• Asif Akhtar, Partner |
  • Melissa Barry, Senior Manager |
4 min read

When establishing or expanding GBS, companies need to determine their optimal delivery model and how to set it up. The most common models are captive (setting up centres owned by the company) or outsourced (outsourcing a defined set of services to a BPO who run the service according to the terms of the contract), but there is a third option to consider: Build Operate Transfer (BOT).

At first glance, Build Operate Transfer sounds like the best of both worlds - you get to use a managed service provider to set everything up (think of an incubator) and then get it back as a well-run captive centre. But, as with any model there are risk-reward trade-offs that are often not fully vetted at the outset.

Consider BOT from the outsourcer’s perspective

In a traditional managed services outsourcing relationship, the service provider tends to make their greatest profit margin in the out years of a contract and beyond. With BOT, the service provider needs to recoup their margins in a shorter time frame as they are transferring the operation back to the buyer. This tends to translate into higher-priced BOT deals vs. BPO deals. On top of that, the service provider is losing out on the potential for longer-term revenue gains and the ability to publicly cite an ongoing client relationship.

Service providers often cite the avoidance of upfront capital costs in the BOT model, but traditional BPO deals can also spread upfront capital costs. A provider is going to charge for the upfront investment, it’s just a matter of when and at what rate.

Ultimately, the service provider is often hoping that the “transfer” part of Build-Operate-Transfer never happens, and that the buyer simply keeps the work with the service provider as a traditional managed services BPO relationship. That way the service provider can charge more for a BOT deal up front while also getting the out-year benefits of a traditional managed service deal.

Economically, BOT is often the best deal for the service provider, but not for the buyer.

Understand the commitments and risks from both sides

  • Transition vs. Transformation - You can't fully outsource transformation. Transformation typically requires combined responsibilities to change not only the work done by business services, but also the operating model elements of employees within the company, as well as suppliers, customers, and other partners. The service provider can be part of the transformation, but it must be a joint effort and you need to co-invest to realise the benefits.

  • Transformation Motivation – BOT carries the risk that service providers are disincentivised to deliver their best service and to drive transformation and innovation when they know the service – and the revenue – is time-limited. The contract needs to have clear service levels and innovation targets to manage this. Developing a strong working relationship and blended culture can also mitigate this risk when both parties feel motivated to work towards the same outcome.

  • Talent attraction and retention – Employee risk tends to increase with BOT as you are hiring into one company and transferring these employees back to the buyer later. The service provider will always prefer to keep the best employees, so it’s critical to make sure you aren't handed back the service without the best performers.

Incorporate the return of services into the contract

A leading BPO provider recently indicated that only a handful of their clients who intend to do BOT actually complete the transfer back. To ensure that the T in BOT is achieved, your contract should include a Transfer Assistance Schedule that covers the guiding principles on handing the process back. Key elements to consider incorporating include talent retention and employee provisions, Intellectual Property, tooling and licenses, and facilities.

Beyond pure BPO or full captive, consider the other closely related alternatives:

  • Captive with a build Partner: Buyer establishes an internally managed GBS centre most commonly in an offshore/near shore location, but relies on an external partner for hiring, onboarding, infrastructure and administrative/legal set-up. Unlike BOT or pure managed service, this doesn't work as well for a transformation arrangement, but can work well for transition.

  • Micro-captive: Buyer hires and retains critical management resources within a GBS centre but leverages an external provider for other elements such as operational staff or spot competencies. The external provider may also provide the physical infrastructure.

So while BOT can be attractive, carefully weigh the pros and cons against alternatives to understand if it’s the right model for you.