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Choosing the right service partner for your outsourcing transactions can be as important as choosing your significant other. It is essential to do some homework before getting involved.

Start with the basics of finding the vendors track record, history, whether it would be a good fit to the existing structure, is the vendor hiding something? Assessing the long-term impact and researching outsourcing market to find the right vendor is essential.

The same diligence needs to be focused on financial factors to differentiate one vendor from the next and selecting the right one. Following are the few essential financial differentiators to compare various service providers for business process outsourcing (BPO).

• Inflation and currency
  It ultimately doesn't matter where you start in your IT or BPO negotiations; it's what's in the contract that you have to work with, so pay close attention to key business terms like inflation and currency. One multinational food company negotiated an annual inflation cap of 5% for service centers in India, and this agreement insulated it from inflation rates that are now in the double digits. Mitigating such risks serves the company when it enters new countries.
  
  Inflation risk can be managed by building projected price increases, tied to a specific index, into the contract. It can also be controlled through establish thresholds of fluctuation, beyond which the price may go up. Avoid currency risk altogether by structuring agreements at the local or regional level, as such handling all billing in the currency of each location. Ask service providers how much inflation and currency risk, if any, is built into their rates, and then negotiate from there.
• Transition costs
  Beware the provider that proposes an upfront payment or a schedule of payments that isn't tied to the transition progress. Instead, look for one that agrees to milestone payments that are aligned with key transition goals, such as relocation of your servers to the provider's data center. In the case of one global Food and beverage company that structured its payments based on milestones, the BPO transition fell behind by about three months -- and, therefore, so did the payments, which saved the company cash out of pocket. In the event of a delay, ensure that you're not paying for underperformance.
  
  Consider a provider's methodology for elements like knowledge transfer, risk analysis, systems transition, project management, hiring and training. Such established methodologies usually will bring lower costs both for the transition and later operations. Another key driver is duration: The longer the transition period, the longer the delay in your operational savings -- and the higher your overall transition cost.
• Transformation costs
  One railroad company prepared for outsourcing, the projected transformation costs continued to increase as the provider tacked on charge after charge for the implementation and customization of software. In the end, the buyer wisely chose a different partner, one willing to lock in on transformation costs and commit to promised results.
  
  The key is to find a provider that will assume some risk during the transformation process. If a server consolidation isn't completed on time or doesn't generate the expected savings, for example, then that loss should be borne by the service provider, not the buyer. The opposite approach in more risk-averse providers is to charge for time and materials -- which potentially gives them an open checkbook.
• Labor arbitrage
  Sourcing the right work to the right location can usually deliver high quality at a substantially lower cost, which makes a provider's geographic location an important differentiator. For transactional processes, seek a service provider with the ability and facilities to move your work into global, wage-favorable locations. For higher-priced, less-transactional processes, look for a provider that can leverage offshore or near-shore locations to access specific skills while maintaining language and cultural continuity.
• Provider productivity
  The expectation in an outsourcing deal is that savings will be generated over time through ongoing improvements in productivity and efficiency. This requires service providers to make a financial commitment without knowing what those improvements will be. Look for a vendor who can demonstrate knowledge of price drivers and business model by locking price and showing continuous decrease over the contract term. This increases the productivity scope at reduced rates.
• Projects
  A related differentiator is a provider's approach to projects: What kind of work -- and how much of it -- is allowed as part of a deal before the provider charges an additional rate? A disagreement over the handling of projects, results in dissatisfaction. No additional charges must be levied for services which should be inherent part of the projects and should be included in the base fee.
• Price visibility
  Providers like to bundle several services for a packaged price, but it's better for buyers to see itemized prices for specific services. This way, you know clearly what you're paying for, and you can compare prices against other service providers. Moreover, the providers that will decrease their pricing are usually easier to work with in the long run.
  
  In addition to the direct cost of operations, for example, a provider's unit rates may include all or a portion of transition costs, risk contingency and project management costs. Asking providers for this level of visibility will help determine whether they have a firm grasp of their cost structures.
• Service-level credits
  Service levels are vital indicators of performance and its standard practice for providers to be penalized if they miss the predetermined agreed target. In evaluating these credit levels which range from 8% to 15% of monthly contract, seek providers who accept high penalty without too much argument as it shows their confidence level to deliver on time. Their willingness to be held financially accountable for non delivery of results makes them an attractive choice over vendors who haggle for no penalty or lower rate of penalty.
• Termination
  When it comes to termination for convenience, the fees are typically in three categories: “capped wind-down assistance,” “unamortized assets” and the “breakage fee.” If you agree to “unwind” the provider's support operations and compensate them for unamortized equipment and staff, then you should be able to negotiate the superfluous breakage penalty down to zero. This is becoming the norm for convenience termination, and the more mature service providers are accepting this contract structure.
• Client references
  Generally a service provider will always come across as more confident of their capability than their actual performance. So a proven solution is one that is attested by previous clients of the vendor. This is a vital differentiator. Companies can check the testimonials of previous clients to decide on the right vendor.
  
  Thus experience matters in outsourcing and a provider may have the lowest price, but if it lacks in experience needed for delivery of consistent results it can prove disastrous. Likewise if the buyer lacks experience in evaluating a service provider it will affect overall success. It’s essential to pay careful attention to the above 10 financial differentiators in an outsourcing transaction to help you make a more informed choice for vendor and establishing a successful relationship.