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Building a Case for BPO - Part 2

Calling Canada... A Red Hot Spot Develops for Call Center Outsourcing

The IRS Is Watching Filings for Independent Contractors

Tips for Outsourcing HR Functions

Asia
Australia
Best Practices
Business Process (BPO)
Canada
Events
Finance & Accounting
Financial Services
Healthcare
Human Resources
Information Technology
Manufacturing
Offshore
Outsourcing Journal
Supply Chain Management

Taking the Pulse of Patient Care Improvement Strategies

BPO Big Bang: Creating Value in an Expanding Universe

In Part One, published in the July issue of the BPO Journal, I touched on core versus non-core functions and gave a few examples of each. To summarize: A function that is core to your business is one that distinguishes your company from your competitors; a non-core function is one that may be critical, but does not directly contribute to shareholder value and the ability to distinctively compete in the marketplace.

Unfortunately, many organizations struggle with deciphering critical versus core, making it difficult to adopt a BPO strategy. The reality is that core versus non-core is still difficult to determine for most organizations. For example, recently I spoke with a chief financial officer (CFO) who was convinced that processing accounts payable and accounts receivable was core to his company's business. I told him while I agree that both of these processes (and the information they provide) are critical to any business, the ability to process better and faster than the next guy simply is not core. It does not differentiate his company from the competition.

How Do We Find Value in BPO?

The most important thing to identify as a buyer of BPO services is the benefits or value you plan to gain from outsourcing. In our work with clients, we strive to help buyers focus outsourcing efforts on the true value they can receive by outsourcing a function. In many cases the outsourcing initiative is driven solely by a desire to reduce operating costs, when, in fact, there are several other business issues that an outsourced solution can address.

If the only value you plan to obtain is cost reduction, I would challenge you to look deeper into your organization to discover what other business and strategic value you could obtain through outsourcing. Some examples include increased speed, better flexibility, improved financial insight, access to capital, etc. As we learned from the history of IT outsourcing, relationships that focus strictly on cost and have no partnering qualities often fail before they begin.

Buying BPO

Now that we have reviewed the fundamentals about core versus non-core, we can talk about spending money wisely (we all like to spend, but nobody likes to waste). Here are the four most common questions we hear from buyers:

1. What do I need to keep in mind as I go about the process?
2. How do I select a service provider?
3. How should I structure a win-win BPO deal?
4. Where can I go shopping? Who are the key players?

1. What do I need to keep in mind as I go about the process?

The best way to procure BPO and maintain a focus on adding value is to drive the transaction from a strategic level and facilitate an interactive process with the potential service providers. It is critical to keep the focus on the value and the outcomes, not the cost. Otherwise, the aspects of success will be hard to maintain.

This often requires a different procurement process than most of us are used to. There are two things to keep in mind. First, you must define your outsourcing objectives using the criteria important to your organization. Then, you must formulate your buying criteria. Your executives can do this by assessing which non-core processes could help meet your company's strategic objectives and what outcomes a service provider would need to deliver through better operation of those the non-core processes.

Second, in order to achieve the desired strategic and business outcomes of BPO, it is critical to treat the potential service providers you are working with as partners. Engaging a service provider early on in the "strategy" development phase will allow you to understand its capabilities and incorporate its thinking into your solution. Developing a concise set of specifications and desired outcomes will help you and the service providers concentrate on the best solution.

2. How do I select a service provider?

Due to the complexity of BPO, it will be difficult to attempt the selection process if you begin with more than a few service providers. It is critical to understand the service providers' various skills in order to invite the right ones to the "dance." In order to find the most appropriate service providers, you can research them yourself, rely on third-party information, or hire a consultant who has worked with the service providers before and understands their strengths and weaknesses.

In identifying the requirements, most companies we work with decide to pursue a Request for Proposal (RFP) process. However, sole sourcing approaches are common in cases where there is a long standing relationship in place, particularly for more complicated BPO transactions that require a very strong buyer-service provider relationship due to the lack of competition.

The RFP process is somewhat like a trip to the dentist for both the buyer and the service provider. For BPO initiatives, it often becomes difficult to compare the service providers' responses because their solutions vary based upon their competitive strengths. The challenge becomes comparing apples to oranges. In these situations, the evaluation must focus on the potential value provided by the solution.

3. How do I structure a win-win BPO deal?

The goal in structuring a successful BPO deal is to achieve the desired results while building and maintaining a strong relationship. We often refer to outsourcing as a marriage for a couple of reasons:

1. You are committing a significant amount of resources to the relationship.
2. No one wants this relationship to end before "death do us part" (or the period of the contract.)

The most critical aspect of structuring the deal is to align the pricing and incentives with the desired outcomes. Since recent trends have been towards driving greater business and strategic value through BPO, pricing has shifted to reflect this new emphasis. We're finding value-based pricing is becoming increasingly common. Value-based transactions are structured around strategic outcomes and business profitability. In many cases, performance incentives and gain sharing are put in place if these objectives are met or exceeded. This changes the pricing method to one of investment and expected return based on actual business results.

4. Where can I go shopping? Who are the key players?

The BPO landscape is changing rapidly. The most notable recent change was the July announcement by IBM that it plans to acquire PwC Consulting (which includes its BPO group) to complement its technology expertise with business process expertise.

The landscape of BPO service providers consists primarily of three distinct groups:

1. Big 5 players or spin-offs (e.g., Accenture, Deloitte Consulting, OPI/KPMG spin-off, Cap Gemini Ernst & Young);
2. Venture capital-funded niche players (e.g., Exult, SourceNet, Equitant, Creditek); and
3. Traditional outsourcers (e.g., ACS, EDS, IBM, CSC)

The Big 5 players build upon traditional consulting strengths to enter the BPO marketplace. In addition, strong executive level relationships and market permission derived from their business consulting and process reengineering backgrounds have given them traction in this space. In addition, many have "purchased" capacity in order to gain quick acceptance and critical mass.

The strategy for the VC-funded niche players is to use capital infusions and technology to gain a foothold in a single area (e.g., accounts payable, HR) for which they have a strong value proposition but initially have limited delivery capability (often requiring them to "acquire" a cornerstone client). After successfully establishing a foothold, the players may begin moving into adjacent processes.

The traditional outsourcing firms are taking advantage of market opportunities to acquire struggling BPO and finance and accounting (F&A) organizations. These companies leverage their IT infrastructure capabilities along with strong client relationships in large companies.

Across the three groups of competitors, there are no clear winners yet. Based on our experience and market knowledge, we believe there will be further consolidation as well as new entrants into the space.

Lessons from the Outsourcing Journal:

• Invest in understanding how to apply core versus non-core concepts to your organization.
• Strive to discover the business and strategic impact of BPO and structure a relationship around creating and capturing that value.
• Buying BPO services is a more complicated process than traditional IT services (e.g., desktop, data center) and requires a process that focuses on and allows service providers to create value for your organization.

Publish Date: September 2002

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Building a Case for BPO: Why haven't companies recognized the value proposition?
Building a Case for BPO - Part 3: From the Service Providers' Perspective

Copyright © 2002 - Everest Partners, L.P.

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