Build-Operate-Transform-Transfer (BOTT): ensuring a firm legal footing from outsourcing to autonomy

Outsourcing is very much in vogue at the moment due to serious efforts by companies to cut costs. When it comes to the contents of outsourcing contracts, there is a clear trend towards Build-Operate-Transform-Transfer models (BOTT). This is a form of cooperative partnership in which an external service provider initially sets up and runs an operating unit for the client (often in an international target market) before it is transferred back to the client’s own company structure after a defined operating phase. The role played by the contractor goes far beyond mere support services: it contributes specific market knowledge, a local network, regulatory experience and qualified human resources to the project.

Companies often use this structure to set up specialised competence centres so that they can focus on professionalising certain business areas and integrate them into their own value chain over the long term – whether in terms of AI readiness, cloud infrastructure or cyber security optimisation. Another major advantage of such BOTT models for companies is the possibility to draw on international talent pools and strategically use different cost structures. In many cases, the units are deliberately set up in nearshore locations (such as Eastern Europe) or at offshore sites (such as India) in order to gain access to highly qualified specialists and pool this expertise, for example in software development, data engineering or AI-driven processes, taking advantage of lower labour costs compared to Germany. Thus, companies can not only improve efficiency but also build up specific know-how without giving up operational management and long-term control over the structures that are built up.

The result of this is a real boom in the use of BOTT structures (and offshoring as a whole) especially to build up business divisions in IT- and technology-related fields. The BOTT model allows companies to set up foreign units which are initially under the operational management of experienced local contractors and are then integrated into the company as separate units – an approach that combines operational control, cost efficiency and knowledge transfer.

Implementing BOTT objectives in contracts

Setting up such a “captive operation” in a foreign jurisdiction often presents companies with considerable practical and legal challenges. To ensure that such a project has the desired outcome, a stable contractual framework is required. Implemented as a strategic management tool, the long-term corporate goals and likewise the legal risks that can arise from the way different legal systems interact have to be considered.

Key issues playing a role both in the drafting of contracts and the selection of suitable contractual partners are the establishment of local teams, i.e. the recruitment and training of qualified employees who will remain with the client in the long term. In addition, the service provider has to be instructed to lease premises and run them on an ongoing basis, including efficient office and asset management, managing and maintaining IT equipment and other technical tools. The service commitments of the outsourcing service provider also play a large role, i.e. the extent to which the provider is prepared to make binding commitments as to the successful development of the services to be provided and compliance with quality features such as service levels in day-to-day operations.

Key legal questions during the individual phases of the BOTT model

Depending on the stage reached by the BOTT model, different legal and organisational risks emerge. During the build phase, the focus is on carefully planning the project and implementing it in a structured manner. This phase determines whether the subsequent operating and transfer phase is based on a sound footing or whether long-term corporate goals may later fall victim to legal and operational frictions.

From the client’s point of view, it is essential that BOTT contracts are designed as a contract for work and services under German law (Werkvertrag) as far as possible. The aim is not just to provide ongoing support services, but to achieve concrete, measurable project results which are subject to formal acceptance by the client during the individual phases and at the end of a project. This includes defined milestones, key performance indicators and acceptance criteria against which progress can be objectively monitored.

One of the main tasks during the build phase is to draw up a detailed transition and implementation plan, which is to be devised in close consultation between the contractor and client. This plan defines all organisational, legal and technical steps to guarantee that a fully functional operating unit is established in the target country. The challenge is to set up the infrastructure and governance frameworks in such a way that the unit is capable of running the client company’s day-to-day business operations for the relevant area steadily and reliably over the subsequent “operate” phase. Employment law aspects are essential at this first stage: technical and organisational operational readiness must be ensured and early plans must be made for any transfer of employees (which has different requirements in foreign jurisdictions), including coordination with existing employee representatives or works councils. The progress of the transition should be reviewed on the basis of milestones approved by the client. At the end of this transition, acceptance of the overall phase should take place.

The operate phase covers day-to-day operations by the contractor and typically lasts for two to three years. Similarly to a traditional IT-outsourcing the focus in this phase is on KPIs and specific service levels, aiming to maintain and optimise business processes without any restrictions – by increasing efficiency, for example. Yet compared to conventional outsourcing models, distinguishing between responsibilities is a real challenge. While in traditional outsourcing the contractor typically assumes responsibility for entire areas, cooperation in the BOTT model is much more tightknit. Instead of just outsourcing, it can be a form of cooperative partnership based on a division of labour and involvement of employees of both the client and the external unit where a precise dividing line has to be drawn between responsibilities and technical interfaces in legal and organisational terms. It is also important to make sure that no joint operations are created between the client and contractor.

At this stage, the underlying contract should already contain clear provisions on the creation and allocation of intellectual property, acceptance procedures and liability mechanisms. This is the only way to avoid disruptions in operations leading to unclear liability scenarios.

The actual transfer phase is preceded by a transform phase. This is not merely designed to prepare for the transfer, but also to optimise the structures and processes established during the operate phase in a targeted manner and adapt them to the client’s strategic objectives (KPIs). The key task here is to transform the organisation from an operation controlled by the contractor into an independent, integrated or integrable business unit of the client.

At this stage there is a particular focus on restructuring employee structures, i.e. adapting role profiles, responsibilities and reporting lines to the client’s internal governance framework. The transform phase may require employee representatives to be consulted and involved in good time. Optimisation of processes and technological enhancements of the systems used often take place parallel to this, especially by integrating modern automation and AI solutions into existing workflows. These measures are intended to ensure that the unit being transferred functions smoothly while also creating sustainable added value in terms of efficiency, capacity for innovation and technological resilience.

The transfer phase represents the major final step in a BOTT project – and at the same time the most high-risk milestone. At this stage, sizable investments have already been made in infrastructure, personnel and expertise, and the economic success of the entire model now depends on whether the transfer of the established unit runs smoothly in legal and organisational terms. It is precisely in this final phase that the nature of the BOTT model as a contract for work and services defining specific results becomes particularly clear: the contractor is liable not just for preparing the transfer properly, but also for the actual results of the project. To ensure that this claim remains legally enforceable, it is essential to define clear and measurable performance criteria in the contract that can be used to assess how the project has progressed. This is the only way to transform abstract performance commitments on points such as increased efficiency, process stability and improved quality into tangible results suitable for acceptance.

While the transfer of business processes at the start of a BOTT project has significant parallels to outsourcing in the context of conventional outsourcing projects, the final transfer is fundamentally different: the BOTT model goes far beyond what is known as “exit management” in traditional IT outsourcing. It is not the orderly withdrawal of a provider, but instead the transfer and integration of a specially created, productive unit with processes, employees and intellectual property tailored to the client into its corporate structure. The requirements for the contracts used to support this step are correspondingly high.

The aspect of intellectual property also plays a particularly important role. It is critical for the client’s business to safeguard all the work results arising from several years of partnership in the long term – not just for the term of the contract. To achieve this, extensive intellectual property rights have to be granted, and rights of use have to be clearly set out during the operate phase describing how software, data and documentation are to be used.

Besides this, it is important to also safeguard the company know-how arising during the course of the partnership that is less tangible but still crucial for the business. To prevent losses, it is essential to successfully bind the key positions from the BOTT unit to the target company. The fact that employment law conditions also play a key role at this stage is no surprise, since the business divisions created in external organisational structures now have to be incorporated into the client’s business and possibly harmonised with existing structures. Existing employment contracts may have to be terminated and new ones entered into (personnel transfer agreements) or a transfer of undertaking may have to be planned. In addition, a transfer of expertise can be organised, for example by holding transfer workshops. Contractual clauses on confidentiality are also essential to ensure that the knowledge gained from the project does not end up in the hands of competitors, whether through changes in employees or follow-up projects. The appropriate use of post-contractual non-compete covenants can provide added protection for know-how.

Last but not least, the local circumstances of BOTT projects give rise to further legal challenges. This relates to the interplay of different applicable legal systems and, for example, to compliance with employment or industry-specific regulations, tax structuring of permanent establishments, cross-border issues as well as court jurisdictions.

Conclusion

At the end of the day, we should remember that BOTT models are highly complex structures whose success depends largely on how the contracts are drafted. Although we can use valuable experience from conventional IT outsourcing when planning BOTT projects, it is essential to understand the specific legal and organisational features of the BOTT model. This requires foresight and relevant experience of implementing cross-company and cross-border project architectures.

We will be happy to help you make optimal use of the economic and strategic potential of such a model – with advice combining legal precision with a practical understanding of operative and commercial interdependencies. We provide interdisciplinary advice on areas requiring combined expertise in digital business, employment/labour, corporate and tax law to provide you with a consistent, practical and future-proof strategy for the relevant contracts and their implementation. In this way, we create the legal prerequisites for the intrinsic benefits promised by BOTT models: sustainable value creation by optimising operating units and the structured transfer of knowledge and technology.