Why this report
Business people have always wondered and more so in the last few months what it takes to bring a company from the red to the black, from a low profit organization to a healthy high profit one. BPO has appeared as the probable answer to most organizations’ problems. While it has provided a means to profitability to large organizations in the western world, it has afforded huge business opportunities to developing countries like India. Today India has become capable of offering cheaper and innovative ways of doing the same business, by virtue of its highly educated work force, convenient rupee-dollar rates and efficient infrastructure. BPO thrives on these factors and many more leading to win-win situations at both ends.
While some people tried to wish away the continuing downturn, the smarter ones tried to rediscover the outsourcing – with all its inherent joys and troubles. Thus outsourcing earned itself a new lease of life as the Business Process Outsourcing (BPO) buzzword. As with all corporate chewing gums, there is a lot of aura and expectation that is attached to it.
In this report we have tried to understand and explain what outsourcing is - with all its strengths and frailties. What it takes to outsource and what it takes be an outsourcing services provider. Which business processes can be outsourced and how. How to ink and how not to ink an outsourcing contract. Thus the purpose of this report is to stress how, when and why an outsourcing decision can be arrived at.
We have also attempted to study what it takes to transform a transaction-based relationship to value-added strategic partnerships.
And finally to sum it up we have analysed Business Process Outsourcing from the perspective of both the outsourcing organization as well as the outsourcing services provider.
1.0 INTRODUCTION
1.1 What is BPO ?
Outsourcing is an appropriately structured arrangement between an Organization and an Outsourcing supplier to perform services, which were otherwise conducted in-house. Outsourcing is becoming an accepted way of functioning for organizations the world over, however companies remain pensive when it comes to entrusting external agencies with critical application and company information. Outsourcing can be a viable option when executed with adequate safeguards. Prior to taking an outsourcing decision, one has to examine the different perspectives with its pros and cons on whether to outsource or not. Outsourcing can encompass a wide range of services, from a particular project to a technical domain to all activities. Each situation requires a different understanding of the priorities, measures, costs, and the benefits involved.
A successful outsourcing project is only possible if the outsourcing decision has taken into consideration all known costs and benefits associated with the project. It is also important that the contract be effectively negotiated and managed.
1.2 What is Driving the Growth in the BPO Market?
Historically, enterprises outsourced many ‘non-core, non-critical processes’ – activities such as landscaping, cafeteria and janitorial services.
The number one driver behind the growth in the BPO market today is an increase in the number of enterprises that are reviewing their internal operations in an attempt to more fully understand their true core competencies, and focus on only those competencies. All other internally provided services then become candidates for examination in terms of how efficiently and effectively those services are being delivered compared to what is available from an external service provider. This decisioning process often includes an evaluation of the cost of owning technology – with it’s associated support costs, that are not core to the enterprise (HR applications as an example). This is leading to an increased willingness to outsource processes considered non-core, yet critical – activities such as claims administration, HR services and payment services.
A secondary driver of growth in this market is a desire by enterprises to improve their current service levels. BPO offers enterprises an opportunity to do so in many cases, and at the same time removes the requirement for the capital expenditure that would be necessary if the enterprise sought to improve those service levels internally. Service providers who can best communicate their ability to deliver significant process improvement (as opposed to simply taking on an existing process in a status quo manner) are likely to emerge as the market leaders who will change the way in which business has traditionally been done.
The third most prominent driver of growth in this market – not surprising given the current economic environment – is a desire by enterprises to extract all possible costs from within their internal operations. Any chance of decreasing transaction-processing costs frees up precious capital that can then be applied to more strategic initiatives.
Over a period of time, enterprises will increasingly narrow those activities they deem to be ‘core, and critical’. An example of an early adopter of this view is a company such as Nike, whose core competency is brand management, with all other activities carried out by external service providers. As this view of what is a ‘core’ process narrows, and is increasingly adopted by enterprises at large, more and more processes will become candidates for BPO.
1.3 Background
Outsourcing as a concept is probably one of the oldest and most commonly practiced. Yet, people have refused to recognize it and give it its due place. As a concept and practise it pervades all aspects of our lives – domestic as well as professional. But, somehow when it comes to giving it its due it doesn’t quite happen.
To take an example out of our domestic lives, often, certain amount of our household chores are done by “domestic aids”. The domestic aid can be a full time resident person or a part time help.
This is outsourcing in its basic form.
Again, taking up yet another example relating to a typical household is the laundry. Sometimes, people would give their clothes to a laundry for washing and ironing and at other times they would wash it themselves but, get it ironed from a laundry. This is again a typical example of outsourcing.
An essential but non-core activity of a household id executed in parts or in whole for a fee by a person or an institution, who is not a member of the household.
In the corporate context, outsourcing is all pervasive. Myriad examples are noticeable at the first glance itself. Perhaps, among the most visible examples are the “Security Services”, “Housekeeping” and “Pantry”.
More often than not the gatekeeper or the security personnel would be from a “Security Services Agency”. This is so even when the Security Personnel happens to be the most visible face of the organization. And perhaps the first impression.
Similar is the case with Housekeeping. Housekeeping or maintainence of facilities is a very important but non core activity. Dirty unkempt premises may not only make a wrong impression on potential customers, but, can also prove to be unhyeginic to the company’s employees. Even then cleaning and maintaining of the premises is outsourced to an outside agency, specialized in this activity for a consideration.
Another noteworthy example, is the canteen services or the pantry. Lunch, tea and coffee being served in a company’s premises is seldom cooked and served by an employee in today’s context. It is likely that the pantry management has been outsourced totally to a catering company. The infrastructure to run the canteen, i.e., chairs, tables, cutlery, utensils is generally provided by the company, whereas the personnel, the food and the cooking and services would be in the scope of work of the caterer.
These are some of the basic but visible examples of outsourcing in the corporate world. Some of the not so visible but equally pertinent “outsourcing” that happens in the corporate world are those that involve the execution of certain semi-core and core activities by an outside entity.
Organisations no longer outsource only non-core labour intensive processes. Labour intensive but essential business processess like sales, “customer care” or “help desk”, or “manufacturing” are critical activities where “goof ups” can prove to be expensive.
So is the case with “intellect” and “creativity” such as Advertising, Public Relations, Research & Development and Software Development. These are extremely creative processes, which call for tremendous reserves of knowledge and intellectual capabilities. Yet these activities are also outsourced. At times these activities or business processes can be very, very critical to the survival of an organization. But today, they are outsourced and outsourcing has proved to be beneficial as well. So if we are to look at outsourcing we would observe that Outsourcing not only happens in individual homes but also in Corporate houses. It is all pervasive and have existed as long as these entities have been in existence.
Over the years business process outsourcing has become wrapped in conventional wisdom. Traditionally, organizations applied simple rules about when to use BPO:
· Outsource non-core activities,
· To niche providers who offer best practice processes,
· In order to achieve cost savings, and
· Improve management ’s focus on more strategic issues.
Today, these rules no longer apply. The definition of business process outsourcing hasn’t changed since its inception, but its potential reach and impact have altered significantly. The BPO universe is expanding. Today, executives use BPO to meet a diverse set of objectives, from tactical to strategic. Some still contract out narrow processes to achieve cost savings. But others have begun to use BPO for very different goals. They are using it to drive consistent management practices through global operations, to start up new operations quickly, to tap new sources of revenue, and to catalyze organizational change.
BPO goes further than technology infrastructure or even applications. The outsourcing provider takes primary responsibility for ensuring that the process works, interfaces effectively with other company functions, and delivers the outcomes intended.
10.0 STEPS TO BE FOLLOWED WHILE OUTSOURCING
10.1 Identifying Agency Needs
The first step in the decision-making process is to identify the organizations' needs. These needs lay the framework for projects and activities.
Address the strategic interests and goals of the company - The strategic plan, the information sources and the company's performance measures should all be taken into consideration while identifying the company's needs. The goals of the company serve as a basis for determining a project's success. Core competencies, by and large, should not be outsourced. However, this might change if it is found viable that resources or knowledge from an external source could supplement the available in-house resources. Specify the service to be provided and identify the rationale behind the outsourcing. The needs could include cutting costs, enhancing service levels, moving to a different technology platform, increasing technical know-how and skills within the organization.
10.2 Selecting the Vendor
Outsourcing skeptics believe that an outsider cannot provide the same attention as the in-house team. Therefore, a thorough vendor scrutiny becomes vital before assigning critical technical roadmaps and confidential information to him.
Understanding the emphasis of a vendor's business, or what it is that drives the vendor, is essential while choosing the appropriate vendor to meet the specific needs. A vendor selection team should be developed that would recognize business areas for the project. The vendor selection team should comprise senior management, legal staff with contract expertise, technical staff, end users and financial staff.
Following is a vendor selection checklist. The parameters on which the vendor should be assessed have been carefully chosen, and it is advised that before entering into a relationship, the vendor selection checklist must be completed. Further, while taking a decision based on our vendor selection checklist, it is advisable to assign weights to the parameters mentioned. The three most important factors considered while choosing an outsourcing vendor included price, quality and flexibility.
10.3 Experience and Expertise
As with any procurement process even in an outsourcing initiative the relevant past experience and skill-sets of the prospective vendor should be considered and given due weightage.
This will not only ensure that best practices are adopted in the outsourced activity but also high efficiency is likely to be maintained. Besides selecting a vendor with relevant past experience is likely to give the company a further edge in terms of reduction of training time and costs.
A strong track record and a positive reputation of the vendor are other important criterion, which will ensure that the partnership has been struck with the correct match. This could further be ensured by undertaking a reference check.
10.4 In-house facilities to meet the agency’s needs
It is important that the prospective vendor already has their processes and infrastructure in place to handle the assignments to be outsourced to them. The vendor should be financially sound. Any investment made by the vendor should be towards improving the processes rather than towards architecting them.
10.5 HR Issues
It is imperative to take into account the HR issues that may arise in the vendors’ organization. The type of selection and hiring processes of the vendor can go a long way to ensure the quality of the assignment. Also retaining and training policies are important as these ensure that the quality of the resources improve with time rather than deteriorate. It is desirable that mature employees populate the vendor organization rather than immature ones.
10.6 Ability to ramp up
Most businesses are cyclic in nature and hence there will be slack seasons as well as peak seasons. Hence the vendor organization should have a flexible business model and be in a position to ramp up/reorganise its resources as well as ramp down its resources without any major problems – organizational, legal etc.
10.7 Security
The vendor organization should be able to instill a certain comfort level as far as maintenance of confidentiality regarding the business process, business standards, business data etc is concerned. Hence it is important that well defined security policies are implementable in the vendor organization and there is a respect for intellectual property within the organization.
It is most desirable that the vendor organization has a sound and resil
Wednesday, December 24, 2008
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