The Basics of Business Process Outsourcing

The predominant business model of the ’50s and ’60s is that size was good. The creation of a huge, lumbering corporation with sprawling campuses was seen as a mark of success, and CEOs would boast that “our company’s so big we have our own in-house printshop. We have a separate warehouse just to hold office supplies. We employ more mid-level bureaucrats than an agency of the United States government.”

But was all that necessary? Time has revealed the obvious answer to that question, and a company that would adhere to the above business model would not last long today. The rules have changed, and business process outsourcing (BPO) has become the cornerstone of the “lean and mean” way of doing business and staying competitive. There is, however, a right way and a wrong way to approach BPO, and Michael Montonen revealed in a recent interview, simply spinning off as many internal processes as possible is no guarantee of success. Montonen, a vice president with Gartner, is the BPO and offshore practice lead for the Gartner Consulting Sourcing team.

Tip #1. Get your outsourcing lifecycle strategy in place first.

Montonen described Gartner’s outsourcing model, which includes four phases; a sourcing strategy, evaluation and selection, contract development, and sourcing management.

In the strategic phase, a company goes beyond the obvious, and asks questions like, “Why am I doing this?” “What are the risks?” and “What kind of relationship do I want with a provider?” Not all outsourcing relationships are the same, and even within the same company, there may be two completely different strategies with different relationships. Some may focus on enhancement, where the service provider supplies some type of superior process expertise; while other relationships are more transformative, where the company’s goals are to transform the business itself and either drive cost savings or increase revenue. One of the biggest factors in a failed outsourcing project is when a company goes straight to the process of vendor evaluation, without taking time to consider strategy.

Phase four of Gartner’s model talks about “sourcing management,” or what’s done after the contracts are already in place. The foundation of this management is the service level agreement (SLA). But beyond that, a benchmarking clause would give you and the vendor the right to re-evaluate the contract and the relationship periodically. Montonen calls it a “relationship health check.” He said, “It’s a sourcing assessment. It’s looking not only at the service level agreements and the metrics, but it’s also looking at the contract. Is the service provider meeting their requirements? It goes back and forth. The client also has some requirements they have to meet. And you assess the relationship.”

Evaluation and selection builds on phase one. Simply putting out an RFP and taking the lowest bidder may work in some, but not all cases. A company may be looking for a very specific type of expertise, and that may be more important than the bottom-line price of service. This is also the time to consider whether it is advantageous to go offshore. Offshore outsourcing does offer an advantage, but it’s not always the right solution. And Montonen added, “You can have cost savings, if that is the primary driver, with onshore companies” as well.

According to Montonen, whether you choose a domestic or an offshore company may be irrelevant, because many BPO vendors have a global delivery model, where they can source services from a variety of domestic and foreign locations, depending on the economic and risk strategy of the client.

Tip #2. Address the question: Is it a marriage or one-night stand? Consider the duration of the contract.

An outsourcing contract often results in deep, long-lasting changes in strategy, and the processes being outsourced don’t always move on a dime. It takes time to outsource, and if you want to bring it back in-house, it takes time to do that, too.

Consequently, BPO contract duration must strike a balance. They must be long enough to make a difference, and short enough to afford a measure of flexibility to the relationship. Typically, BPO contracts last anywhere from three to five years. “The old 10-year deals are gone,” said Montonen. “Some people still do them, but we recommend that you don’t do that, because it simply ties you too long with a service provider.” Instead of a long-term contract, a better approach is a contract with a shorter duration that allows for periodic renewal.

The acceptance of the outsourcing model, the proliferation of service providers both here and abroad, and the availability of business-to-business (B2B) exchanges facilitate the outsourcing transaction and also enhance its competitiveness. The use of B2B exchanges in particular necessitates a shorter contract term. These exchanges make it much more possible for a company to stay on top of the service provider community, stay informed about newcomers and become familiar with price trends.

Online exchanges of any sort tend to result in price pressure, and the same is true with the B2B exchanges. Over time, prices for services will go down. A company that ties itself to too long of a contract will miss out on an opportunity to take advantage of this competitive atmosphere.

Also, there may be circumstances where a company wants to bring a process back in-house, and here too, it’s necessary to add an addendum to the contract that shows an exit plan. This clause would outline a transition plan, on how the service provider would help to transition the process back in-house.

Tip #3. Identify and assess the risks in your outsourcing plans.

Organizing any business process, whether internal or external, has a set of risks. BPO entails a particular set of risks, and these must be identified and evaluated. There are two things you can do to make sure the risk remains acceptable: Make sure that the vendor is able to service the process and retain a certain amount of oversight and control over the process.

Business-critical functions like accounts payable or accounts receivable, for example, have a major impact on your overall business. It’s not an isolated function. “Accounts receivable is critical for the revenue coming in, and accounts payable is important from a cost management standpoint,” said Montonen. “So you want to manage those. You provide the business guidelines for the vendor to run those functions, but based on your policies. The whole idea there from a performance risk standpoint is that you’re always in control.”

Towards that end, a company must understand what to keep in-house and what to outsource. While there are many processes that can be outsourced, policy creation must be kept in-house purely from a risk management point of view. “Accountability has to stay with the CFO or the sourcing manager running the relationship,” added Montonen. “You can’t delegate that.”

Tip #4. As the client, you can’t outsource compliance.

Legislation such as HIPAA and Sarbanes-Oxley has had a major impact on the enterprise, and many companies have had to spend millions to bring themselves into compliance with these and other rules. The end results of these laws are desirable, both to the public corporation and to society; HIPAA, for example, protects the rights of patient privacy through technological means, and Sarbanes-Oxley, among other things, imposes a set of internal controls that guarantees that the integrity of financial data hasn’t been compromised. But regardless of the positive outcome, compliance can be costly. Non-compliance can be even costlier, in terms of fines or even prison sentences.

Obviously, the need for compliance weighs heavily on outsourcing arrangements. In addition to making sure that all of your internal processes are compliant, a company is now obligated to also make sure that all of its outsourced processes are compliant as well. This poses special challenges, because a small service provider that’s privately owned may not be required to comply with Sarbanes-Oxley, for example, while its clients do have that obligation. This requires all service providers large and small to become very familiar with, and compliant with these regulations.

Of course, compliance should be stipulated in the contract, and the service provider should provide documentation that it’s able to, in essence, function as a virtual extension of its client’s compliance-regulated process.

Tip #5. Keep lines of communication open.

Any time a third party outsourcing representative comes near a corporate office, the rumor mill starts churning. The fact is, outsourcing has become a necessary corporate strategy, but in the end it doesn’t even always result in staff reductions. It will, however, almost universally result in changes to internal processes. Employees don’t like either.

“Change management and communication with employees is absolutely a critical success factor,” said Montonen. “Employees want to be told why it’s being done — what are the business reasons.” As soon as a decision has been made to pursue an outsourcing strategy, that’s when the communication process should start. Don’t keep employees in the dark. The result could be damaging to morale and to production. “What typically happens is once you have an RFP out, or some service providers are providing proposals, the word gets out. Somebody knows somebody who knows somebody, so the word will either come out informally from the outside, or formally, from the inside.”

Dian Schaffhauser contributed to this article.

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