In this blog post we explore build-operate-transfer (BOT) models in relation to businesses setting up offshore delivery centers, commonly becoming known as Global Capability Centers (GCCs).
Morgan Lewis is seeing a rise in businesses exploring the use of BOT models to set up GCCs in offshore locations as an alternative to the traditional offshore outsourcing models.
We spoke with Sesank Kandalum, Director at Boston Consulting Group (BCG), who is also seeing a rise in BOT models:
“Organisations that are looking to set up GCCs are seeing this as one of the most viable routes to get started. Lower initial investment, lack of time or inhouse expertise to deliver a large offshoring outsourcing, and the optionality to bring the operation in-house are some of the main reasons the BOT model is increasingly being considered.”
What are BOTs and GCCs?
The BOT model is not a new concept. It has traditionally been utilized in two ways:
- By businesses looking to set up entities in foreign jurisdictions, where either entry into such jurisdictions is difficult or the business does not have the expertise to do so, and therefore a third party is needed to assist
- As a form of project delivery (usually infrastructure related) by private entities for the public sector, e.g., building a hospital or toll road
In each case, a service provider is contracted to (1) build the business or asset, (2) operate the business or asset, and (3) transfer the business or asset to the customer upon an agreed trigger.
The BOT model is now being used in relation to IT and business process service delivery as a means for businesses to ultimately obtain access to the offshore service market, initially via the comfort of an experienced third-party service provider.
The basic premise of these IT/BPO BOT models is that a service provider will be appointed to do the following:
- Build a GCC for the customer. This includes:
- Setting up a legal entity for the GCC, usually a limited company using an off-the-shelf company or setting up an entirely new company; however, it could be another form of organization, depending on the jurisdiction. The customer may or may not be involved with the corporate documentation, depending on the structure the parties have agreed to
- Obtaining premises from where the GCC will operate; this may be specifically procured premises or may be a space within the service provider’s preexisting delivery premises (either as a dedicated building or a dedicated space within a multitenant building)
- Procuring all necessary services, including IT, administrative/back office services, utilities, and facilities; these may be procured from third parties or may be provided by the service provider itself
- Hiring new personnel to operate the GCC or the service provider providing its own personnel to be assigned to the GCC
There is also likely to be a design phase prior to the build starting, during which the parties agree to the exact details of the GCC build.
- Operate the GCC. This stage is much like a traditional outsourcing model. The GCC that has been set up will be contractually obliged to provide specified services to the customer. The contract will usually include all of the standard provisions of an outsourcing agreement, including detailed services descriptions, service levels, governance provisions, and risk-sharing provisions such as liability and relief clauses.
- Transfer the GCC. This stage can be particularly complex and will depend on how the GCC has been set up and what the agreement of the parties is in relation to the transfer, including the transfer trigger events and any payments required in respect of the transfer. It will generally include the following:
- The transfer of the assets of the GCC or of the GCC itself to the customer
- Where the transfer is an asset transfer, comprehensive exit obligations under the operational outsourcing agreement to effect the transfer of the services from the GCC to the customer.
- A transitional services agreement to cover any service gaps following the transfer of the assets or the GCC to the customer.
Why Are Businesses Exploring This Model?
Pure outsourcing to offshore jurisdictions is still a popular model; however, with the increase of technologies facilitating automation and GenAI capabilities, some businesses are exploring ways in which they can quickly capture the benefits of offshore outsourcing, while retaining more control and ultimately having flexibility to take control of the services (for example, where the business feels the benefits are stagnating, or it wants to take its service delivery in another direction, perhaps utilizing new technologies) while retaining its presence in the jurisdiction.
Sesank says that from BCG’s experience businesses are exploring this model for several reasons:
“Savings in upfront cash investment costs assumed by the vendors along with a lower administrative burden on management in setting up a GCC are clear drivers. Beyond this, a BOT model allows businesses to have tighter control over their IP and to align their offshore teams to their organizational culture from the very beginning, which facilitates a seamless insourcing of the operation at the end of contract. The BOT model also enables greater customization of projects and flexibility in managing resource allocation, which can be hugely important for businesses wanting to respond to rapidly changing market needs and scale as needed.”
Uptake of BOT models by businesses with mature offshore outsourcing models is likely to be lower than those looking to move service delivery offshore for the first time. Those with mature models will already have one or more trusted suppliers in the applicable jurisdiction, with potentially limited benefit of a material change in the structure of its contracting in relation to the services delivered by such suppliers.
However, the desire for such a change may occur where there is a strong business case for adjusting the level of control that the business has over its outsourced services, with some businesses looking to bake flexibility into their outsourcing agreements to convert the agreement into a BOT arrangement. This involves developing specific provisions in order to move to a BOT structure, including provisions regarding transfers of personnel and assets, ringfencing the applicable entity in order to effect a transfer, and the agreed commercial triggers to convert the arrangement.
The Three Main BOT Structures
There is no true “off-the-shelf” BOT deployment model. Just as with a traditional outsourcing they each have their own specific nuances, and should be guided by the needs of the business along with the expert guidance of the service provider.
We typically see three main ways in which BOT deployments are structured:
- Asset Based: The service provider sets up an offshore GCC either via an existing corporate entity or new corporate entity. Customer has an option to require the transfer of all applicable assets to the customer.
- Corporate Entity Based (service provider owned): The service provider sets up an offshore GCC via a new corporate entity owned by the service provider. Customer has an option to purchase the full share capital in that corporate entity.
- Corporate Entity Based (joint venture): The service provider sets up an offshore service centre via a new corporate entity owned by the service provider and the customer as a joint venture (typically service provider as majority shareholder and customer as minority shareholder). Customer has an option to purchase all of the provider’s share capital in that corporate entity.
Each of these structures has differing contractual requirements and pros and cons that must be carefully assessed at the outset of the BOT project.
Says Sesank, “the BOT model requires medium-term effort to realise a long-term vision of setting up a GCC. It is very important to evaluate the structures at the very start and identify the one that aligns with the businesses’ goals. A properly chosen contract can help the business achieve the full potential of the GCC project, de-risking the delivery, controlling operational costs and effecting a smooth exit for both parties at the end of the contract.”
Roundtable Event
Morgan Lewis and Boston Consulting Group will be jointly hosting a roundtable event in September 2024 in London to discuss BOT models, including current trends and contracting considerations. If you would be interested in attending the event, please reach out to one of the authors.
Sesank Kandalum, Director at Boston Consulting Group kindly contributed to this article with his helpful insights.