Reducing Operational Risk in Business Process Outsourcing

Business process outsourcing (BPO) is fraught with risks, whether onshore or offshore. When you make a decision to outsource a business process — possibly involving layoffs — bringing it back in-house if it doesn’t work as needed is an expensive proposition. This doesn’t even take into account the public relations impact or the effect it will have on careers of people involved in such decisions. Reducing these risks is essential to the success of the outsourcing effort.

Ravi Aron, Wharton Professor of Operations and Information Management, has written about three kinds of risks in outsourcing:

  • Operational risks. Possible slippages on quality, cost or speed of process execution.
  • Strategic risks. Related to issues such as protection of intellectual property, security and privacy.
  • Composite risks. Longer term risks, such as losing the capability to execute such business processes in-house in the future due to loss of talent and knowledge of the business process.

Among these, strategic and composite risks to some extent can be mitigated by contract terms and operational controls. However, managing operational risk is an on-going activity that needs to be done continuously. BPO metrics provide a good framework for continuous monitoring, reporting and management of operational parameters. In this article I touch upon one way you can set up a framework for monitoring and measuring operational parameters and — through it — mitigate operational risk substantially.

Quality, cost and speed of execution depend upon a variety of orthogonal factors in process execution. What’s the best way to make sure that operational risks are mitigated in a sane way? A BPO metrics framework provides the answers.

A Framework for Mitigating Operational Risk in BPO

Factors that introduce operational risk can be broadly classified as people, technology and process risks. These factors are also highly inter-related. Good or bad performance on one dictates good or bad performance on others. We propose a framework for identifying all related factors and then, by using appropriate metrics, mitigating these risks.

Business Process Outsourcing Risk Framework

People Risks

Turnover in call centers in the US is estimated to be upwards of 30%. In countries like India, the turnover with BPO vendors is at least 50% or higher. People issues affect the conduct of business processes to a great extent. So personnel turnover is a key metric that predicts the success or failure of your outsourced business process. Also, call centers engaged in business processes like phone-based help desks depend upon agents showing up on time and handling their processes. Thus, absenteeism is an important key metric. Metrics such as average waiting time suffers if absenteeism is high. Also if turnover is of concern, a constant stream of new recruits being trained is of great importance. Training metrics also become important in this case.

Technology Risks

Technology risks need to be mitigated for good operations management. Almost always, technology integrating a company’s systems with those of the service provider is involved. Service providers could be using the buyers’ internal systems through a browser or a dedicated network link. Many outsourced business processes involve scanning and digitization of paper documents that are manually processed at onshore or offshore destinations. In these cases, unless a seamless computing and communication infrastructure is maintained at high levels of availability, business process execution suffers.

Service providers could have their own systems, networks and applications for providing process services. An example of this is outbound telemarketing services where the deliverables are qualified prospects; the service provider may invest in technology shared among many buyers of such services.

Technology metrics such as system uptime, network uptime and application uptime need to be measured so that business processes can be executed without interruptions. If a customer calls and the service provider can’t access the customer relationship management system, your business process suffers.

Process Risks

Process risks are, by far, the most comprehensive set that needs to be managed properly for ensuring minimal operational problems. Each business process has its own set of metrics that are important to the buyer as well as the vendor of these services. The perspectives of the clients and vendors of BPO services regarding risks are interesting. To the BPO services buyer, overall high customer satisfaction is the goal of customer-facing processes. Other risks may be important, but are subservient to the customer satisfaction goals.

The BPO services vendor is interested in making sure that process risks covered by contractual obligations are addressed first and foremost. Since many contracts include provisions for incentives and penalties for meeting and not meeting certain metrics, they end up high on the agenda. However, many vendors go above and beyond these and keep track of other metrics that help them with internal agent performance evaluations. Other metrics that will help them make sure that the business process is executed properly could also be monitored, whether they need to disclose these to the customers or not. They know that if these metrics aren’t met consistently, the entire contract may be in jeopardy sooner or later.

A broad classification of process risks is one of qualitative risks and quantitative risks. Qualitative risks may deal with customer satisfaction issues and are measured usually by the BPO client using customer satisfaction surveys, in case the processes are customer facing. In non-customer facing processes such as financial accounts finalization, qualitative risks may be linked to an assessment of how well the services were provided.

Quantitative risks broadly deal with efficiency and effectiveness risks. They can be dealt with appropriately through prudent and appropriate choice of metrics. Efficiency metrics usually deal with time-related aspects of a business process. Average handle time and average hold time are good examples of efficiency metrics that deal with telephone support. Efficiency metrics may also include such items as number of loan cases handled per hour or number of claims handled per hour.

Effectiveness metrics deal with outcomes of business processes such as those that involve outbound or inbound selling. Percentage of outbound calls that resulted in a sale is a good effectiveness metric example.

Process metrics are usually few in number but highly relevant to the business process in question. These often encompass currency denominated metrics such as invalid credits issued and improper claim items allowed. These effectiveness metrics directly hit the bottom line performance of business processes such as credit card issues or insurance claims handling.

Realizing the Promises of BPO

Business process outsourcing promises cost savings, use of shared resources and greater efficiencies. However, only by using an appropriate set of metrics will you ensure that your organization fully realizes the benefits of outsourcing. A systematic approach with a framework of metrics enables organizations to select the right metrics and implement proper monitoring and analysis of business processes. Sustained collection of process performance information enables proper mitigation of operational risk. The BPO measurement framework I’ve outlined here offers a disciplined approach to such risk reduction.

Useful Links

“Reining in Outsourcing Risk,” Knowledge@Wharton