you can predict exactly what the total cost will be.

Similarly, because the pricing model is fixed to begin with, there is absolutely no
way that you can get a price-off if you request that the pickles in your burger be
removed and the drink replaced with one of a lower value.

2. Time and material price model

- The price for service is based on the time and material that was used.
- Used when a service is very flexible and it is not predictable in terms of how
much time and material is needed.
- In some cases, a maximum price for the service is negotiated by the client/
customer to build in some control or safety level

The Time and Material pricing model can be better understood if we take a closer
look at establishments that primarily offer “made to order” products and services.
For example, tailoring shops that specialize in wedding attire or printing shops that
make invitations for events. In each instance, the client’s choice of raw materials
and complexity of design will have a direct impact on cost.

In practice, it is often a mix of the above-mentioned pricing models that is used.

Companies utilize both pricing models. This gives them greater control and
flexibility in engaging their own respective clientele.

IT-BPM Contract Financials

In this discussion, we will be tackling the following: CAPEX and OPEX, associated
process costs, and we will also be looking at the elements or components of loaded
costs.

What is CAPEX and OPEX?

CAPEX (or Capital Expenditure) is a business expense incurred to create future benefit.
Expenditure or assets like a building or the physical space, machinery, equipment or
upgrading existing facilities so their value as an asset increase.

OPEX (or Operational Expenditure) is the money the business spends in order to turn
inventory into output (throughput). These are operating expenses which also include
depreciation of plants and machinery which are used in the production process.
 Table 1. Comparison of CAPEX and OPEX

CAPEX
Definition Capital expenditures are
expenditures creating future
benefits. A capital expenditure
is incurred when a business
spends money either to buy
fixed assets or to add to the
value of an existing asset with
a useful life that extends
beyond the tax year.
Also known as.. Capital Expenditure, Capital
Expense
Accounting treatment Cannot be fully deducted in the
period when they were
incurred. Tangible assets are
depreciated, and intangible
assets are amortized over
time.
In output/ throughput Money spent on inventory falls
accounting: under CAPEX.
In operations Costs incurred for acquiring fix
assets (property, equipment)
Examples Buying computer hardware,
acquiring intellectual property
assets like patents.
OPEX
OPEX refers to expenses
incurred in the course of
ordinary business, such as
sales, general and
administrative expenses (and
excluding cost of goods sold –
or COGS, taxes, depreciation
and interest).
Operating Expense, Operating
Expenditure, Revenue
Expenditure
Operating expenses are fully
deducted in the accounting
period during which they were
incurred
The money spent turning
inventory into output/
throughput is OPEX
Costs associated with the
operation and maintenance of
fix assets.
Salaries and benefits,
maintenance and repair of
computer hardware, utilities,
rent, business development
and employee engagement
expenses

To better understand the accounting treatment of CAPEX, let us breakdown this

statement. It states that CAPEX cannot be deducted in the period when they were
incurred.

In the next segment of this statement we have the line that reads; “Tangible assets are
depreciated...” Let us first define some terms.

 Tangible – something that is capable of being perceived with the sense of touch
 Assets – items with economic value owned by an individual or a corporation which
could be converted to cash
 Depreciated – lessened or diminished the value

So if we were to take that entire thought together, we come to understand that it simply
means; any item that we can touch that belongs to a company loses its value over time.
That is why second-hand cars are significantly cheaper than brand new cars even if they
are of the same model. This holds true for; cellular phones, appliances, clothes, etc.

Moving on to “... intangible assets are amortized over time.” Intangible assets are not
physical in nature, such as; intellectual property, patents, trademarks, copyrights and
business methodology. All of which are worth billions of US dollars or Euro. In recent
technology news; Samsung lost to Apple in court. The resulting loss was because of
patent-copyright infringement. An infringement is the intentional or unintentional
profiting from an idea, design, concept that is legally owned by another individual or
corporation without the owner’s knowledge and consent. Similarly, RIM- Blackberry is
paying Nokia no less than 50-million Euro.

Next word is "amortize". In accounting terminology, amortization refers to expensing

the acquisition cost minus the residual value in a systematic manner over their
estimated useful economic lives to reflect its consumption, expiry, obsolescence or
other decline in value as a result of use of time. For example, training bonds. Your
company sent you to a highly specialized certification course for Six Sigma at the
expense of the company. You were be required to sign a bond that requires you to
render additional “X” years of service using the knowledge and skills that you acquired
in the course for the benefit of the company. If you opt to leave the company prior to
the expiration of “X” years, you will be required to pay for a sizable portion of the cost
paid by the company for your certification.

Components of Process Cost

Process costs associated with roles (activities-processes-tasks) that may be outsourced

via the offshoring outsourcing strategy. They are as follows:

1. Labor Cost

- Compensation
- Benefits
- Bonuses
- Incentives

Compensation like salary and wages refers to the money paid by an employer for
services rendered by its employee. Next we have benefits. Benefits are of two (2)
types; the ones required by law that the employer provide to its employees and ones
provided by the company or the employer. Bonuses are given based on what an
employee has done while incentives are given to motivate an employee towards the
goals.

2. Direct Cost

- Employee Development (Training), Employee Relations Programs

- Employee Tools/ Equipment: desktop computers, communications
- Coordination and Management: travel, representation, meetings and workshops

3. Indirect Cost

- Infrastructure: indirect costs for network, mail, and other shared employee
services, rental, depreciation/ amortization
- Other charges: head office or regional shared cost allocation, interest cost,
foreign exchange gains/ losses

For us to explain infrastructure costs, let us look at our malls with multiple vendors.
Each vendor pays a fixed rental price along with other mall amenities like electricity
 and water. So, if the mall were to offer free Wi-Fi to shoppers and guests, is it really
free?

Now when it comes to other charges, let’s look at Coca-cola as an example. You
would have to travel very far to find a Coke-less area of the Philippines. This
nationwide availability is made possible through a well- thought distribution system.
A system heavily dependent on the efficiency of multiple stakeholders with each
representing a hand-off before the final customer or consumer. The shared costs
here are the components of that distribution system – long-haul freight, trucks,
delivery vans, delivery tricycles.

Components of Loaded Onshore Cost

The following are the loaded annual cost:

1. Compensation: salary and bonuses

2. Benefits: training, health and life insurance, profit sharing, pension matching,
worker’s compensation, employer share of payroll and social security taxes
3. Infrastructure: facilities, venue rent, IT support

Regulatory Requirements

In this discussion, we will be tackling BOI qualification, BOI requirements and PEZA.
There are two (2) major types of regulatory requirements.

1. Adherence to Government Regulations (External)

- Board of Investments (BOI)

- Bureau of Internal Revenue (BIR)
- Bureau of Immigration
- Department of Labor and Employment (DOLE)
- Pag-ibig Fund
- Philippine Economic Zone Authority (PEZA)
- Securities and Exchange Commission (SEC)
- Social Security Services (SSS)
- Data Privacy Law

External regulations refer to the various government regulations from the

appropriate government agency.

2. Industry/ Company Regulations (Internal)

- Institutional and operational standards/ policies/ guidelines

- Service provider implements own regulations

Internal regulations refer to regulations levied by the industry upon itself to ensure
the standardization of various practices for its own benefit.

Let us discuss some of the external requirements.

Board of Investments (BOI)

- A Republic of the Philippines agency created under the Department of Trade

and Industry.
- It strives to attract direct investments into the country to contribute to economic
growth and jobs creations in the Philippines.

BOI Qualification: A Philippine enterprise can register their project with the BOI if
the proposed activity is listed as a preferred project in the current IPP. The said
enterprise may engage in domestic-oriented activities in the IPP whether classified
as pioneer or non-pioneer.

Let’s try to understand other concepts imbedded in the paragraph above. First, let us
look at IPP or Investment Priorities Plan.

The IPP is an annually released listing, approved by the Office of the President. One
desirable by-product of this investment is the creation of jobs. Some international
companies brought their manufacturing plant here in the Philippines providing us
more jobs.

Through BOI qualification in undertaking IPP projects or activities, a business

entity may avail of attractive fiscal and-fiscal incentives. The point of course of
these incentives is to make the Philippines the ideal location to set-up and run their
operations.

However, an activity which is not listed may still be entitled to incentives if the
following conditions are met:

- At least 50% of the production is marked for export (for 60% Filipino – 40%
Foreign-owned enterprises); or
- At least 70% of production is marked for export (for more than 40% Foreign-
owned enterprises)

Any outsourcing company is qualified under 100% export. Because of that, many
IT-BPM companies will look to the Philippines as a preferred destination.

For foreign-owned firms or those whose foreign investment exceeds 40% of the
outstanding capital stock who can engage in domestic-oriented activities, can only
be registered with the BOI if they propose to engage in an activity listed or
classified in the IPP as pioneer.

However, if it falls to meet the pioneer classification, it can likewise opt to be an

export-oriented firm to qualify for BOI registration. However, this time, the export
requirement is at least 70% of actual production.

In each instance, the objective of an organization is to gain BOI qualification. What

is apparent is that the Bureau protects the interests and promotes the growth of the
Philippines.

BPO Requirements | They are as follows:

 DTI Registration: Sole Proprietorship
 SEC Registration: Corporation, Branch Office, Regional Headquarters
 Audited financial statement and Income Tax Return for the past three years (if
applicable)
 Board Resolution to authorized company representative
 Accomplished Application Form 501 and Project Report

PEZA, The creation of

- The development of Special Economic zones throughout the country, and the
very competitive incentives available to investments inside PEZA Special
Economic Zones are embodied int eh Special Economic Zone Act of 1995
(Republic Act No. 7916), a law passed by the Philippine Congress.
- Promote Philippine investments, extend assistance, register, grant incentives to
and facilitate the business operations of investors in export-oriented
manufacturing and service facilities inside selected areas throughout the country
proclaimed by the President of the Philippines as PEZA Special Economic
Zones.

Qualification: Export-oriented enterprise that are found in any of PEZA special

economic zone.

Requirements

- Duly accomplished and notarized PEZA application form and anti-graft

certificate
- Corporate Profile (including that of parent company, if applicable)
- Board Resolution authorizing the filing and designation of a representative
- Securities and Exchange Commission SEC Certificate of Registration, Articles
of Incorporation and By Laws (if not available, submit draft of Articles of
Incorporation)
- Project Brief (i.e., Information on Market, Technical, Financial and
Management aspects of the project to be registered)

Data Privacy Law – Republic Act No. 10173

- An act protecting individual personal information in information and

communications systems in the government and the private sector, creating for
this purpose a national privacy commission, and for other purposes.

Given the highly interconnected nature of our personal and professional lives, a law
such as this is helps secure and keep separate personal information from company
information. The advancements in personal electronics – smart phones, tablets,
storage devices like memory cards and thumb drives and “cloud” or” online storage
all present a potential threat in maintaining the integrity of company as well as
client information. Republic Act 10173 is a means by which the government intends
protect its private as well as corporate citizenry.

Industry Internal Regulatory Requirements

 Now, let’s discuss the internal regulatory requirements in the industry.

 Industry Specific Regulations – Control of communication channels and

information systems: Article 16 – (1)\

The communication channels and information systems of the bank shall be

controlled to ensure that information obtained within the bank is reliable,
complete, traceable, consistent, in a suitable format and character to meet the
requirement, and accessible by relevant units and personal in a timely manner.

 Industry Specific Regulations – Auditing of partnerships subjects to

consolidation: Article 34 – (1)

Banks shall take all necessary measured to ensure that their internal audit units
can inspect all activities and units of their consolidated partnership without
limitation.

With these two (2) examples, it is evident that it is in the best interest of an industry
and its members to implement and enforce such measures. The cumulative affect
benefits both member companies, despite the fact may be competitors, and their
respective clientele.

V. Teaching and Learning Activities

Using the same groupings last activity, we are going to add another dimension to their
ongoing business ventures. Last time, we worked together in our respective business
groups each business groups in providing a general idea of which products or services
would they be outsourcing. More importantly, each business group also provided us
with the reason why they would be outsourcing those products and services. This time
we will implement the lesson we have just covered.

Group Activity

- Each group should come up with a SOW and MSA for their respective businesses.
- Every group will only be given 30 minutes to prepare both the SOW and MSA.
- The output must be documented using MS Word and prepare for a slide
presentation using MS PowerPoint
- Each group has a 30-minutes to present

Since this is our first attempt to write an SOW and an MSA, treat this as your initial
draft which is open for revisions and improvements. The group output is to be
written on flipcharts.

Given the time limit to draft our group SOW and MSA, do not worry about the
wording. Let us focus on the thoroughness or completeness of our SOW and our
MSA. To help with this process, we may recall our core elements and our contract
financials.
 Participants have thirty (30) minutes to prepare the SOW and the MSA.

Keep in the mind the products and services that you will be outsourcing. At the end
of the thirty (30) minute preparation of your SOW and MSA, we will have the
group presentations. Each group will have no thirty (30) minutes to present and
defend the SOW and MSA they have just created.

VI. Recommended Learning Materials and Resources for Supplementary Reading

Please click/ copy-paste the following links listed below in a web browser like Google
Chrome or Mozilla Firefox for supplementary readings.
1. https://www.deloitte.co.uk/makeconnections/assets/pdf/the-outsourcing-handbook-
a-guide-to-outsourcing.pdf
2. https://www.outsourceaccelerator.com/whitepaper/strong-future-of-outsourcing-
white-paper/
3. https://www.xerox.com/downloads/usa/en/t/TL_whitepaper_records_management_
Rich_Baily.pdf

VII. Flexible Teaching Learning Modality (FTLM) Adopted

In this module, the online and remote FTLM is adapted using Edmodo and Zoom
application. For the online modality, the Zoom video conferencing application shall be
used for the purpose of delivering a lecture and allowing a synchronous discussion with
the students. For the remote modality, Edmodo shall be used to upload and download
the module, and to allow asynchronous discussion with the students. This will also be
used as a platform for the submission of the requirements.

VIII. Assessment Task

Quiz No. 1

Instruction: Match Column A with Column B to identify what specific reason for outsourcing
is described.
Column A Column B
______ 1. Describe specific work to be delivered, a. Master Services
by when, at what cost Agreement
______ 2. It is a detailed schedule of when the b. Cost to the client
transition period starts and when the c. Scope of Work
service provider assumes control of the d. Key Performance
contracted processes Indicator
______ 3. Covering agreement that summarizes e. Timeline
terms applicable to every job-order with
the service provider
______ 4. Refers to the payment made by the
client to the service provider for
honoring contractual agreements
______ 5. These performance standards include
average handling time, sales attainment
and customer satisfaction rating.

Quiz No. 2
Instruction: Based on our previous topic, identify the BOI requirements by putting a check
mark on the space before the number.
_______ 1. DTI Registration: Sole Proprietorship
_______ 2. Municipal Office Clearance
_______ 3. SEC Registration: Corporation, Branch Office, Regional Headquarters
_______ 4. Audited financial statement or Income Tax Return for the past three (3)
years (if applicable)
_______ 5. Statement of Assets and Liabilities
_______ 6. Income Statements
_______ 7. Board Resolution to authorized company representative
_______ 8. Accomplished Application Form 501 and Project Report

Quiz No. 3

1. Describe the attributes of a client-service provider relationship.

2. Define the following: IT-BPM Contract, SOW, MSA, SLA and KPI.
3. What are the five (5) core elements of an IT-BPM Contract?
4. Define and differentiate CAPEX and OPEX.
5. What are the components of process cost?
6. What are the five (5) BOI requirements?

IX. References

Books
 2013. Fundamentals of Business Process Outsourcing 101 Teacher’s Guide. Talent
Development, IT and Business Process Association of the Philippines
 2013. Introduction to BPO. Jaipur National University, Jaipur, India
Online

 http://www.merriam-webster.com/dictionary/amortization
http://www.investopedia.com/terms/k/kpi.asp
 http://en.wikipedia.org/wiki/Service-level_agreement
 http://compensationinsider.com/what-is-the-difference-between-a-bonus-and-an- incentive/
 http://en.wikipedia.org/wiki/Master_service_agreements
http://en.wikipedia.org/wiki/Statement_of_work