Business Process Outsourcing: The Competitive Advantage
by Rick Click and Thomas
Review by Madanmohan Rao (firstname.lastname@example.org)
This insightful and practical guide provides actionable recommendations on how companies should approach outsourcing of some of their business processes. It does a good job of capturing the various complexities and risks that can arise in the outsourcing journey, and gives executives useful checklists on how to deal with some of these risks at each stage in the BPO lifecycle.
The 11 chapters are divided into five parts: BPO overview, scoping, vendor selection, project management and future trends. The material is well referenced but also written in an easily accessible style with summaries and key takeout points at the end of each chapter.
Rick Click is the CEO of American Outsourcing Group (www.aogusa.net), and Thomas Duening is assistant professor of management at the University of Houston.
“BPO is here to stay and it will be a disruptive force in many industries. No one can ignore BPO since it will surely affect the cost-structure of nearly every industry. I predict that the hype around BPO will subside quickly, but the business advantages it will bring to many are here to stay,” begins Robert Palmer, chief engineer at Occidental Oil and Gas, in the foreword.
“BPO is a socio-technical phenomenon that impacts both technical and social systems of the organisation,” the authors begin. BPO is one of those interdisciplinary workplace innovations that require a diverse set of skills in order to be successful.
BPO is not just about cutting costs but also the transfer of service functions to the best-in-class performers to gain competitive advantage, innovative synergies and market-shifting capabilities. The focus of BPO can be cost, quality or innovation, depending on the level of domain knowledge of the BPO vendor. This can eventually lead to acquiring new third party expertise, increased market flexibility, improved scalability and reduced time to market.
The rise of BPO can be regarded as an emergent rather than evolutionary development, since no one initially set out to design BPO as an organisational strategy – it seems to have emerged from the convergence of a number of factors ranging from global telecom connectivity to creative models of tapping global labour pools. Due to its socio-political impacts, BPO has been both hailed and vilified, and will indeed continue to be a topic of controversy.
BPO spots for different domains have been emerged in a number of countries around the world: India (engineering, technical), China (manufacturing, technical), Mexico (manufacturing), US (analysis, creative) and Philippines (administrative). Labour is not just inexpensive in these locations but highly skilled as well.
BPO covers a wide range of activities: payroll, benefits administration, HR, customer service, call centres, technical support, financial analysis, symbolic analysis, software design, tax preparation, telemedicine, medical transcription, and even creation of business content like sales kits and presentations.
The authors distinguish various flavours of outsourcing: offshoring, nearshoring, onshoring, dual shoring, offshore insourcing, and even reverse-outsourcing (eg. Amazon offering its e-commerce features for other retailers).
The authors identify six steps in the BPO lifecycle: analysing the opportunity, selecting the vendor, developing the contract, managing the transition, and operating the contract. For starters, the authors recommend that companies set up a BPO Steering Team, which manages the BPO Analysis Team, BPO Vendor Selection Team and BPO Project Management Team. “The steering team is responsible for initiating the outsourcing project, communicating its links to corporate strategy, and seeing to it that project goals are achieved,” the authors explain.
The steps involved in setting up a BPO initiative include: establishing the analysis team, conducting the analysis, identifying core and noncore activities, identifying BPO opportunities, modelling the BPO project and developing the business case. The authors make distinctions between critical, key and support processes, and develop a 3-D matrix for process parameters like productivity, cost and mission criticality.
The project objectives should include timing, costs, risk mitigation and deliverables. Methodologies like Total Cost Management (TCM) can help factor in the various elements of cost: financial, strategic, hidden, quantifiable. Ultimate impacts of BPO can be measured via a range of metrics including quantitative (financial, productivity) and qualitative (internal, external, vendor).
The BPO analysis team should preferably have had experience with past change programs; third party consultants can also help here. The BPO vendor selection process includes establishing the selection team (which should include legal staff and end users), drawing up vendor qualifications, sending out a request for information (RFI) and then a request for proposals (RFP), evaluating the shortlists, and selecting the final vendor.
The authors recommend a number of useful Web sites for BPO news and research, including OutsourcingCentral.com, Outsourcing Centre, Outsourcing Institute and FirmBuilder.
The relationship between the BPO buyer and vendor will be more intimate and intense than a normal buyer-seller relationship. “The BPO contract negotiations should be conducted in a positive-sum spirit, with an eye toward building a trusting, synergistic relationship,” the authors advise. The contract should include scope of work, service level agreements, pricing, terms, governance, IPR, industry-specific concerns, termination clauses, transition planning and dispute resolution.
The transition period requires careful attention to change management, which includes describing the vision of the BPO initiative as it relates to the company’s future, internal communication, managing cultural impacts, and establishing new performance benchmarks. Care should be taken to manage job loss, changeover, and even rumours among disgruntled or alarmed employees.
The authors point to interesting phenomena like the “Hawthorne effect” (increased performance as a result of being observed) and “social facilitation” (people seem to perform at a higher level when they are in a social setting) which can be leveraged in change management initiatives to win over uncooperative employees.
Successful buyer-vendor relationships require negotiating skills, effective communication and business acumen. Rewards, penalties and remedies for vendor activities should be spelled out. One chapter is devoted to a wide range of possible BPO risks, such as human capital (employment laws), IP and vendor organisational risks (eg. false credentials).
In the long run, the authors see a trajectory of issue emergence, growth and maturity for BPO. “Over the next five to ten years, US firms should seek to take advantage of the fact that Indian and Chinese higher education systems are churning out five times as many engineers as US institutions,” the authors advise.
BPO is maturing, and buyers and vendors have co-adapted to one another. BPO is spreading beyond Fortune 1000 companies to SMEs as well. MetLife outsourced its claims processing to Affiliated Computer Services (ACS) to move from paper-based workflow to digitised operations, leveraging ACS offshore centres in Ghana, Mexico, Guatemala and China.
Retailer Sears and grocery dispenser Genco resolved to co-development of BPO competence in the area of handling returned merchandise. Sears was thus able to improve its operational efficiencies and Genco extended its service portfolio.
Other BPO case studies discussed in the book include ACA Financial (outsourced data centre), Kohler Company (converting microfilm assets to electronic documents), BC Hydro (IT services, HR) and AT&T (HR). The book also covers failed BPO initiatives, such as the experience of Life Time Fitness (improper project specification, lack of joint offshore team management).
For startups, entrepreneurs and venture capital investors, BPO firms also offer prospects of high growth and greater margins than many other industries. “The opportunities for intrepid entrepreneurs to disrupt their industry by using highly scalable and talented global labour pools are unprecedented. We predict an investment and new venture creation boom centred on global outsourcing to be a modifier to the threat of jobs going overseas,” the authors explain, with respect to the US context.
One of the valuable contributions of the book is its treatment of the topic of knowledge management – in the client, BPO vendor and the buyer-vendor relationship. One strategic cost often cited in BPO case studies is loss of organisational learning as a result of transfer of important activities to another entity. “This can lead to strategic blunders if the outsourced activity is important to the organisation’s core competence and the organisation is not working closely enough with its vendor in mutual exchange of knowledge,” the authors caution.
“Strategic benefits can arise from a deep partnership arrangement between BPO buyer and vendor. Such a relationship focuses not just on cost-effective performance on the outsourced activity, but also on knowledge-sharing, innovation and reciprocal exchange across business processes, including the outsourcer’s core competence,” the authors explain.
If external consultants are roped in, the BPO analysis team must learn as much as possible from them. “Failure to concentrate on organisational learning and building a knowledge base for managing BPO projects will lead to additional costs at some point in the project,” the authors caution.
The authors also advise managers to develop BPO champions in the organisation, who will be responsible for absorbing, analysing, communicating and documenting knowledge gained from third parties and through internal research processes.
But many companies do not seem to appreciate the time and money it takes to get a good relationship up and running between BPO buyers and vendors, according to Hank Zupnick, CIO of GE Real Estate. “You have to build in a year for knowledge transfer and ironing out cultural differences,” cautions Zupnick.
Developing the internal knowledge of BPO the first time around means the organisation has developed the capacity for additional BPO initiatives at some future date. “The greatest value-added benefit is likely to be the reduced time required for future vendor selection,” the authors observe. Some companies, such as FMC Corporation, even have created the position of outsourcing relationship manager.
“Knowledge management should be transparent from one firm to another, and reciprocal exchange of insights should be considered routine. Furthermore, a quest for innovation in the interlinking of the critical and core processes must be a paramount concern for both sides of the outsourcing relationship,” the authors advise. Developing strategic KM capacities with the vendor should be a focus of BPO buyers, and not just price issues.
Factors affecting the buyer-vendor relationship from a KM perspective include the depth and scope of relationship, as well as choice of assets and business culture to adopt. The relationships for the vendor can be of three types: arm’s length, cooperative and an extension of the buyer’s organisation. Shared vision, aligned interests, integrated systems, information security and sharing of risks and rewards are viewed as ingredients of a successful BPO relationship.
Vendor employees should be given incentives to seek and report data patterns that may result in process improvements. An important consideration for clients is not just knowledge infrastructure of the vendor, but also cross-enterprise knowledge management.
In sum, this is one of the more useful and practical books on outsourcing, as compared to the rash of books on the subject. Each chapter in the book begins with an interesting quote, and it would be fitting to end this review with two notable quotes:
“You can’t cross a chasm in two steps.” – David Lloyd George, British politician
“Progress lies not in enhancing what is, but in advancing toward
what will be. – Kahlil Gibran
Madanmohan Rao is the editor of “The Knowledge Management Chronicles”
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