A Defined Process for Business Process Outsourcing: Will Core Competency Focus Take Jobs Offshore?
The administration in Washington is beginning to push around a bill that will punish companies who offshore US jobs overseas. While the rationale is certainly appealing to the common man, the fact is that offshoring has been going on for some time now. Business Process Outsourcing, (BPO) is a strategy that entails moving jobs from the US to offshore locations, either insourced or outsourced, generally in India. BPO has been around since 2002 – and according to our recent study, is a process that is likely to continue at a growing rate. In fact, 76% of respondents in our survey believe the BPO market is continuing to expand rapidly, although 67% agree that the size of these deals are getting larger. No surprise here – the most common reason for this trend?: 67% have demonstrated and measurable cost savings to show for it. The survey also shows that the highest risks perceived by organizations to BPO and offshoring include loss of customer data, hidden costs, and lack of visibility to transactions.
Our research shows that even these risks can be managed through a deliverable process which we will describe here. This financial services company (which we will call FS1) is at a mature stage of procurement maturity, and has been engaged in BPO/ITO for almost 7 years. They started in ITT-Application support and testing, and have moved to a portfolio of external outsoruced providers using both offshore and onshore providers. The portfolio approach to BPO has been deployed widely, starting with their lending back office operations. They moved on to finance, HR, and procurement. Their bank office operation is now publicly held and is recognized in the press.
The company has recently moved to non-service outsourcing programs lately, more complex types of services, and pushing to a new level beyond arbitraging. Believe it or not, legal services is also moving offshore. This is a new area for the company and for other banks. Some banks are doing it simply because they are not captives of offshoring, and are simply outsourcing to 3rd parties they already have agreements with out of convenience. However, this organization recognizes that this is a more difficult sell to partners in the bank. The control of information, fragmentation of these services in the organization, and the long sales cycle associated with selling these deals internally makes it something that should be approached carefully, and takes time to grow. For example, areas such as wealth management and fraud detection monitoring are areas that are critical to approach slowly and get people acclimated, and build a strong business case.
The company’s Chief Procurement Officer emphasized the need to build an internal capability for outsourcing as a core component of his strategy. There is an initial thirst for these deals that is fueled by the popular press, and it is important to fully understand the capabilities that are required in suppliers before deployment. Many times outsourced capabilities are hard to source, and FS1 has taken a strong role in supplier development – that is, growing the capabilities in offshore suppliers, and building on the synergies of existing offshore partners. This is an important best practice. FS1 emphasizes that many times suppliers are not aware of their integrated capabilities, and the FS1 team needs to grow and develop these, while also building the case and understanding the need internally on the client side. This could not be taken unless the organization had already reached a level of outsource maturity. The deals are project based, and the team can only bite off processes that are complex when the market and maturity of outsourcers is ready to take these on.
Typically, outsource providers have a consulting arm, an outsourcing BPO arm, and a technology arm, and these may not be well integrated. FS1’s team emphasizes that “it is up to US to integrate their offerings – on the supplier side, and to identify and develop the “opportunity space” internally, to separate and cobble capabilities that can be outsourced within the bank.”
To enable this capability, FS1 developed a Center of Excellence, based on the evidence of a need for a function to manage this dual internal and external role. They recognized that a purely functional client capability would not have the specialized skills to fully execute this. The Global Outsourcing group acts as a catalyst to build a need AND a capability set in the bank. This is very difficult, and requires a specialized, separate group with unique skills. This group is tasked with building an outsource strategy, and to work on opportunity development through long-term engagements with internal business partners, while also building the market intelligence that enables them to leverage outsourced partners and build on their existing capabilities.
The group has three distinct lifecycle areas they go through.
- Opportunity development – understanding the opportunity and the requisite capabilities, and seeking the appropriate partner with the potential capabilities to meet the need.
- Transition – working with managers to build out SLA’s, process mapping, and codifying packages based on the SLA’s, workforce and training issues. This includes governance structure development and service level implications. SLA’s are built out and metriFS2 put in place to ensure that the bank and the supplier executes.
- Service delivery – managing all compliance terms, review of performance, ensuring that all deliverables are in play, and satisfying returns.
To support this, FS1 has a governance effectiveness model, that is designed to optimize results, risk, and financial value. The structure works around a sourcing portfolio that enables decisions based on performance management requirements, compliance risk, and subdimensions of operational performance. The team ensures that the right structure and tools are in place.
The Global Outsourcing group operates within the bank, and is located within SCM. These are full-time hires, with a unique skill set: all of them have worked on both buy and sell-side contracting outsource deals, at companies like Amex, financial services, and outsource provider. The COE Director emphasized that this is a specialized area in SCM, and people need to be able to systematically assess goods and services outsourcing requirements.
When asked why FS1 does NOT use an external provider like TPI, The CPO noted that “the main reason is that they can’t do the SEEDING”. What this means, is that the organizational context is an imperative for successful outsourcing. It takes a long time to truly understand the details of a deal – and to bring on the level of due diligence that the Global Outs group brings would be difficult, and a tremendous expense. One deal with TPI would cost more than the annual budget of the outsource office. These deals take months, and in many cases, the seedlings don’t sprout, so using an external provider is a tough call. In most deals, the needs are known, but there is a lot of exploration required to confirm the need. Also, an internal party has more influence and authority given that they have a badge, with internal stakeholders.
The benefits need to be clearly spelled out around cost avoidance, primarily, and avoidance of capital investments, as well as financial outcomes. Operational SLA’s are also important. Increasingly, these include things like ability to respond – especially in mortgage processing, where a 12 hour quicker turnaround using the India office was important.
With this type of sophisticated and deliberate process around outsourcing – is there any doubt it will continue to grow. I believe that the key here is through higher education. If we can work to develop more sophisticated managers capable of thinking and driving solutions to these types of complex outsourcing issues – there is hope yet for the unemployment rate to come down….and perhaps even see the number of people entering law school go down as those jobs also go overseas…