Leveraging Lean Six Sigma in Business Process Outsourcing

May 22, 2006

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We hear the slogan, “moving up the value chain” often in the context of business process outsourcing (BPO). BPO service providers typically use this to refer to the execution of other knowledge processes such as financial or legal research that gain them better revenues and margins. We also frequently hear the phrase, “business transformation,” usually used as a synonym for BPO that demonstrates cost savings and little more.

What’s the key to gaining true value and business transformation? One approach is to apply lean Six Sigma to move processes from a point of stable outsourcing to “leaning” to process redesign and ultimately, to process innovation.

In Lean Solutions: How Companies and Customers Can Create Wealth Together authors James Womack and Daniel Jones describe how Fujitsu Services did precisely this with its contract with British Midland International. BMI outsourced its service help desk function to Fujitsu. Pretty bland stuff. This business process involved handling calls from BMI agents at airports regarding computers and printers that were installed at airport offices and airline service counters.

Fujitsu’s goals for this business process evolved from one of just providing the help desk services to trying to eliminate the root causes of the calls and thus the calls themselves! It worked with the printer makers to improve printer reliability to such an extent that calls to the help desk fell 80% and continues to fall with their on-going Kaizen (continuous process improvement) efforts. This business transformation effort was so successful that Fujitsu was awarded the contract for handling BMI’s entire IT asset infrastructure. This time around, the contract was structured with the same emphasis on cost cutting, but with the addition of gaining continuous process improvement and better quality.

This article outlines how lean Six Sigma can help you move up the value chain if you’re a service provider and achieve true business transformation if you’re the client. If you want to learn the basics of lean Six Sigma, I provide a list of resources under “Useful Links.”

The Typical Transition

The figure below shows the as-is state of most processes under transition from the client to the service provider in the usual outsourcing initiative.

As-is state of BPO transition

Typical steps in the BPO transition process include:

Process transition. Observing, participating and training in the process; documenting the process and key Critical to Quality (CTQ) or Service Level Agreement (SLA) measures; forming a process team; training the team; and running a pilot effort in parallel to the regular operation of the process.
Transfer to regular BPO operations group. Once the process team is in place with the BPO service provider and it has been executing the process for a certain period of time, it is transitioned to their operations group for ongoing operations.
Measure and report SLAs and metrics. BPO contracts may specify SLA measures like average handle time (for phone processes) or network availability (for network management processes). Service providers often measure a number of additional metrics that help them evaluate the performance of their own employees and/or to make sure that the business process is executed well.
Statistical process control check. Optionally, many service providers make sure that key performance indicators are in statistical process control. If they’re in process control, only minor adjustments are made to the process, often necessitated by people turnover or other more minor factors. If KPIs aren’t in statistical process control, then root causes may be addressed and adjustments to the process made appropriately.

If you analyze the above as-is state of BPO transitions and operations, you might notice that there’s no fundamental innovation or reengineering of the business process. Sure, there may be minor adjustments or tweaks, but nothing more. This hardly heralds business transformation in the making!

Movin’ On Up

The figure below shows the to-be state, where the business process is improved continuously using lean Six Sigma.

To-be state of BPO using Lean Six Sigma

Let’s walk through the stages.

The first set of steps are the same as in the as-is state — process transition, transfer to operations, measure and report SLAs and statistical process control check. Here’s what’s added.

Six Sigma efforts. These help ensure that the process is in statistical process control whether the process runs as-is or when any fundamental change to the process is implemented. All KPIs need to be stable and in statistical process control! Defects need to be identified and minimized, moving from lower sigma levels towards a Six Sigma level.
Process leaning. This involves a number of tools and techniques that provide continuous improvement to all aspects of a business process — turnaround time, accuracy, error rates, currency-related effectiveness metrics, customer satisfaction levels and so on. The tools you’ll find of value include value stream analysis (making sure that each process step is adding value to the customer and non-value adding steps are completely eliminated or speeded up), failure mode and effect analysis- FMEA (analyzing and minimizing risks due to failure of process steps), service blue printing (analyzing customer touch points and minimizing the chances for making mistakes) and Poke Yoke methods (mistake proofing). (If these terms are new to you, I suggest you look them up at iSixSigma.com to further your education on these techniques. You’ll find the URL in “useful Links.”)
Process redesign/innovation. These flow naturally after an extended period of process leaning and use of Six Sigma. Radical process redesign may not work as well as process innovation and redesign born out of an extended period of deep analysis and understanding of existing processes.

How You, the Client, Will Benefit

When your BPO service provider moves up the value chain with lean Six Sigma, you benefit in a number of ways:

First, you’ll see an evolution from pure cost savings to process improvement. Presumably, this metamorphosis results in better quality and greater speed at less cost (as the application of the Toyota Production System and other lean Methods have proven in manufacturing as well as services). Process improvement adds to the cost savings or at least mitigates costs as and when they rise.

Second, you’ll be able to leverage process understanding and documentation. In many large organizations in the US and Europe, business processes have evolved over time. The latest documentation for the business process may not exist. BPO vendors may insist on documenting the business process along with workflows, KPIs and SLAs for legal and contractual purposes. The very process of outsourcing makes many of these processes explicit. Moving up the value chain with lean Six Sigma depends upon proper documentation of the business process.

Third, you’ll see a movement from informal to formal process measurements. Before outsourcing, there may not have been a compelling need to formally identify SLAs and KPIs for processes and measure them diligently. However, now that they’re outsourced, informality leads to formality due to legal and contractual reasons. Process improvement can build on these measurements and result in better quality while identifying areas to reduce expense.

How Your Service Provider Will Benefit

Moving up the value chain in BPO benefits your service provider in a number of ways. Why should you care? The success of the outsourcing engagement depends as much on the relationship you form with your service provider as on the services performed by that provider.

First, it gets the vendor out from under the mode of competing on price. When a service provider adds value over and above simple costs savings with continuous process improvement, it removes that company from the fray of competing on price for contract extensions or other business processes. They become a partner that provides true business transformation. They can renegotiate contracts based on value added with process improvement rather than a simple time and materials or full-time equivalents approach.

Second, the service provider becomes a true business partner. Moving up the value chain provides a chance for a longer term relationship with your company. When a client outsources a technical help desk, the ideal isn’t to handle those calls in the best possible way; it’s to reduce those calls altogether while still keeping customer sat levels high. That kind of transformation, effected through lean Six Sigma, can demand revenues an order of magnitude higher than simple process execution (because the client gains far greater benefit).

Third, the service provider gains invaluable vertical skills development. When a BPO service provider moves up the healthcare claims processing value chain, they cease being just a service provider. Over time, they slowly become world-class experts in healthcare, not just claims processing! They can leverage this expertise for much more valuable process design/redesign/innovation business, thereby continuing the cycle of continuous improvement.

How To Start Down Your Road to Business Transformation

One place to begin is by looking for the addition of incentives for process improvement to your contracts. Initially, Fujitsu was getting paid by BMI for help desk processes on an FTE number of agents basis. The service provider had no incentive to fix root causes of commonly reported problems in calls to their help desk. However they renegotiated the contract. They based it on the number of BMI employees that could potentially call their help desk rather than the number of agents needed to take calls (FTE number). This meant they would get paid the same if they handle 100 calls a day or 1,000 calls a day! This kind of structuring provided an incentive for the service provider to do real business transformation! It became a win-win for both the buyer and provider! For proper process improvement efforts, incentives and contract need to be designed in such a way that they encourage appropriate efficiency and effectiveness.

Don’t expect immediate payback, especially in the trust department. Moving up the value chain in BPO needs to be done one step at a time over a long period. First, the provider needs to execute the business process that exists today properly and then slowly improve it step by step. Once the provider understands the process in all its dimensions, it can earn client trust by demonstrating small improvements first before attempting any process redesign or innovation.

You need to take a long-term outlook. Service providers — especially offshore ones — are vulnerable to price competition from other countries. For example, when the focus is on price, many business processes in India could be considered vulnerable to price competition from lower-cost locations. Moving up the value chain requires a longer term outlook on the vendor. The beauty of that is that it is difficult for a competitor to duplicate in a short amount of time. When service providers begin their lean Six Sigma journey and bring clients along for the transformation, they can ensure protection of their current business — and even win additional business once they demonstrate that they’re long-term business partners.

BPO provides an outstanding opportunity for both clients and service providers to look at both optimizing cost savings and achieving continuous process improvement! Lean Six Sigma provides the tools and techniques for making business transformation not just a slogan, but a systematic, disciplined way of daily operation.